AFM362 Chapter Notes - Chapter 6: Fair Market Value, Property Income, Capital Cost Allowance
SchoolUniversity of Waterloo
DepartmentAccounting & Financial Management
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Chapters 6 & 7: Transactions and Income Attribution
Income Attribution: A process of allocating income earned on property that was
transferred to a non-arm’s length individual back to the original owner (the transferor).
Business income is not subject to attribution.
Transfer: A sale, whether or not proceeds are at market value. Includes sales made
with loan financing as well as gift s on income producing property.
Related Persons: The Act deems related persons n ot to deal at arm’s length and
therefore the attribution rules apply. Related persons are:
- Direct-line antecedents such as your or your spouse’s parents, grandparents,
great grandparents, and your descendant such as your children, grandchildren,
great grandchildren, etc
- Adopted children
- Children’s spouses
- Siblings and their spouses
- Spouses siblings and their spouses
Transactions Subject to Attribution: Income attribution may occur when an asset
earning property income and or capital gains and losses is transferred in the following
(1) An individual transfers or loans property to a spouse, or
(2) An individual transfers or loans property to a non -arm’s length (related) niece,
nephew, or minor
Common-Law Partner: A person who cohabits at that time in a conjugal relationship
with the taxpayer and either:
(1) Has so cohabited with the taxpayer for a continuous period of at least one
(2) Would be the parent of a child of whom the taxpayer is a parent
Exceptions to the Attribution Rules:
Fair Market Value Transfer: When a property is transferred at the fair market
value and fair market value consideration is receiv ed in return, the attribution rules
do not apply.
Interest Charged: The use of a loan may be used to negate the attribution rules if:
- The interest charges are at least equal to the lesser of:
o The prescribed rate
o An arm’s length rate (“commercial” rate)
- If funds are loaned directly, then interest at a commercial rate, as determined
above, must be charged and paid on the loan or attribution will occur
- The interest must be paid within 30 days of the end of each and every year in
which the debt was outstanding or attribution will occur. This means the
transferee cannot miss even one annual interest payment.
- The purpose is not to avoid taxes
Spousal Election: If the transferor elects out of the spousal rollover in a transfer of
property to his/her spouse, the attribution rules will not apply but an immediate
deemed sale at FMV will occur. The transfer also needs to be at FMV, not a gift.
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