Minimizing Capital Gains Tax section 74.1 75.1 Canadian-USA-Global tax help -

 
Below is the result of your feedback form.  It was submitted by
xxxxxx xxxxxxx on Monday, June 1, 2009 at 10:14:46
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My_question_is: Canadian-specificquestion: 
My husband and I own five apartments, all apartments are in both of our names (50/50).  
We would like to put all apartments in my name and leave the mortgage in both of our names.  
Is this possible?  
 
We are planning to start selling the apartments in five years or so and would like to minimize our capital gains tax.  
 
I currently stopped working and will not be returning to work and that would be the reason to put it in my name.  

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david ingram replies:

This was rejected but my 10:00 AM appointment did not make it so I went looking at the rejects and thought this was worthy of comment.

Under section 75(1) of the income tax act, if your husband puts the apartments in your name, he is still subject to the capital gains tax when 'you' sell them.  Under Section 74.1, he is still liable for the rents.

UNLESS

If you have the actual money, he could sell his share to you now but then he would owe capital gains tax on the sale now and you would owe the tax on any increased value in the future.  (of course he could use a spousal election but then you really get into complications as you will see if you read the following at

 http://www.ctf.ca/articles/News.asp?article_ID=3012 )


To make this work, you also have to show that 'you' had the money to buy them from your husband and should also be able to prove that you had the money for your half in the first place.

If it was your husband;s money that bought them at the start and he just put them in your name, then it is all taxable to him anyway. 

I will also be the first to admit that the CRA is NOT very diligent about tracking down the source of money and applying these rules unless something comes to their attention.

Selling or giving the second half to you would be one of those triggering events that might / could/ would more likely bring it to their attention.

BUT MAYBE

At the same time, if you had bought the apartments using an inheritance from your family or from your savings prior to marriage then ALL the GAIN and the rents, etc., would be taxable to you even if your husband's name was on them.

Evey situation is different of course.  If you are going to do something like this, make sure that you check it out very thoroughly first.

There is nothing new about this.  Bulletin IT-510 explains the attribution rules relatively well and I reproduce it here for your edification.

