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Tax implications of Gifts, Transfers, or Loans to a Spouse or a Related Minor Child (Attribution Rules)

There are tax implications for transfer by way of gifts or loans of any income-producing property or money that for the purchase of income producing property, to spouse or related minor Child. The transfer may be either direct or indirect, or by means of a trust.

Where such transfer is made to a spouse, any income earned on such property will normally be added back to the income of the person giving the gift or loan. If at any point, that property is sold any gain arising from that will also be attributed back to the person giving the gift or loan.

In the case of gift or loan is made to a related minor child, the income from the property will normally be attributed back to the person giving the gift or loan. However, the capital gains from the property will be considered capital gains of the minor.

A related minor, for purposes of the attribution rules, is a child who is under 18 years old and does not deal with the individual at arm's length and includes a niece or nephew of the individual.

However, the following are some exceptions to the aforementioned attributions rules:

  1. Any income earned from the original income (secondary income) will not be attributed back to the person giving the gift or loan.  An example would be where dividend-producing shares are transferred to a minor or spouse, and dividends are used to purchase more shares.  The dividends from the additional shares would not be attributed back and will become income of the minor child or spouse.
  2. Business income earned from money or business assets transferred.
  3. The attribution rules do not apply to loans where interest is charged at a rate at least equivalent to the specified rate of interest. 

Source: Income Tax Act s 74.1(1), s 74.1(2), s 74.2(1), 74.5(2)

For further information, feel free to contact:

Anil Sharma, B.Comm(Hons), CPA, CGA
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Above article is for general information purpose only. Readers should not rely on or use the information provided as a basis for a course of action without first obtaining the appropriate professional advice.

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