The following information is reprinted from an article by Davidson and Company.

“There are various income attribution rules in the Income Tax Act that can apply after you transfer income-earning property including money to your spouse or minor children. The rules usually apply if you do not receive fair market value consideration on the transfer.

For example, if you give shares to your spouse, any dividends received by your spouse on the shares will be included in your income under the attribution rules. Similarly, if your spouse sells the shares and realizes a taxable capital gain, this will be attributed to you and one-half the taxable capital gain will be included in your income.

Interestingly, the government has not enacted rules that attribute your minor children’s capital gains back to you. Therefore, if you transfer property to your minor child, any subsequent capital gains (and losses) from the property will be reported by your child. Assuming that your child is in a low tax bracket, such a transaction can result in substantial tax saving.

It is therefore easy to legitimately split capital gains with your children. For example, you can purchase equity mutual funds or common shares for your children, and not worry about the attribution rules applying to the subsequent capital gains. (Dividends are a different story; either the income attribution rules or the “kiddie tax” on split income can apply to dividends received by your minor children.)

The above discussion applies equally to transfers of property to trusts in which your children are beneficiaries. For example, if you have a trust with your minor children as the only beneficiaries, you can transfer property into the trust and any subsequent capital gains can be taxed to your children (alternatively, they can be taxed in the trust). The attribution rules will not generally apply to attribute the capital gains back to you.

Furthermore, the income attribution rules do not normally apply to investment income earned by your adult children (18 years of age or over). Therefore, if you transfer property to your adult children, both the investment income earned from the property and subsequent capital gains will not be attributed back to you.

If you transfer property to your children for less than the fair market value, the transfer will be deemed to take place at fair market value. Therefore, if the property has an accrued capital gain, you will have to report the gain at that time. Accordingly, it usually makes sense to transfer a property with little or no accrued capital gain, or even one with an accrued loss. If the property has an accrued capital loss, you can report the capital loss notwithstanding the “superficial loss” rules under the Income Tax Act (these rules apply to transfers to your spouse but not to transfers to your children).”

Disclaimer:

This information is provided as an information service only and is not intended to substitute for competent professional advice. No action should be initiated without consulting a professional advisor.

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