CANADA CUSTOMS AND REVENUE AGENCY INTERPRETATION BULLETIN NUMBER IT-510 DATE: December 30, 1987 SUBJECT: INCOME TAX ACT Transfers and Loans of Property made after May 22, 1985 to a Related Minor REFERENCE: Subsection 74.1(2) (also section 74.3, subsections 74.1(3), 74.5(1), (2) and (6) to (11) and paragraph 74.5(12)(b)) APPLICATION This bulletin applies to transfers and loans of property made after May 22, 1985 to related minors. For transfers of property made before May 23, 1985 to minors, see IT-260R, the Special Release thereto and subsection 75(1) of the Act. SUMMARY This bulletin discusses a comprehensive set of rules intended to prevent a taxpayer and a related minor from splitting income from property so as to reduce the total amount of tax payable thereon. Except where fair market value consideration is paid by the related minor, income earned on property transferred or loaned from a taxpayer to a related minor (and on property substituted therefor) is generally deemed to be income of the taxpayer and not of the related minor. The commentary below discusses the applicable rules in greater detail. DISCUSSION AND INTERPRETATION 1. For the purposes of this bulletin, the following terms and their meanings are explained: Transferred or Loaned Property - means all transfers or loans of property whether accomplished directly or indirectly, by means of a trust or by any other means whatever. A transfer includes a sale whether or not at fair market value, as well as gifts but has never included a genuine loan. (Prior to May 23, 1985 loans that were not considered genuine (see IT-260R) were treated as transfers but this distinction is no longer necessary.) Related Minor - a person who is under 18 years of age, and who (a) does not deal with the individual at arm's length (e.g. a parent and a child or other descendant whether by blood relationship or adoption, do not deal at arm's length - see IT-419), or (b) is a niece or nephew of the individual. Beneficially Interested - An individual is "beneficially interested" in a trust if the individual has any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of a discretionary power by any person or persons) to receive any of the income or capital of the trust either directly from the trust or indirectly through one or more other trusts. See 12 below for examples of situations where an individual is beneficially interested in a trust. Substituted Property - Paragraph 248(5)(a) provides that in the circumstances discussed in this bulletin, where a taxpayer has disposed of or exchanged a particular property and acquired other property in substitution therefor and subsequently, by one or more further transactions, has effected one or more further substitutions, the property acquired by any such transaction is deemed to have been substituted for the particular property. ATTRIBUTION OF INCOME FROM TRANSFERRED OR LOANED PROPERTY 2. Subsection 74.1(2) provides that where an individual has transferred or loaned property (including money) to a related minor or to a trust in which a related minor is beneficially interested at any time any income or loss from the property or property substituted therefor is deemed to be income or loss of the individual for a taxation year unless the minor has attained the age of 18 years before the end of the year; see 15 to 18 below for additional exceptions to the rule. APPLICATION OF ATTRIBUTION RULES 3. It is necessary to distinguish between income or loss from property and income or loss from a business. Subsection 74.1(2) does not apply to attribute business income or losses even if the business operates with some or all of the property obtained originally from the transferor. 4. Income or loss derived from the investment or other use of the income from transferred property is not attributed to the transferor and thus for income tax purposes is income or loss of the transferee. For example, interest on any interest allowed to accumulate is not attributed to the transferor and is income of the transferee. 5. Pursuant to subsection 74.1(3) the attribution rules in subsection 74.1(2) apply to transferred or loaned property which is used either to repay, in whole or in part, borrowed money that was used, in whole or in part, to acquire property or to reduce an amount payable in respect of that property. 6. As it applies to a related minor (a "specified person" under subsection 74.5(8)) subsection 74.5(6) provides that where an individual has transferred or loaned property to a third party (a) and that property or property substituted therefor is, or (b) on condition that any property be transferred or loaned directly or indirectly by the third party to or for the benefit of a related minor, pursuant to paragraph 74.5(6)(c), the property transferred or loaned by the third party is deemed to have been transferred or loaned by the individual to or for the benefit of the related minor, and pursuant to paragraph 74.5(6)(d) any consideration received by the third party is deemed to have been received by the individual. 7. Subsection 74.5(7) provides that where an individual is obligated either absolutely or contingently to effectively ensure repayment in whole or in part of a loan or any interest in respect thereof made by a third party directly or indirectly to or for the benefit of a related minor, (a) the property loaned by the third party is deemed to have been loaned by the individual to or for the benefit of the related minor, and (b) interest paid on the loan by the individual is ignored for the purposes of paragraphs 74.5(2)(b) and (c) (see 17 below). 8. Subsection 74.5(9) provides that where an individual has transferred or loaned property to a trust in which a related minor is beneficially interested the transfer or loan is deemed to be for the benefit of the related minor. 9. As it applies to a related minor (a "designated person" under subsection 74.5(5)), paragraph 74.3(1)(a) applies where an individual has transferred or loaned property to a trust in which a related minor is beneficially interested at any time and determines an amount that is deemed to be the income of the related minor which is included in the individual's income pursuant to subsection 74.1(2). 10. Pursuant to paragraph 74.3(1)(a) the income of the minor described in 9 above is the lesser of (a) the minor's income under paragraph 12(1)(m) from the trust, and (b) the proportion of the income earned by the trust from the transferred or loaned property that (i) the minor's income under paragraph 12(1)(m) from the trust is of (ii) the aggregate income from the trust of all persons each of whom is throughout the year a related minor or the individual's spouse. In (b) the "income earned by the trust" excludes capital gains and is calculated before deductions are made under subsections 104(6) and (12). 11. An example of the operation of paragraph 74.3(1)(a) follows: An individual transfers, for no consideration, bonds which pay interest of $1,200 per annum to a family trust the beneficiaries of which are the individual's three children, two of whom are less than 18 years of age throughout the year. The trust's income prior to any deductions under subsections 104(6) or (12) is $1,500. Each beneficiary has an equal entitlement to the trust income all of which is payable in the year. The two related minors are designated persons. The income from the transferred bonds in respect of each of the related minors is the lesser of: (a) the income of the designated person from the trust ($500, i.e., one-third of $1,500), and (b) A multiplied by B divided by C where A is the income of the trust from the transferred property ($1,200), B is the income of the relevant minor from the trust ($500), and C is the income of all the designated persons from the trust ($1,000). $1,200 multiplied by $500 divided by $1,000 = $600 Thus the amount of income attributed to the individual in respect of each related minor is $500. 