Marriage – A Tax Shelter ?
Jack Bernstein*
Introduction
Many women, as well as their fianc6s and husbands, are unaware
of the fact that the Canadian Income Tax Act I treats the act of
marriage as a fiscal metamorphosis. The tax provisions confronting
newlyweds are numerous and complex, for tax consequences will be
produced by their every activity, from their choice of matrimonial
regime to their banking arrangements to their business.relationship.
Further tax effects will be experienced upon -death or dissolution of
the marriage. This article focuses on the various provisions of the
Income Tax Act and the succession duty and gift tax legislation of
Quebec and Ontario, as they apply to spouses.
Date of Marriage
The first decision which a couple must make which has tax
consequences is the choice of the date on which the marriage is to
take place. Paragraph 109(1) (a) I.T.A. provides that an individual
who, during the year, was a married person who supported his
spouse, may deduct from his or her annual income an amount equal
to $1,600 plus $1,400 less the amount by which the dependent spouse’s
income for the year while married exceeds $300. It should be noted
that:
(i) paragraph 109(1)(a) does not stipulate that the individual
claiming the deduction must be married throughout the year;
and
(ii) the maximum deduction is only reduced by every dollar of
taxable income in excess of $300 earned by the dependent
spouse “while married”.
*B.C.L.
(McGill). I wish to extend my thanks to Nat Boidman, C.A.,
for his helpful comments.
1 S.C. 1970-71-72, c.63 as amended (hereinafter referred to as I.T.A.). It is to
be noted that the Act is an example of a statute in which the legislators have
at least in theory succeeded in extending the application of the law to both
sexes (who are ubiquitously referred to as “the taxpayers” or “the spouses”)
in an even handed manner. Cf. the article by Ritchie in this Special Issue of the
McGill Law Journal.
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For example, assume Ms A, a successful executive, and Mr B, an
impoverished law student, are contemplating marriage during the
first week of January 1976. Provided that a great inconvenience would
not ensue, it could be to their advantage to move the marriage
date ahead to December 31, 1975. This would enable Ms A to
claim the maximum $3,000 marital status deduction for 1975, not-
withstanding the fact that Mr B has net taxable income for the
year in excess of $300, as the dependent spouse did not earn any
income in 1975 “while married”. Assuming Ms A would have paid
tax of $700 on $1,400 of income, the tax savings could pay for the
honeymoon.
Choice of Matrimonial Regimes in Quebec
The question of matrimonial regimes is very current and contro-
versial. While others in this Special Issue of the McGill Law Journal
have discussed the topic in detail,2 the author would note at this
point that the tax consequences of such a choice should also be
considered. We may look to Quebec for illustration of the tax effects
of the various options.
In Quebec, spouses married without a marriage contract prior
to July 1, 1970 are under the legal regime of community of property,
and spouses married thereafter are under the legal regime of partner-
ship of acquests.3 The legal regime may be varied by marriage
contract entered into either before or after marriage.4 The matrimo-
nial regime will normally take effect from the day the marriage is
solemnized.5
Separation of Property
If the spouses choose to be separate as to property, each spouse
will be taxed on the entire taxable income derived from property
in his or her name. Where the spouses are joint owners of an income
producing property, it may be possible for each spouse to pay tax on
2 See the articles by Freedman, Hahlo and Jacobson in this Special Issue
of the McGill Law Journal.
3 Arts.1260 and 1268 C.C.
4 Art.1265 C.C.
5 Art.1261 C.C.; but see, Caparros, Le problame de la date d’entrde en vigueur
du nouveau regime lors d’une mutabilitd conventionnelle de rdgime natrimo-
nial (1973) C.de D. 335.
1975]
MARRIAGE – A TAX SHELTER?
633
one half of the annual revenue provided that both spouses contri-
buted equally in acquiring the property.”
Community of Propefty
Under the Quebec regime of community, community property
comprises all moveables of the spouses whether acquired prior to or
during the marriage, all immoveables of the spouses acquired during
the marriage, the revenue derived from immoveable property owned
by the husband at the date of marriage and the husband’s remune-
ration during the marriage.7 The balance of the property of the
spouses is divided into private and reserved property 8 and the
income and capital gains derived therefrom is taxed in the hands of
the spouse owning the property. The issue has arisen as to whether
each spouse should be taxed on one half of the total revenue derived
from community property.
The Supreme Court of Canada in the case of Sura v. M.N.R.9
concluded that only the person legally entitled to receive property
income will be taxed upon it. Prior to 1969, it was the husband alone,
as sole administrator of the community, who could freely dispose of
such property; the right of the wife with respect to the community
property did not crystallize until the dissolution of the marriage.’?
The Court thus concluded that all revenue derived from community
property during the subsistence of the marriage must be taxed solely
in the hands of the husband, as only the husband was empowered to
collect the revenues, and income tax is levied on the recipient of
revenues rather than on the property itself.” The Sura case has
been repeatedly followed in cases where spouses have attempted
to split their income on this basis.’2
In 1969, the husband’s right to freely dispose of community
property was fettered by an amendment to article 1297 C.C. Although
the husband remained the sole administrator, he is now required to
6 If the property registered in the names of both spouses was purchased
with funds provided by one of the spouses, the entire annual income of the
property will be taxed in the hands of the true purchaser by virtue of I.T.A.
(discussed, infra, under “Transferring Funds to a Spouse Without
s.74(1)
Incurring Income Tax Liability”).
7 Art.1272 C.C.
8 Arts.1275 and 1425a C.C.
9 62 D.T.C. 1005.
10 Art.1338 C.C.
1I.TA, s.2(l).
12Skelton v. M.N.R. 56 D.T.C. 147; No.676 v. M.N.R. 60 D.T.C. 42; Pope v.
M.N.R. D.T.C. 456; Bedford v. M.N.R. 64 D.T.C. 411.
