Module 10. Part 1: Gifts and Non-arm s Length Transactions. TX 2 Advanced Personal and Corporate Taxation

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1 TX 2 Advanced Personal and Corporate Taxation Module 10 Transfers of Property Among Family Members 1 Module 10 Part 1 Topic 10.1 Gifts and Non-arm s Length Transactions Part 2 Topic 10.2 Attribution Rules Part 3 Topic 10.3 Estate Freezes Part 4 Topic 10.4 Case Studies 2 Part 1: Gifts and Non-arm s Length Transactions Gift voluntary disposition of property for no consideration Non-arm s length dispositions for inadequate consideration s. 69 General rule: transactions between related parties must take place at FMV 3 1

2 Inadequate Consideration s. 69(1)(a) If acquisition cost greater than FMV, purchaser deemed to acquire at FMV if NAL transaction Vendor must report actual proceeds received Purchaser deemed to acquire at FMV Double tax on inflated proceeds results 4 Inadequate Consideration s. 69(1)(b) Gift for no proceeds or sale for proceeds less than FMV if NAL transaction Donor (vendor) deemed to have received proceeds = FMV No adjustment made to purchaser s cost if sale Potential double taxation 5 Inadequate Consideration s. 69(1)(c) For gifts, bequests, inheritances etc Person acquiring deemed to have acquired property at FMV, therefore eliminating double tax 6 2

3 Inter vivos transfer of property Exceptions to s. 69(1) provisions: S. 73 inter vivos tax-free rollover on transfer of capital property to spouse or common-law partner, former spouse or common-law partner in settlement of rights arising out of the marriage or common-law relationship, or to alter ego or joint partner trusts Inter vivos transfer of farm property to child 7 Part 2 Attribution Rules S to 74.5 Rules to prevent individuals from splitting income with spouses or certain minors Operate to eliminate the tax benefit in respect of the transfer or loan of property by requiring the taxpayer who transferred or loaned the property to pay tax on the income generated from the property 8 Attribution Rules Spousal Attribution income and capital gains Minor Children income attribution only Tax on split income 9 3

4 Corporate Attribution s Extends the attribution rules to certain loans or transfers of property made by an individual to a corporation One of the main purposes of the transfer or loan is to benefit a spouse, common-law partner or NAL person under 18 years of age Does not apply if the corporation is an SBC Non-deductible deemed interest benefit 10 Attribution Rules S. 56(4.1) - may attribute income from property to a lender or creditor in the case of certain nonarm's length interest-free or low interest loans or indebtedness 11 Planning Exceptions: No attribution in cases of: Business income Capital gains from property transferred to minors Property income to adult children (maybe, subject to s.56(4.1) Income earned on attributed income Transfers at FMV where interest charged and paid within 30 day of year-end, i.e. Jan

5 Planning Marriage breakdown (not necessarily a planning opportunity you want to consider!) Spousal RRSP contributions Salary to spouse or minor children no attribution, but definitely issues relating to reasonableness and deductibility. Other exceptions noted in readings 13 Part 3 Estate Freezes Essential part of an estate plan Goal: to assist in orderly asset transfer to other family members and next generation while minimizing and quantifying taxes Funding of tax liability on death often key issue don t want to be in situation where assets have to be sold in order to pay estate taxes 14 Direct Sale: Control over property FMV s. 69 issues Funding purchase Attribution CGD s traps 15 5

6 Holding Company: Use s. 85 to roll property into company for fixed value preferred shares Other family members hold common equity shares (transfer future growth) Watch out for s corporate attribution issues and s if shares rolled in If passive investment assets rolled in taxation of investment income high tax rate and Part IV, refundable Part I tax concerns What happens in event of arm s length sale? 16 Reorganization of Capital S. 86 freeze Could also do internal crystallization of CGD, i.e. S. 86 but elect under s.85 to step-up ACB using available CGD 17 Other Rollover of Farm Property to Children 18 6

7 Trusts Not as a mechanism to accomplish freeze, but as a way to control transfer of control over assets to beneficiaries Also possible to build-in flexibility with respect to the plan reversible freeze Attribution issues 19 Part 4 Case Studies Comprehensive cases in lesson notes Tie together many concepts covered in this course Try to recognize fact patterns and what solutions indicated 20 7

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