12. The following are examples of situations where an individual is beneficially interested in a trust: (a) trust income is payable to the individual; (b) income is held in trust and will be paid upon the individual's attaining a certain age; (c) the individual is one in respect of whom a preferred beneficiary election may be made; (d) the individual is one of a class who has a remaindership interest under the trust. The individual is beneficially interested in the trust in (b) even if the right to receive the income ends should the individual die before attaining the specified age and in (c) even if the trustees have full discretionary powers concerning the distribution of the capital or income of the trust so that the individual may in fact receive nothing from the trust. 13. Where depreciable property is transferred to a related minor and the minor has no other property of the same class as the property transferred, the income or loss from the property attributed to the transferor should reflect any amount of capital cost allowance, terminal loss or recapture of capital cost allowance in respect of the class which would otherwise be taken into account in computing the income of the minor. Where depreciable property is transferred to a related minor and the minor has other property of the same class as the property transferred, in computing the income or loss from the property attributed to the transferor (a) a reasonable portion of the capital cost allowance claimed by the minor in respect of the class (which portion may not exceed the maximum capital cost allowance that would be deductible in respect of the transferred property if the property were in a separate class) may be deducted, and (b) a terminal loss or recapture of capital cost allowance which arises and would otherwise be included in computing the income of the minor in respect of the class of depreciable property should be taken into account to the extent that such amount can reasonably be considered to relate to the transferred property. After the year of disposition of the transferred property and provided a substitute depreciable property is not acquired by the minor, there is no attribution of capital cost allowance, terminal loss or recapture of capital cost allowance that arises in respect of the class. 14. Where income arises from depreciable property transferred to a trust the amount attributed to the transferor is determined as described in 10 above, even though the trust's income calculation includes amounts in respect of capital cost allowance, terminal loss and recapture of capital cost allowance in respect of the class. EXCLUSIONS 15. Subsection 74.1(2) does not apply to attribute income or loss to a transferor that relates to a period (a) following the death of the transferor or transferee or (b) throughout which the transferor is not resident in Canada. 16. Pursuant to subsection 74.5(1), income or loss from transferred property does not attribute to the transferor where (a) the sale or other transfer is made for consideration equal to fair market value of the transferred property, and (b) the sale price or other consideration for the transfer is (i) fully paid by the transferee in cash or kind (and not from property furnished by the transferor), or (ii) satisfied in whole or in part by indebtedness in respect of which interest is charged at a rate not less than the lesser of the rate of interest prescribed for the purposes of subsection 161(1) and the rate that would be agreed upon between arm's length parties under similar circumstances at the time that the indebtedness is incurred, if all such interest is paid not later than 30 days after the end of the year in which it becomes payable. 17. Pursuant to subsection 74.5(2), subsection 74.1(2) does not apply in respect of loans where interest is charged on the indebtedness at a rate not less than the lesser of the rate of interest prescribed for the purposes of subsection 161(1) and the rate that would be agreed upon between arm's length parties under similar circumstances at the time the indebtedness is incurred, if all such interest is paid not later than 30 days after the end of the year in which it becomes payable. When such a loan is forgiven the exemption in subsection 74.5(2) ceases to apply and section 80 becomes applicable. 18. Pursuant to paragraph 74.5(12)(b), the attribution rules described in 2 above do not apply to a transfer of property to a related minor when transferred as or on account of an amount paid that is (a) deductible in determining the payer's income for the year, and (b) required to be included in the payee's income. For example, the payment of money to a related minor as remuneration for services provided in a business conducted by the payer is a transfer of property, but, where conditions (a) and (b) are satisfied, not a transfer to which attribution applies. In such cases, any income or loss arising from any subsequent investment of the remuneration by the minor is not attributable to the payer. CAPITAL GAINS AND LOSSES 19. Where property is transferred to a related minor or to a trust where a related minor is beneficially interested, subsection 74.1(2) does not apply to attribute to the transferor any taxable capital gain or allowable capital loss arising from a subsequent disposition of that transferred property by the minor or the trust. However, in respect of the inter vivos transfer of certain farm property to a child under 18 years of age, section 75.1 may apply to attribute to the transferor any taxable capital gain or allowable capital loss from the disposition of the transferred property by the child (see IT-268R3). 20. Any taxable capital gains and allowable capital losses on dispositions of property which are attributable to a transferor by virtue of section 75.1 may be included in computing the transferor's lifetime capital gains deduction under section 110.6. ARTIFICIAL ATTRIBUTION 21. Subsection 74.5(11) provides that the attribution rules do not apply where one of the main reasons for a transfer or loan of property or a series thereof is to reduce the amount of income tax that would be payable on the income or gains. DIVIDEND TAX CREDIT 22. Subsection 82(2) provides, in effect, that where the transferor of property includes in income a dividend received or deemed to be received by the transferee from a taxable Canadian corporation, the transferor is required to gross-up the dividend and is entitled to the dividend tax credit. NON-RESIDENT TRANSFEREE 23. Where an amount paid or credited to a non-resident of Canada is included in another taxpayer's income by virtue of sections 74 to 75 and is thereby subject to tax under Part I of the Act, subsection 212(12) provides that non- resident withholding tax is not exigible on such amount. LIABILITY FOR PAYMENT OF TAX 24. Where as a result of a transfer of property an amount (including a taxable capital gain from the disposition of the transferred property) has been included in the income of a transferor for a taxation year by virtue of sections 74 to 75.1, the transferee and transferor are jointly and severally liable under paragraph 160(1)(d) for and increase in the transferor's Part I tax liability resulting from the inclusion of that amount in income. Furthermore, paragraph 160(1)(e) provides that the transferee and transferor are jointly and severally liable for any liability of the transferor under the Act in respect of the year in which the transfer took place or any preceding taxation year, to the extent that, at the time of the transfer, the fair market value of the transferred property exceeded the fair market value of any consideration received for it. Notwithstanding the joint and several liability described above, section 160 does not limit the liability of the transferor under the Act. ----------------------------
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SUGGESTED PRICE GUIDELINES - Aug 5, 2008
 
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
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Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--

-Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com or www.garygauvin.com.  If you forward this message, this disclaimer must be included." -


 




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