634
McGILL LAW JOURNAL
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obtain the prior concurrence of his wife in order to validly make a
gift inter vivos of community property or to alienate any immoveable
property belonging to the community. The restrictions imposed on
the husband’s powers as administrator may serve as a basis for
distinguishing the Sura case and could open up new avenues for
income splitting. Alternatively, since the spouses now are entitled
to contractually modify the community regime, 3 a provision might
be inserted entitling both spouses to administer the community
property.
The Sura case might also be attacked on the ground that it is
inconsistent with the application of subsection 74(1) I.T.A.14 and
sections 38 and 39 I.T.A. For example, as far as subsection 74(1)
I.T.A. is concerned, should the wife’s investment portfolio form part
of the community property, the income derived therefrom would be
taxed solely in the hands of her husband by virtue of the Sura case.
However, if the fact that the husband is the beneficial owner of one
half of the moveable property of his wife (by virtue of the spouses
choosing the community regime) is viewed as a “transfer” of property
to the husband, then subsection 74(1)
I.T.A. should operate to
attribute one half of the income to the wife. Sections 38 and 39 I.T.A.
define the terms “taxable capital gain” and “capital gain” with
reference to the disposition of any property “of the taxpayer”. It
thus appears that it should be possible to split this source of income
between the spouses who, under the community regime, are viewed
as co-owners.
Where a gift is made from community property, each spouse is
considered to have made one half of the gift. 15 Where spouses have
paid the premiums on a life insurance policy with community funds,
it has been held that only one half of the proceeds of the policy will
be subject to succession duties.’ A spouse is not entitled to bequeath
more than his or her share in the community,17 and upon dissolution
through death or otherwise, the capital of the community property
‘3Arts.1384, 1258 and 1259 C.C.
14 Supra, f.n.6.
15 Leduc v. M.N.R. 67 D.T.C. 501; Taxation Act, S.Q. 1972, c.23, s.932.
16 Bernier-Frdgeau v. M.N.R. 57 D.T.C. 1005. The Succession Duties Act, S.Q.
1964, c.70, s.26(3) provides that:
“Whenever the deceased was common as to property and no beneficiary
was designated, one half only of the proceeds of such policy shall be
included in the estate.”
However, if instead the beneficiary of the life insurance policy had borne
all of the premiums, no succession duty would arise by virtue of s.26(1).
– 7 Art.1293 C.C.
19751
MARRIAGE – A TAX SHELTER?
is divided equally between the spouses or their representatives.”
Income tax and succession duty liability is only computed on the
portion of the community property allocated to the deceased.
Although it may not be possible to utilize the community regime as
a vehicle for income splitting in Quebec, it is an effective mechanism
for capital splitting.
Partnership of Acquests
Where no marriage contract is entered into, since July 1970 the
spouses will automatically be governed by the regime of partnership
of acquests. This regime resembles separation of property during
the marriage and community of property on its dissolution. Each
spouse has full powers of administration and alienation over his or
her private property and acquests during the subsistence of the
marriage; however, neither spouse may dispose gratuitously of his
or her acquests without the consent of the other spouse.19 If the
spouses were to be regarded as undivided owners of the acquests,
the capital gains liability derived therefrom would be shared by the
spouses. On death, the estate of the deceased will only comprise one
half of the acquests.
M.N.R. v. Faure Estate
The recent case of M.N.R. v. Faure Estate 20 has added a new
dimension to the use of matrimonial regimes as a means of estate
planning in Quebec.2’ The deceased and his spouse had entered into
a marriage contract at the time of their marriage in Belgium which
provided that the spouses were to be in community of property.
However, the spouses inserted an additional clause in the contract
which stipulated that the surviving spouse was entitled, on the death
of the deceased spouse, to all the community property. The issue
before the Federal Court of Appeal was whether this provision in
the marriage contract divested the deceased of any right in respect
of the community property after his death. As the laws of Belgium
and Quebec with respect to the community regime are similar, it was
agreed that the case should be determined according to the pro-
18 Art.1361 C.C.
‘9 Art.1266o C.C.
2075 D.T.C. 5076. The case is presently being appealed to the Supreme
Court of Canada.
21 No succession duty liability is levied in Ontario on an estate passing
to a spouse by virtue of The Succession Duty Act, R.S.O. 1970, c.449, s.7(3).
McGILL LAW JOURNAL
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visions of the Quebec Civil Code.22 The contractual provision was
regarded as valid by the Court and given full effect from the day
the marriage was solemnized. Accordingly, the widow of Frangois
Faure was the owner of all of the community property from the date
of the marriage and no taxes were exigible pursuant to the Estate
Tax Act ” as no property passed on death. If the Supreme Court of
Canada maintains this decision, it will be possible for spouses to
insert the same provision in their marriage contracts before or even
after their marriage in order that no succession duty liability will
arise on death. The case is, however, of limited practical importance
as the rate of Quebec succession duties is declining annually and
income tax liability on death may be avoided by a direct bequest to
a spouse or spousal trust.
Gifts in Marriage Contracts
Gifts in marriage contracts will attract deferred tax liability. Prior
to 1970 when article 770 C.C. was repealed and article 1265 C.C. was
amended, it was only possible to make a gift to a spouse via a
marriage contract. It was and still is quite common for marriage
contracts in Quebec to contain a gift inter vivos (a gift of furniture
and household effects up to a fixed amount and/or a cash gift
payable within a term of five to ten years) and a gift mortis causa
(a cash gift made in contemplation of death).24 Unless the marriage
contract contains a clause, not contrary to public order and good
morals, which nullifies the gifts on separation or dissolution of the
marriage, the gifts will subsist.25 The gift tax provisions of Ontario 20
and Quebec 27 provide that the transfer of property to a person in
consideration of marriage will constitute a gift. However, a person
is not deemed to have made a gift in the year solely by entering into
a marriage contract. 28 Upon actually tranferring the funds or proper-
ty to the spouse in fulfillment of the covenants of the marriage
contract, the transfer will trigger gift tax as well as the attribution
rules of subsection 74(1) I.T.A.
