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
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.
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