ADMS 3520 Chapter Notes - Chapter 7: Fair Market Value, Capital Gain, Capital Asset
Course CodeADMS 3520
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
transferee will record as his/her ACB the same value with regards to which the
transferor pays capital gains tax liability.
No formal election form needs to be filled out with respect to the above elections.
Transfer of a Farm Property to the Child:
ITA 73(3) lays down the rules for the transfer of the farm property to the child.
They are as follows:
1)The transfer will be deemed to have taken place at the ACB of the
If the transfer price is at or below the ACB of the capital cost of the
2) If the Transfer takes place at a value which is equal or more than the
FMV is the ACB for the transferee Child.
3) If the transfer takes place at a value between the ACB and the FMV,
the actual proceeds will form part of the consideration for the
the same value forms part of the ACB of the Asset.
4) The word “ Child Includes Child his/her spouse, grand child and
his/her spouse and great grand child and his/her spouse under the age of
19 and dependant on the transferor.
5) The transfer can be from the unincorporated business or partnerships
or the corporations.
The income attribution arises whenever there is an in adequate consideration for
The income attribution rules apply to situations where an individual has
1. A spouse or the common law partner
2. An individual who is under 18 and does not deal with an individual at an
Whenever the transfer of a capital asset is made for an inadequate
consideration to the spouse or the common law partner, there are no capital gain tax
implications and whenever the same asset is disposed off by the spouse/CLP, the
capital gains are attributed back to the transferor unless the election in ITA 73(1)
was previously made by the transferor.
As regards the income generated from the same capital asset the attribution rules
would apply and the income will be attributed back to the transferor.
In case of a transfer of the capital asset to the minor child/grand child/great grand
child and the nieces and nephews, the income will be attributed back in the hands of
the transferor up to the age of the majority.
However, there will be a capital gains tax liability at the time of the transfer of the
capital asset to the child and thereafter there will be no attribution of the capital
gains in the hands of the transferor and will be treated as the capital gains of the
Also the income attribution rules do not apply when the transferor becomes non-
resident or when the transferor dies or when there is no spousal relationship
between the husband/wife or the common law partner at the time the income from
the asset is generated.