22 Art.1406 C.C.
22a Estate Tax Act, R.S.C. 1970, c.E-9.
23 I.T.A., s.70(6) discussed infra under “The Death of a Spouse”.
24 Art.1257 C.C.
25 Art.208 C.C.
26 The Gift Tax Act, 1972, S.O. 1972, c.12.
2 7Taxation Act, Part VIII, S.Q. 1972, c.23.
28 Quebec, ibid., s.908(a); Ontario, supra, fLn26, s.3(a).
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MARRIAGE – A TAX SHELTER?
Joint Bank Accounts
The spouses should also be aware that joint bank accounts may
result in a gift tax being payable. The spouses may contribute equal
or unequal amounts to such an account, or only one spouse may
contribute. The purpose of a joint account may be economic conve-
nience or to provide a benefit for the other spouse; whether the
deposit of funds by one spouse in a joint account will constitute a
gift to the other will depend upon the presumptions of advancement
and resulting trust in the common law jurisdictions 29 and in Quebec
upon the provisions of the Civil Code relating to gifts 29a and aliment-
ary obligations. 29b The operation of a joint bank account by spouses
does not create the relationship of a commercial partnership.3
It should be noted that a taxpayer has been successfully assessed
for gift tax where he deposited the proceeds of a winning ticket of
in a joint bank account with his wifeY1
the Irish Sweepstakes
What if a Quebec resident were to win the Olympic lottery and
deposit the one million dollar prize in a joint bank account? The
gift tax exigible on the deemed gift of $500,000 is approximately
$206,250-
32
A problem also occurs on the death of a spouse where the
consorts are separate as to property and a joint bank account exists.
Where only one spouse contributed to and made withdrawals from
the joint account during his or her lifetime, it has been held that
the other spouse acquired a beneficial interest in the bank account
and therefore estate tax would only be levied on one half of the
balance in the account3 Where both spouses have contributed
unequal amounts to a joint bank account and the capital thereof
has been used for investments, it is an almost impossible task
for the executor to ascertain the precise interest of the deceased
2 9 Waters, Law of Trusts in Canada (1974), 301.
29a Arts.761 et seq. C.C.
29b Arts.165 et seq. C.C.
3 0 Brunell v. M.N.R. 58 D.T.C. 545.
31 Goeglein v. M.N.R. 68 D.T.C. 5271.
32 Deemed Gift
Exempt Portion (upon adoption, the Budget of Apr. 17,
1975 will have retroactive effect to Jan. 1, 1975)
Taxable Value of Gift
$500,000
(15,000)
485,000
Tax Payable –
50% x 285,000
subsection 906(h) of the Taxation Act (Qu6.)
63,750
142,500
$206,250
33 Conway Estate v. M.N.R. 65 D.T.C. 5169.
McGILL LAW JOURNAL
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spouse in the substituted property. For these reasons, joint bank
accounts ought to be used as seldom as possible and at no time
should large amounts be accumulated in such accounts.
Transferring Funds to a Spouse Without Incurring Income Tax
Liability
The Act contains several provisions which are intended to prevent
the taxpayer from diverting income to a spouse and thereby reducing
the overall tax liability of the spouses.
Fair Market Value
As spouses do not deal at arm’s length4 before or during mar-
riage, it is essential that transfers of property to a spouse be at fair
market value where subsection 73(1) does not provide relief. 41
Paragraph .69(1)(a) I.T.A. provides that the person acquiring pro-
perty is deemed to acquire the property at fair market value not-
withstanding that a lesser amount was actually paid by the trans-
feror, and where a person disposes of property for less than fair
market value or by way of gift the vendor/donor is deemed to
receive proceeds equal to the fair market value of the property.
This latter provision-may have the adverse consequence of increasing
the income or capital gains liability of the vendor/donor without
increasing the actual proceeds paid. Moreover, no provision exists
for adjusting the cost base of the property to the transferee
accordingly. This would result in double taxation upon the sub-
sequent disposition of the property by the transferee. For example,
assume capital property acquired after 1971 and having an original
cost of $100
is transferred to a non-qualified spousal trust for
$100. The property has a fair market value at the time of transfer of
$110, and the Department of National Revenue intervenes and
deems the transferor to have received $110, resulting in a taxable
capital gain of $5. If the transferee disposes of the property for
$110, a taxable capital gain of $5 will be realized.
As it may be very difficult to determine the fair market value
of a property, and in order to avoid the adverse tax consequences
outlined in the previous paragraph, it is becoming increasingly
popular to insert price adjustment clauses in sale agreements when
parties are not dealing at arm’s length. The Department of National
Revenue has expressed the view that these clauses will be respected
34 I.T.A., ss.251(2)(a) and 251(6)(b).
34a See discussion infra “Methods of Income Splitting”.
19751
MARRIAGE – A TAX SHELTER?
where the parties have manifested an intention to transfer the
property at fair market value and advance notice is given to the
Department 5 It is the writer’s view that where the parties attempt
to transfer the property at fair market value (for example, where
an independent valuation is obtained) notice need not be given to
the Department in order that the clause be effectual.
