duplex tax questions - Section 74.1(1) Section

QUESTION:
I'm thinking of purchasing a duplex and living in one half/renting out
the other half.  Could such a duplex be purchased in my wife's name so
that the rental income could be declared on her taxes only?(She makes
less money than me and is therefore in the lower tax brackets.)
I'm also wondering if that Saccomanno case regarding the capital gains
exemption is still good law.  Haven't there been any changes to the
Income Tax Act since it was decided in 1986 designed to counter this
practice?  The CRA bulletin refers to section 45(1)(c). Was that
provision in existence in 1986?
===============================
david ingram replies:
There are a couple of points to made.
1. The Duplex can be in your wife's name.  However, if it is only
"your" money that pays for it, the profits or losses (as the case may
be) are yours, not your wife's - Section 74.1(1) deals with the
operating profits or losses and section 74.2 deals with the capital
gains or losses.  They read as follows:
 74.1. (1) Where an individual has transferred or lent property
(otherwise than by an assignment of any portion of a retirement
pension pursuant to section 65.1 of the Canada Pension Plan or a
comparable provision of a provincial pension plan as defined in
section 3 of that Act or of a prescribed provincial pension plan),
either directly or indirectly, by means of a trust or by any other
means whatever, to or for the benefit of a person who is the
individual's spouse or common- law partner or who has since become the
individual's spouse or common-law partner, any income or loss, as the
case may be, of that person for a taxation year from the property or
from property substituted therefor, that relates to the period in the
year throughout which the individual is resident in Canada and that
person is the individual's spouse or common-law partner, shall be
deemed to be income or a loss, as the case may be, of the individual
for the year and not of that person.
Transfers and loans to minors
 (2) Where an individual has transferred or lent property, either
directly or indirectly, by means of a trust or by any other means
whatever, to or for the benefit of a person who was under 18 years of
age (other than an amount received in respect of that person as a
consequence of the operation of subsection 122.61(1)) and who
(a) does not deal with the individual at arm's length, or
(b) is the niece or nephew of the individual,
any income or loss, as the case may be, of that person for a taxation
year from the property or from property substituted therefor, that
relates to the period in the year throughout which the individual is
resident in Canada, shall be deemed to be income or a loss, as the
case may be, of the individual and not of that person unless that
person has, before the end of the year, attained the age of 18 years.
Repayment of existing indebtedness
 (3) For the purposes of subsections 74.1(1) and (2), where, at any
time, an individual has lent or transferred property (in this
subsection referred to as the "lent or transferred property") either
directly or indirectly, by means of a trust or by any other means
whatever, to or for the benefit of a person, and the lent or
transferred property or property substituted therefor is used
(a) to repay, in whole or in part, borrowed money with which other
property was acquired, or
(b) to reduce an amount payable for other property,
there shall be included in computing the income from the lent or
transferred property, or from property substituted therefor, that is
so used, that proportion of the income or loss, as the case may be,
derived after that time from the other property or from property
substituted therefor that the fair market value at that time of the
lent or transferred property, or property substituted therefor, that
is so used is of the cost to that person of the other property at the
time of its acquisition, but for greater certainty nothing in this
subsection shall affect the application of subsections 74.1(1) and (2)
to any income or loss derived from the other property or from property
substituted therefor.
S.C. 1986, c. 6, s. 38; S.C. 1986, c. 55, s. 17; S.C. 1987, c. 46, s.
25; S.C. 1994, c. 7, Sch. VII, s. 4; S.C. 2000, c. 12, s. 142.
