ADMS 3520 Lecture Notes - Lecture 6: Accountant, Dispositio, Dividend Tax
25 Jun 2018
School
Department
Course
Professor
1 Lecture 6: Non-Arm’s Length Transactions, Departure from Canada and Death of a
Taxpayer
1.1 Recommended Exercises and Self-study Problems
§exercises 9-8, 9-9, 9-10, 8-15, 8-16, 9-14, 9-15, 9-16, 9-17, 11-10
▪self-study problems 9-8, 9-9
▪self-study problems 9-10, 9-11 (ignore the part about farm land)
2 Non-Arm's Length Transfers [CTP 9-142 to 9-172]
▪The non-arm’s length transaction rules determine the deemed proceeds of disposition and
adjusted
cost base (ACB) for gifts and transfers to non-arm's length persons. This is relevant
for
determining: (a) the capital gain at the time of the transfer and (b) the future capital gain
to the
new owner of the property (when he/she sells the property)
▪Rules apply to transfers (gifts or sales) when the transfer is between persons (individuals,
corporations, etc.) who are not at “arm’s length”
▪see example at 9-168 for a theoretical tax avoidance opportunity in non-arm’s length
transfers
▪ITA 251(1): Related persons are deemed to not deal with each other at arm's length
▪It is a question of fact whether others deal at arm's length
▪Related = connected by blood, marriage, common-law partnership or adoption
▪Connected by blood
§= child, parent, grandparent (and great-grandparent, great-great grandparent, etc.)
§
= brother, sister
§= horizontal or vertical relationship on family tree
▪But not aunts, uncles, nieces, nephews, cousins
▪Related by marriage
§
= spouse and in-laws
▪e.g. mother-in-law, daughter-in-law, sister (or brother)-in-law
2.1 Inadequate Consideration [ITA 69]
▪All gifts are deemed dispositions at FMV (even gifts to arm’s length persons) except for gifts
to
spouses [ITA 69 and 73(1)]
▪See Figure 9-2
2.2 Sales to non-arm's length persons
▪Sales to non-arm’s length persons should take place at FMV except for transfers to spouses
because the one-sided adjustment in ITA 69 is intentionally harsh
▪If the sales price is > FMV, the purchaser's ACB is deemed to be FMV
▪If the sales price is < FMV, the seller's proceeds of disposition is deemed to be FMV
▪Sales price too low (< FMV) is the more common situation
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
find more resources at oneclass.com
▪read 9-154 carefully
▪A gift or sale to a spouse automatically occurs at tax cost (ACB for capital property, UCC for
depreciable property) [ITA 73(1)]
▪However, if the transferor makes an election not to have ITA 73 apply, ITA 69 and the above
rules apply (i.e., the disposition will occur at FMV). These rules for spouses apply to spousal
trusts and common-law partners
2.3 Attribution Rules [9-187 to 9-201]
▪The income attribution rules can determine the tax on the future income and capital gains
earned by the new owner of property. Special rules apply when (a) a property is loaned or
transferred to a spouse or minor child (child under 18) or minor niece or nephew [ITA 74.1
(income) and 74.2 (capital gains)]; (b) a property is loaned to another non-arm’s length
person (e.g., a 30 year old child, an 84 year old parent) and one of the main purposes of the
loan was to reduce the income of the lender [ITA 56(4.1)]
▪The attribution rules move the income (and capital gains in the case of a spouse) from the
family member’s tax return to the lender/transferor’s tax return
▪If a loan or transfer is to a spouse, any income or capital gains earned by the spouse is
taxed in the lender/transferor's hands [ITA 74.1 (1) and 74.2(1)]
▪If a loan or transfer is to a minor child (or minor niece or nephew), only the income
earned by the minor (not capital gains) is taxed in the lender/transferor's hands [ITA
74.1(2)]
2.4 Tax on Split Income [the Kiddie Tax] [11-110 to 11-120]
▪The tax on split income (referred to as the kiddie tax) applies to certain types of income
earned by minors, including dividends from private corporations (i.e., incorporated small
businesses) [ITA 120.4]
▪Because it is a tax at the very top marginal tax rate, it essentially eliminates income splitting
benefits from children being shareholders in private corporations (until they are 18 years old
or older)
▪The kiddie tax also applies when children earn business income (typically earned through a
trust or partnership) that is from the business of a related individual
▪The kiddie tax is not really an “attribution” rule because it does not move the income; it
simply taxes it at the top rate
▪As per the June
6,
2011
Federal
Budget,
for certain capital gains realized after March
22, 2011, if a minor has a capital gain on the non-arm’s
length
disposition
of shares
that would have been subject to the kiddie tax (if dividends were paid) then the
capital gain will be deemed to be a dividend . Hence the capital gain will:
•be subject to the kiddie tax;
•will not be eligible for capital gains inclusion rates;
and
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 6: non-arm"s length transactions, departure from canada and death of a. Recommended exercises and self-study problems exercises 9-8, 9-9, 9-10, 8-15, 8-16, 9-14, 9-15, 9-16, 9-17, 11-10 self-study problems 9-8, 9-9 self-study problems 9-10, 9-11 (ignore the part about farm land) The non-arm"s length transaction rules determine the deemed proceeds of disposition and adjusted cost base (acb) for gifts and transfers to non-arm"s length persons. This is relevant for determining: (a) the capital gain at the time of the transfer and (b) the future capital gain to the new owner of the property (when he/she sells the property) Rules apply to transfers (gifts or sales) when the transfer is between persons (individuals, corporations, etc. ) who are not at arm"s length see example at 9-168 for a theoretical tax avoidance opportunity in non-arm"s length transfers. Ita 251(1): related persons are deemed to not deal with each other at arm"s length.