Attribution of Income and Losses
Subsection 74(1) of the Act provides that where a person has
transferred property either directly or indirectly ‘by means of a
trust or by any other means whatever to his spouse-, or to a person
who has since become his spouse, any income or loss for a taxation
year from the property or from property substituted therefor shall,
during the lifetime of the transferor while he is resideht in Canada
and the transferee is his spouse, be deemed to be the income or a
loss of the transferor and not of the transferee. The income derived
from the transferred property will be attributed to the transferor
until such time as the transferor dies or ceases residence or the
marriage is dissolved 6
This provision is very broad and would encompass most transfers
to spouses. A transfer of property occurs whenever one spouse is
divested of property and as a result the property vests in his or
her spouse.3 7 A “genuine” loan of money to a spouse, even otl an
interest free basis, does not constitute such a transfer 38 The general
phrase “by any other means whatever” does encompass the transfer
of property pursuant to a marriage contract. As outlined above, gift
tax will be exigible on a transfer of property pursuant to a marriage
contract, and the income derived from the property transferred will
be attributed to the transferor. At one time, it was possible to transfer
property to a spouse prior to the marriage and successfully avoid
the attribution rules; 39 however, the insertion of the phrase “or to
3 Interpretation Bulletin IT-169. Interpretation bulletins, published under
the authority of the Deputy Minister of National Revenue, comprise the
Department of National Revenue’s interpretation of the Income Tax Act. The
bulletins are neither binding upon the Department of National Revenue nor
upon the courts.
36 Where capital property is transferred to a spouse pursuant to a separation
agreement, the income derived from the property will only be attributed
to the transferor until the decree absolute.
37 Fasken Estate v. M.N.R. 4 D.T.C. 491.
38nterpretation Bulletin IT-136, Para.6; Weiser v. M.N.R. 55 D.T.C. 221;
Dunkelman v. M.N.R. 59 D.T.C. 1242; Robins v. M.N.R. 63 D.T.C. 1012; Oelbaum
v. M.N.R. 68 D.T.C. 5176.
30Connell v. M.N.R. 2 D.T.C. 903.
McGILL LAW JOURNAL
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a person who has since become his spouse” has specifically provided
for this situation. It should be noted that a sale of property between
spouses even at fair market value would not prevent the attribution
of the income derived from such property to the transferor.40 The
provision also applies to impute to the transferor the income derived
from property substituted for property transferred by him.41
An interesting question arises as to whether the phrase “trans-
ferred property” contained in subsection 74(1) I.T.A. would include
the transfer of a business to a spouse. The Act distinguishes between
income derived from a business and income derived from a
property.42 Subsection 248(1) I.T.A. defines “property” to include
real, personal, corporeal or incorporeal property and “business” to
include a profession, calling, trade, manufacture or undertaking of
any kind, including an adventure or concern in the nature of trade
but not an office or employment. It appears that the definition of
property is broad enough to encompass the transfer of a business
or of income from a business. However, paragraph 7 of Interpretation
Bulletin IT-136 recognizes this distinction and provides that sub-
section 74(1) does not apply to business income even if the business
operates with some or all of the property obtained originally from
the transferor.43
The wording of subsection 74(1) is also broad enough to encom-
pass the situation where a spouse has saved up sufficient funds from
housekeeping savings to make an investment. The income derived
from such an investment would be attributed to the spouse who
made all contributions to the housekeeping funds. It should be noted
that such a transfer renders the transferor and transferee jointly
liable for the resulting taxes, pursuant to section 160 I.T.A.
In the case of Nailberg v. M.N.R.44 three individuals, each owning
one third of the issued stock of each of four companies, attempted
to avoid the attribution rules by each selling shares in the companies
to the wives of the other shareholders. No money changed hands
and the purchase price was satisfied by each wife issuing a demand
non-interest bearing promissory note in favour of her husband. The
Court, relying on the principles that it is the substance and not the
form of the transaction which must be regarded and that a taxpayer
40 Interpretation Bulletin IT-136, Para.5.
41 Bethune v. M.N.R. 58 D.T.C. 1038; contra, Maclnnes v. M.N.R. 54 D.T.C.
1031 (decided before substituted property was inserted in I.T.A., s.74(1)).
42 1.T.A., ss.3, 9 and 12.
43 Robins v. M.N.R., supra, f.n.38; Wertman v. M.N.R. 64 D.T.C. 5158.
4469 D.T.C. 361.
1975]
MARRIAGE – A TAX SHELTER?
cannot do indirectly what he is prohibited from doing directly,
applied section 74.
Attribution of Capital Gains
Subsection 74(2) of the Act provides for the attribution to the
transferor of taxable capital gains realized, or allowable capital
losses incurred, as a result of a disposition of property which has
been transferred pursuant to subsection 74(1). 5 Paragraph 14 of
Interpretation Bulletin IT-136 provides that
… where a capital gain realized on disposition of transferred property
by the transferee has been attributed to the transferor and a substituted
property has been acquired by the transferee, the funds representing the
portion of the capital gain which accrued after the property was trans-
ferred to the transferee are not considered as part of the substituted
property.
For example, assume that a wife transfers shares to her husband
having a cost to her of $10,000 and a fair market value of $20,000.
Subsection 73(1) provides that upon a transfer of capital property
to a spouse, there will be a deferral of capital gains and the trans-
feree acquires the property at the same cost base as the transferor.
Her husband later disposes of the property for $40,000 and the capital
gain of $30,000 is attributed to his wife. If more shares are acquired
by the husband at a cost of $40,000, only one half of any income or
capital gain realized from the substituted property will be attributed
to the wife.
Spousal Employees
Subsections 74(3) and 6(8) I.T.A. are designed to prohibit a tax-
payer from attempting to split his or her income by remunerating
his or her spouse. Where a taxpayer is employed by his spouse who
is carrying on a business as a sole proprietor, no deduction may be
made for salary paid to the employee and no amount may be included
in the income of the employer. Unfortunately, no exception is made
for bona fide employment and these provisions will apply notwith-
standing the fact that the spouse is receiving remuneration commen-
surate with his experience and efforts. However, as a corporation
is regarded as a distinct entity for corporate and fiscal purposes,46
45 Until the recent amendment to I.T.A., s.74, the transferor was taxed on
the income or capital gains derived from transferred property but was pro-
hibited from claiming resulting capital or non-capital losses. E.g., Martens v.
M.N.R. 64 D.T.C. 191; Stratton v. M.N.R. 66 D.T.C. 5422.