Gain or loss deemed that of lender or transferor
 74.2. (1) Where an individual has lent or transferred property (in
this section referred to as "lent or transferred property"), either
directly or indirectly, by means of a trust or by any other means
whatever, to or for the benefit of a person (in this subsection
referred to as the "recipient") who is the individual's spouse or
common-law partner or who has since become the individual's spouse or
common-law partner, the following rules apply for the purposes of
computing the income of the individual and the recipient for a
taxation year:
(a) the amount, if any, by which
(i) the total of the recipient's taxable capital gains for the year
from dispositions of property (other than listed personal property)
that is lent or transferred property or property substituted therefor
occurring in the period (in this subsection referred to as the
"attribution period") throughout which the individual is resident in
Canada and the recipient is the individual's spouse or common-law
partner
exceeds
(ii) the total of the recipient's allowable capital losses for the
year from dispositions occurring in the attribution period of property
(other than listed personal property) that is lent or transferred
property or property substituted therefor
shall be deemed to be a taxable capital gain of the individual for the
year from the disposition of property other than listed personal
property;
(b) the amount, if any, by which the total determined under
subparagraph 74.2(1)(a)(ii) exceeds the total determined under
subparagraph 74.2(1)(a)(i) shall be deemed to be an allowable capital
loss of the individual for the year from the disposition of property
other than listed personal property;
(c) the amount, if any, by which
(i) the amount that the total of the recipient's gains for the year
from dispositions occurring in the attribution period of listed
personal property that is lent or transferred property or property
substituted therefor would be if the recipient had at no time owned
listed personal property other than listed personal property that was
lent or transferred property or property substituted therefor
exceeds
(ii) the amount that the total of the recipient's losses for the year
from dispositions of listed personal property that is lent or
transferred property or property substituted therefor would be if the
recipient had at no time owned listed personal property other than
listed personal property that was lent or transferred property or
property substituted therefor,
shall be deemed to be a gain of the individual for the year from the
disposition of listed personal property;
(d) the amount, if any, by which the total determined under
subparagraph 74.2(1)(c)(ii) exceeds the total determined under
subparagraph 74.2(1)(c)(i) shall be deemed to be a loss of the
individual for the year from the disposition of listed personal
property; and
(e) any taxable capital gain or allowable capital loss or any gain or
loss taken into account in computing an amount described in paragraph
74.2(1)(a), 74.2(1)(b), 74.2(1)(c) or 74.2(1)(d) shall, except for the
purposes of those paragraphs and to the extent that the amount so
described is deemed by virtue of this subsection to be a taxable
capital gain or an allowable capital loss or a gain or loss of the
individual, be deemed not to be a taxable capital gain or an allowable
capital loss or a gain or loss, as the case may be, of the recipient.
Deemed gain or loss
 (2) Where an amount is deemed by subsection 74.2(1) or 75(2) or
section 75.1 of this Act, or subsection 74(2) of the Income Tax Act,
chapter 148 of the Revised Statutes of Canada, 1952, to be a taxable
capital gain or an allowable capital loss of an individual for a
taxation year,
(a) for the purposes of sections 3 and 111, as they apply for the
purposes of section 110.6, such portion of the gain or loss as may
reasonably be considered to relate to the disposition of a property by
another person in the year shall be deemed to arise from the
disposition of that property by the individual in the year; and
(b) for the purposes of section 110.6, that property shall be deemed
to have been disposed of by the individual on the day on which it was
disposed of by the other person.
Election for subsection (1) to apply
 (3) Subsection (1) does not apply to a disposition at any particular
time (in this subsection referred to as the "emigration disposition")
under paragraph 128.1(4)(b), by a taxpayer who is a recipient referred
to in subsection (1), unless the recipient and the individual referred
to in that subsection, in their returns of income for the taxation
year that includes the first time, after the particular time, at which
the recipient disposes of the property, jointly elect that subsection
(1) apply to the emigration disposition.
Application of subsection (3)
 (4) For the purpose of applying subsection (3) and notwithstanding
subsections 152(4) to (5), any assessment of tax payable under this
Act by the recipient or the individual referred to in subsection (1)
shall be made that is necessary to take an election under subsection
(3) into account except that no such assessment shall affect the
computation of
(a) interest payable under this Act to or by a taxpayer in respect of
any period that is before the taxpayer's filing-due date for the
taxation year that includes the first time, after the particular time
referred to in subsection (3), at which the recipient disposes of the
property referred to in that subsection; or
(b) any penalty payable under this Act.
S.C. 1986, c. 6, s. 38; S.C. 1988, c. 55, s. 52; S.C. 1994, c. 7, Sch.
II, s. 51; S.C. 1995, c. 3, s. 20; S.C. 2000, c. 12, s. 142; S.C.
2001, c. 17, s. 54.
----------------------------------------------------------------------
David Ingram again:
Therefore, if you wish to put it into your wife's name so that she
gets the profit, you have to make sure that she puts up the money.
There are, of course, variations.  You could put up the money and
initially you would pay the tax.  However, as she pays you back with
her rental profits, every year, more and more would become taxable to
her.
Saccomanno is still valid as far as I am concerned.  If there was a
glitch, it would be that you "might" have to pay a little tax on the
increased value of the building.  However, the house and 1/2 hectare
are still tax free under section 54(e).
Have fun, you might want to sit down and buy an hour's worth of time.
-------------------------
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