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Lecture

Chapter 7- Non Arms Length Transactions and Income Attribution.pdf

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Department
Economics
Course
ECON 4400
Professor
All Professors
Semester
N/A

Description
Non Arms Length Transactions and Income Attribution Transactions at an Arm’s length-its implications: When the capital Asset is transferred –Actual Proceeds forms part of the considerations for both the transferor and transferee. This means that the transferor will record the capital gains or loss by considering the actual sale proceeds and the same value forms part of the Adjusted cost base for the transferee. Problems do arise when the capital asset is not transferred at an arm’s length. The transaction is not deemed to have been carried out at an arm’s length when the transferor and the transferee are related-ITA 251(2)(a). Following is the rule when the transfer of a capital asset occurs in such a case. Transfer Price Proceeds of Dispositions Adjusted Cost Base For Transferor For Transferee Fair Market Value(FMV) Fair Market Value Fair Market value Above FMV Actual Proceeds Fair Market Value Below FMV FMV Actual Proceeds Nil(Gift) FMV FMV The above Tax rules do apply except where it is expressly allowed by any other provisions of the Act.e.g.Tax free rollover from Husband to wife where unless the husband transferor elects to pay capital gains, the transfer will have no tax implications at the time of the transfer of the asset from husband to the wife. Qualifying Transfers: The following transfers are treated as qualifying transfers meaning thereby there will be no capital gains implications while the capital asset is transferred. They are as follows as per Section 73(1) of ITA:  A transfer to the individual’s spouse or common law partner,  A transfer to the individual’s spouse or common law partner in settlement of the rights arising out of the marriage settlements.  A transfer to a trust which the individual’s spouse or common law partner is the income beneficiary. The rules of the transfers are as follows:  In case of a transfer of a non-depreciable capital asset, the transfer will be at the adjusted cost base of the transferor. The transferee will record the ACB of the transferor as his/her ACB.  In case of a transfer of depreciable capital asset, the transfer will be deemed to be at UCC(Un depreciated Capital Cost) or where only a part of the depreciable capital asset class is transferred, at the appropriate portion of the class which does not result in to capital gains. The transferee will record the ACB of the transferor as his/her ACB. The above rules will apply unless the transferor elects to pay the capital gains tax liability ITA 73(1). This is done by simply paying the appropriate capital gains tax at in the year in which such transfer occurs. In such an event the trans
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