46 E.g., Saloman v. Saloman [1898] A.C. 22; Sazio v. M.N.R. 69 D.T.C. 5001.
McGILL LAW JOURNAL
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a taxpayer may be employed by a corporation controlled by his
spouse without triggering the application of subsection 74(3) I.T.A.
Only that portion of the salary paid by the corporation to the spouse
which is reasonable in the circumstances will be deductible by the
corporation.47
It is becoming increasingly popular for artists, athletes, entertain-
ers and businessmen to form personal service corporations. The
corporation will be taxed at an effective annual rate of 25% 48 on
its first $100,000 of active business income and funds may be divert-
ed to a spouse by way of salary or dividend. Professionals may
similarly, to the extent permitted by the respective professional
codes 4 9 incorporate certain aspects of their professional practice
into what is commonly known as a management corporation. The
advantages are the same as those of the personal service corporation.
Care must be exercised in the structuring of these corporations in
order to avoid a challenge from the Department of National Revenue
on the groutnd that the corporation is a sham and an attempt to
artificially reduce income.50 In Murphy v. M.N.R., the only case which
has been concerned with management corporations vis-a-vis spouses,
a doctor paid a management fee to a company owned by his ac-
countant in return for nursing services provided by his wife.5′ As
Ruling Decision TR-14 indicates, the Department of National Revenue
is prepared to accept professional management companies in which
a spouse will be a controlling shareholder and a bona fide employee.
A formula is provided in subsection 74(4) I.T.A. to be used in
computing the portion of the salary of a spouse employed by a part-
nership which may be attributed to the consort who is a partner.
The amount attributed is proportionate to the partnership interest
of the spouse. For example, in the case of 176 v. M.N.R.”2 a husband
was employed by a partnership consisting of his wife and her two
brothers. One third of the income received by him was deemed to
be income of his wife.
Subsection 74(5) I.T.A. is designed to prohibit the spouses from
splitting their income by entering into a partnership agreement.
This subsection grants the Minister of National Revenue the dis-
47I.T.A., s.67; Mulder Bros. Sand & Gravel Ltd. v. M.N.R. 67 D.T.C. 475.
4 8I.T.A., s.125(1). The tax reduction will be very attractive where the
individual is in the top marginal tax rate of approximately 63%.
49 The practice of medicine may only be carried on by a natural person;
see Kindree v. M.N.R. 64 D.T.C. 5248.
50 I.TA., s.245(1).
51 68 D.T.C. 5178.
5254 D.T.C. 298.
19751
MARRIAGE – A TAX SHELTER?
cretionary power to attribute the income of a spouse derived from
the partnership to the other spouse. The discretion accorded the
Minister pursuant to subsection 74(5) is in respect of the entire
income derived by a spouse. Accordingly, the Minister is not em-
powered to redistribute the profits between the husband and wife
partners, but must either accept the division of profits or reassess
the entire profit as the income of a sole spouse. Although this
provision was not intended to apply to the case where husband and
wife are bona fide partners, the Minister has nevertheless often
exercised his discretion in this situation.5 3 Despite this frequent-exer-
cise of ministerial power, there has been only one case where the
income tax 4
facts revealed an apparent scheme for avoiding
Evidence is required by the taxpayer demonstrating that the Minister
has wrongly or injudiciously exercised his discretion, and the absence
of such evidence is sufficient ground for the court to conclude that
the Minister’s ruling should not be interfered with. 5 Where, however,
the Minister has invoked his discretion without considering all the
facts of the particular case, the court may refer the case back to the
Minister for further consideration.”
Even where a bona fide partnership is found to exist between
husband and wife, the allocation of profits between the spouses
must be fair and reasonable in the circumstances 7 Interpretation
Bulletin IT-231, dated June 30, 1975, provides that subsection 74(5)
I.T.A. is applicable where one of the spouses neither actively engages
in nor invests his or her own proprety in the business of the partner-
ship. This would apparently include the situation where a spouse
borrows the money necessary to invest in the partnership and the
loan is obtained on the strength of credit of the other spouse or the
business of the partnership, and is repaid out of his or her share of
the partnership profits. The Minister will consider the qualifications
of a spouse and the amount of services rendered in determining
whether the spouse is actively engaged in the business of a partner-
ship. Notwithstanding the foregoing, where the spouses would other-
wise be regarded as bona fide partners but the principal reason for
their agreed apportionment of profits is for tax purposes, the court
may reallocate the profits pursuant to subsection 103(1) I.T.A.
53 No. 246 v. M.N.R. 55 D.T.C. 188; Margolis v. M.N.R. 56 D.T.C. 426; Harper
v. M.N.R. 57 D.T.C. 549; Shack v. M.N.R. 60 D.T.C. 187; Greene v. M.N.R. 60
D.T.C. 355; No.733 v. M.N.R. 61 D.T.C. 392; Funk v. M.N.R. 61 D.T.C. 590;
Henri v. M.N.R. 71 D.T.C. 162.
54Shack v. M.N.R., ibid.
55 Henri v. M.N.R., supra, f.n.53.
56 Robins v. M.N.R. 62 D.T.C. 331.
571I.T.A., s.103(1).
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In light of the jurisprudence and the discretionary power of the
Minister, a partnership is not the most appropriate vehicle for a
husband and wife venture. Interpretation Bulletin IT-231, comforting
as it may be, does not have the force of a legislative amendment to
section 74 and cannot be relied on in court. It is evident that where,
prior to marriage, a taxpayer’s fiancde is employed by the taxpayer
or a partnership in which the taxpayer is a member or the couple
are in partnership, thought should be given to incorporation in order
to avoid the undesirable tax consequences outlined above.
