Early in my career at the bank, a haggard-looking businessman limped in to my office to begin the process of negotiating a loan to settle with his estranged spouse. He was completely drained, emotionally and financially. The pain in his eyes alone was enough to make me want to go home and hug my wife. (I did). This experience was repeated several times for me. (As was the subsequent hugging). I know there are some very good reasons to end a marriage - I learned that at home as a boy - but to these businessmen, and their wives, the financial cost alone was breathtaking. And the emotional toil was telling on their very countenances, the way they walked, the weariness in their eyes.
Perhaps in recognition of the financial stress of relinquishing a marriage partnership, the rules which normally apply to claw back income and nail down taxes to the higher-earning spouse are relaxed somewhat in the case of a relationship breakdown. These claw-back rules are called: "Attribution Rules." Below are a few of the details.
Spousal Tax Attribution and Marriage Breakdown:
What is Attribution?
The attribution rules are a set of provisions designed to prevent unsanctioned income splitting between spouses or other family members, clawing back any tax advantage which might have otherwise been gained in the attempt. For our purposes, we will focus on spousal attribution only, including common-law partners.
Income earned from property which is gifted, sold or loaned (except for a genuine loan - see below) to a spouse or a trust of which the spouse is a beneficiary are clawed back to the transferor spouse and considered to be the income of the transferring spouse.
The attribution rules will also apply when a person:
becomes the spouse of the transferor (starting from the date of marriage), or;
in the case of common-law, after 12 months of living together, or;
from the beginning of their conjugal relationship if a child has been born from this relationship.
Spousal RSP:
In the case of a spousal RSP, any withdrawals from the account in the year in which a spousal RSP contribution is made or in the two years following the contribution must generally be included in the income of the contributing spouse for up to the amount of the contribution.
Spousal Loan Exception:
When the transferee spouse pays fair market value for the property using his or her own funds or pays interest at a rate at least equal to the Canada Revenue Agency's prescribed interest rate each year, attribution rules do not apply. This is the subject of another entire article.
Death, Divorce, or Expatriate Impact on Attribution Rules
Attribution rules will cease to apply following the death of the transferor spouse, following a divorce judgment or separation agreement, or throughout the period in which the transferor spouse is not a resident Canadian.
Impact of a Relationship Breakdown on Attribution:
If your relationship breaks down, the attribution rules may not apply.
For common law partners experiencing a breakdown of their conjugal relationship and for married couples following a marital breakdown but prior to a divorce, attribution rules will generally not apply during the period the spouses are living separate as a result of their relationship breakdown.
Attribution will not apply to capital gains arising from the disposition of transferred or loaned property between spouses where the disposition occurs while the spouses are living apart because of a relationship breakdown and both spouses jointly elect not to have the attribution rule relating to capital gains apply. This election can be made at any time following the relationship breakdown and will apply for the year the joint election is filed and thereafter. The election should be filed with the transferor spouse's income tax return.
What if we Make Up?
The attribution rules discussed above would apply again if the spouses were to reconcile and resume their marital/ conjugal relationship.
This article is for information only and is not legal or tax advice. Please consult your lawyer or accountant before acting on any of the information presented herein.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