Superficial Losses
It would be attractive if a spouse could dispose of capital property
in order to realize a capital loss and reacquire the same or identical
property directly or have his or her spouse acquire it shortly there-
after. For example, assume it is December 1975 and a wife has realized
a taxable capital gain of $10,000 in the year from the disposition of
certain marketable securities. Her other holdings include shares of
the capital stock of a public corporation, the value of which could
increase substantially at any time but which is presently trading
at a value substantially less than the cost to her. She would like to
realize sufficient capital losses for the year to offset her capital gains,
yet due to her faith in this corporation, she would not like to divest
herself of the shares. The wife therefore sells the shares on the
market at fair market value with a view to having her husband
reacquire the property in a day’s time at approximately the same
value. This would enable her to “have her cake and eat it too”.
Unfortunately for her, subparagraph 40(1) (g) (i) and paragraph
54(i) of the Act operate to deem the superficial loss realized when
an identical property is acquired within 30 days of the disposition
by the taxpayer, his spouse or a controlled corporation, to be nil.
The adjusted cost base of the substituted property will be increased
by the amount of the superficial loss.57a It is therefore necessary for
spouses to keep a close watch on each other’s investments to avoid
accidentally triggering a superficial loss. The simplest manner of
avoiding this provision is to have one’s children acquire the property
and hold it for more than one month prior to its retransfer.
Indirect payments
Subsection 56(2) I.T.A. operates to prevent an indirect transfer
of property or income to a spouse. Assume that a wife directed her
57a Ibid., s.53(1) (f).
19751
MARRIAGE – A TAX SHELTER?
employer to pay a portion of her salary directly to her husband.
Subsection 56(2) of the Act could be invoked in order to include
the amount of the salary in the wife’s income for the year.
Subsection 56(4) I.T.A. prevents the transfer or assignment of
a right to income to a person with whom the transferor or assignor
does not deal at arm’s length, such as a spouse. For example, if a wife
who owns an apartment building instructs the tenants to make the
rental payments to her husband directly, subsection 56(4) I.T.A.
would include the rental payments in her income. It is also possible
that double taxation may result where this subsection is applicable,
as it only provides for the inclusion of the income in the hands of
the transferor and not for the corresponding reduction of the income
of the transferee. It is thus conceivable that the tranferee will have
included the amount received in income and that the transferor will
be obligated to do the same when reassessed. Subsection 74(1)
I.T.A., which deals with the attribution of income from a property
transferred to a spouse, provides specifically that the income from
such a property will only be taxed in the hands of the transferor.
Section 55 I.T.A. is a catchall provision designed to prevent any
transaction which results in an artificial increase in the taxpayer’s
losses or an artificial decrease in the taxpayer’s gains.
Methods of Income Splitting
Despite the mesh of provisions designed to prevent income split-
ting among spouses, there are still several means by which this
can be done successfully. For example, rather than transferring funds
to a spouse in order that a capital property may be acquired, it is
preferable that the funds be loaned to the spouse. The attribution
provisions will not apply even if a demand non-interest bearing note
is received as consideration for the loan s The loan may gradually
be repaid with annual cash gifts from the transferor. The fact that
interest is not charged on a loan to a spouse will not result in a gift
tax assessment. 9
As outlined above, a taxpayer may draw a salary from a corpora-
tion controlled by his or her spouse, and spouses may pool their
assets by virtue of a bona fide partnership arrangement.
58 Supra, f.n.38.
59 Information Circular 73-18. If a demand note is not used, failure to charge
interest may result in a gift tax assessment pursuant to the Taxation Act,
supra, f.n.27, ss.899 and 899.1, and The Gift Tax Act, 1972, Ontario, supra, f.n26,
s.1(27).
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It is also possible to make annual cash gifts to a spouse without
incurring a gift tax liability. In Ontario, absolute and indefeasible
gifts made by the donor to his spouse are exempt from gift tax
pursuant to subsection 10(g) of The Gift Tax Act, 1972.”0 In Quebec,
annual gifts of $5,000 may be given tax free to a spouse pursuant
to subsection 919(g) of the Taxation Act.61 The recent Quebec Budget
has proposed that tax free gifts to spouses be increased to $15,000
a yearIa It must be borne in mind that although no gift tax may
result on the transfer of funds to a spouse, the attribution rules of
section 74 I.T.A. will continue to apply. However, because of the
attribution rules it may be advisable for a spouse to borrow an
amount equal to the gift from the bank and to use these funds to
acquire the desired capital, property. The bank loan can then be
repaid with gift money. The capital property which was acquired
would not then be viewed as property substituted for property
transferred and no attribution would occur.
Section 73 I.T.A. enables a taxpayer to transfer capital property
to an inter vivos trust in respect of which his or her spouse is the
sole income and capital beneficiary during the lifetime of the trans-
feree, or to the spouse directly, without incurring any income tax
liability. In order for the “rollover” to apply, both the taxpayer and
the spouse or spousal trust must be resident in Canada at the time
of transfer of the property. The transferor is deemed to have disposed
of the property for proceeds equal to the tax cost of the properties
(i.e. the cost computed for tax purposes rather than the actual cost)
and the transferee is deemed to acquire the property at a cost equal
to the deemed proceeds. It should be noted that a clause enabling
the trustees to encroach on the capital for the benefit of children or
a clause which restricts the wife’s rights upon remarriage would
have the effect of “tainting” the trust and section 73 would be
inapplicable. The income derived from the transferred property is
attributed to the transferor by virtue of subsection 74(1) I.T.A.
Where both spouses are independently employed and enter into
business dealings with one another, all transactions must take place
at fair market value. 2
In summary, it is apparent that great care must be exercised in
structuring any transfer of property or funds between spouses in
60 Supra, f.n26.
1 Supra, f.n.27.
61a Budget Speech by the Minister of Finance on April 17, 1975, to take effect
from January 1, 1975; Journal des Dgbats, Assemblde Nationale, 17 avril, 1975,
vol.16, no.13, 368.
62 I.T.A., s.69; Edward v. M.N.R. 69 D.T.C. 738.
19751
MARRIAGE – A TAX SHELTER?
order that no income or gift tax liability arise as a result of such
a transfer..
Death of a Spouse
Upon the death of a spouse, the aggregate value of the estate
of the spouse must be computed for provincial succession duty
purposes. The share of the surviving spouse in the community pro-
perty or acquests will not be included in the estate of the deceased.
Moreover, upon death there is a deemed realization of all of the
capital property of the deceased pursuant to subsection 70(5) I.T.A.,
resulting in recapture of capital cost allowance and capital gains,
unless the property is bequeathed directly to a spouse or spousal
trust. This is in reality only a deferral of income tax as the recapture
and capital gains tax will be triggered on the death of the second
X
spouse.
In Ontario, no succession duty arises on property bequeathed to
a spouse.6 In Quebec, estates having an aggregate value of up to
$150,000 are exempt from succession duty.64 In order that no Quebec
succession duties arise, the situs of the assets of the deceased must
be located outside of Quebec at the time of death and the assets must
be bequeathed to a non-resident of the Province so that there is no
transmission of property in Quebec on death.6 For example, term
deposits are situate at the bank branch where the money is on
deposit. It is not very difficult to instruct the bank, within a short
time prior to the death of the spouse, to transfer* the account to a
branch in a non-succession duty province. The funds may then be
bequeathed to an inter vivos spousal trust set up in such province.
Similar steps may be taken with respect to jewelry, insurance
policies, bonds, debentures, shares (of corporations having share-
transfer offices outside Quebec) and promissory notes.
Where a spouse is desirous of obtaining a life insurance policy
on his or her life and having the other spouse as a beneficiary, the
premiums should be borne by the beneficiary in order to avoid
succession duty liability on death. 0 If the beneficiary does not have
sufficient income to pay the annual premiums, the insured spouse
could provide the beneficiary with funds through an annual gifting
83The Succession Duty Act, R.S.O. 1970, c.449, ss.7(2) and 7(11)(d).
64Succession Duties Act, R.S.Q. 1964, c.70, s.11(1).
05 Ibid., ss.4 and 6.
0 Ibid., s.26; The Succession Duty Act, supra, f.n.63, s.1 (r)(v).
McGILL LAW JOURNAL
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program. However, the exchange of cheques should not be simul-
taneous nor should the amounts correspond exactly. 7
Both the Quebec and Ontario succession duty Acts contain pro-
visions which include gifts made during the five years prior to the
death of the deceased in the aggregate value of the estate 8 Both
Acts provide that the succession duty otherwise payable shall be
reduced by the amount of gift tax previously paid.”9
Where the deceased has capital property, the deemed disposition
of which would result a substantial recapture and capital gains
liability, provision should be made in his or her will to bequeath
this property either directly to his spouse or to a spousal trust as
is contemplated by subsection 70(6) I.T.A. 70 Where the property
is bequeathed directly to the spouse or a spousal trust, a rollover is
effected and the spouse or spousal trust acquires the properties
transferred at the same tax cost as the deceased and no tax liability
arises. It should be noted that the property must be vested inde-
feasibly in the trust, with the surviving spouse as sole income and
capital beneficiary during his or her lifetime. A bequest to the trust
made conditional upon the spouse not remarrying will have the
effect of tainting the trust and subsection 70(6) I.T.A. will be appli-
cable.71 A possible modification of this clause which will not have the
effect of tainting the trust is to provide that the surviving spouse
will continue to receive all of the income of the trust until his or
her death but will cease to have any right to the capital of the trust
at the time of his or her remarriage. The capital of the trust will be
67 The cases of M.N.R. v. Cox Estate 71 D.T.C. 5150 and Estate H.B.L. Wittal v.
Minister of Finance of B.C. 75 D.T.C. 401 held that an insured taxpayer must
not sell his or her life insurance policy to his or her spouse in consideration
for funds provided by the insured taxpayer, in order to avoid the succession
duties arising on the death of the insured. It is submitted however, that the
initial undertaking of the beneficiary in paying the annual premiums on the
life insurance policy in respect of which his or her spouse is the insured, even
with funds provided by the insured, would be permissible and would avoid
succession duty liability for the proceeds from such a policy.
18 Succession Duties Act, supra, fn.64, s.22(1); The Succession Duty Act,
supra, fmn.63, s.5(1) (g).
9 Succession Duties Act, ibid., s.22(a); The Succession Duty Act, ibid., s.9.
70 Where it is anticipated that the capital properties will appreciate following
the death of the first spouse, thought should be given to bequeathing the
properties directly to the children or to a non-spousal trust in respect of
which the spouse and children are beneficiaries. There will be an immediate
capital gain and/or recapture which will be less than that which would be
realized on the death of the second spouse if a spousal trust was utilized.
7l Dontigny v. M.N.R. 73 D.T.C. 5398.
1975]
MARRIAGE – A TAX SHELTER?
allowed to accumulate and will not be used by anyone prior to the
death of the surviving spouse.
Where a testator has failed to bequeath capital property solely
to his spouse or a spousal trust, and substantial recapture and capital
gains liability will result pursuant to subsection 70(5) I.T.A., it may
still be possible for the spousal trust to qualify for the rollover
provided in subsection 70(6). Subsection 70(6.1) of the Act provides
that a trust shall be considered to be. created by a taxpayer’s will if
the trust is created by a disclaimer by a beneficiary under the tax-
payer’s will. In order for a disclaimer not to amount to a gift or
disposition in favour of another beneficiary, such as the spouse, the
disclaimer must be worded in general terms and not be made in
favour of specific beneficiaries.72
Where a taxpayer ceases to carry on a business, subsection 24(1)
I.T.A. permits the deduction for tax purposes of the balance of the
expenditures made in acquiring cumulative eligible capital which
is comprised of certain intangibles such as goodwill, patents, and
trademarks. However, when the business is subsequently carried on
by a spouse (as on the death of a spouse) no deduction is permitted;
instead, the balance of the eligible capital account is transferred to
the spouse carrying on the business.73
Where it is anticipated that the deceased will have substantial
installments owing to him for services rendered or property sold
prior to his or her death, a specific bequest should be made to the
spouse or the spousal trust of the right to receive these amounts in
order that the beneficiary may elect pursuant to subsection 72(2)
to continue to take the various reserves allowed by the Act (and thus
only pay tax on amounts actually received).
If the deceased spouse has a Registered Retirement Savings Plan,
provision should be made to transfer the refund of these premiums to
the surviving spouse in order that he or she may be entitled to defer
72No gift or assignment; Smith Estate v. M.N.R. 58 D.T.C. 1015; Herman
v. M.N.R. 61 D.T.C. 700; contra, Plaxton v. M.N.R. 60 D.T.C. 38; Bulman v.
M.N.R. 62 D.T.C. 593.
73I.T.A., ss,24(2) and 70(5.1). An interesting question is whether the spouse
will be considered to have carried on the business throughout the period com-
mencing January 1, 1972 for the purposes of I.T.A.R. 21(1) which sets out a
formula by which a portion of goodwill proceeds are taxed where a sale occurs.
It is the writer’s opinion that the wording of I.T.A., s.24(2) is not specific
enough for the spouse to be deemed to have carried on the business from
January 1, 1972. Consequently, upon the sale of the goodwill of the business,
one half of the proceeds from the sale will be included in the income of the
spouse.
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payment of tax on the amount transferred. This is effected by claim-
ing a deduction pursuant to subsection 60(j) I.T.A. and either pur-
chasing an income averaging annuity as allowed by paragraph
61(2) (d) I.T.A. or transferring the funds into a registered retirement
savings plan under which the surviving spouse is an annuitant,
pursuant to subsection 60(1) I.T.A74
Dissolution of Marriage: Separation and Divorce
Upon a separation or divorce, the Divorce Act 75 provides that
interim76 and permanent77 corollary relief may be granted. Fiscal
implications should be considered by both spouses prior to entering
into a property settlement.
In order to qualify alimony as deductible to the payer and taxable
to the payee, the following criteria must be met:
(i)
(ii)
(iii)
(iv)
the amount must be paid pursuant to a decree, order or
judgment of a competent tribunal or pursuant to a written
agreement;
the amount must be payable on a periodic basis;
the amount must be paid for the maintenance of the reci-
pient, the children of the marriage or both the recipient
and the children of the marriage; and
the recipient must be living apart from the spouse or
former spouse making the payments, and be separated
pursuant to a divorce, judicial’separation or written sepa-
ration agreement 8
Almost identical criteria must be satisfied in order for mainte-
nance payments to be deductible by the payer and be taxable to the
payee.79 Maintenance payments must be made pursuant to a court
order, but the separation need not be pursuant to a written sepa-
ration agreement, judicial separation or divorce.
There is no doubt that the maintenance provisions encompass
all court orders made pursuant to the Divorce Act and pertaining
to interim or permanent corollary relief. An interesting question is
whether payments made following a decree of nullity will qualify
74 Interpretation Bulletin IT-240 published August 11, 1975.
75 R.S.C. 1970, c.D-8.
76 Ibid., s.10.
771Ibid., s.11.
78I.T.A., ss.56(i)(b) and 60(b).
79Ibid., ss.56(1)(c) and 60(c).
19751
MARRIAGE – A TAX SHELTER?
as deductible maintenance payments. If the marriage is void ab
initio, the marriage is regarded as never having taken place. As the
parties never were “spouses”, it is doubted that maintenance pay-
ments would be -deductible.
Written Agreement
The agreement must be written.80 The amounts paid prior to a
written agreement are not deductible to’the payer nor must they be
included in the income of the payee; 81 nor are payments made
pursuant to an agreement in anticipation of the dissolution of the
marriage contemplated in section 56 I.T.A.82 An undated and un-
signed document does not constitute an acceptable agreement within
the meaning of section 56;83 furthermore, letters evidencing nego-
tiations between a spouse and the other spouse’s attorney do not
constitute a written separation agreement.34
Periodic Basis
It is settled law that a lump sum settlement is neither deductible
to the payer nor taxable to the payee. 5 Interpretation Bulletin IT-118
defines periodic payments to mean “payments which are made
periodically, recurring at fixed times, not at variable periods, not in
the exercise of the discretion of one or more individuals, but from
some antecedent obligation”. A distinction must be made between a
lump sum settlement payable in installments and regular mainte-
nance payments. Only the latter will be deductible to the payer and
taxable to the payee. The specific wording in the order or agreement
dictates whether such payments can properly be considered as “peri-
odic” or simply as installments of a lump sum settlement. Regular
payments will be deductible where they are made over an extended
period and are stated to be for the purpose of the support and mainte-
nance of the spouse and/or children.8 6 Where a separation agreement
and/or court order is retroactive in wording and effect and provides
for payments on a periodic basis, it has been held that the lump
sum payment of the arrears is fully deductible to the payer and must
s0 Haigh v. M.N.R. 71 D.T.C. 308.
81 Pezet v. M.N.R. 74 D.T.C. 1246.
82 Cooey v. M.N.R. 52 D.T.C. 132; Ellis v. M.N.R. 55 D.T.C. 393.
83Reid v. M.N.R. 72 D.T.C. 1540.
84 Griep v. M.N.R. 70 D.T.C. 1661.
8 5 Veliotis v. M.N.R. 74 D.T.C. 6190; McWhirter v. M.N.R. 68 D.T.C. 197;
86 Interpretation Bulletin IT-118, Para.8.
Stewart v. M.N.R. 71 D.T.C. 326; Wilton v. M.N.R. 71 D.T.C. 87.
McGILL LAW JOURNAL
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be included in the income of the payee. 87 If property is transferred
pursuant to a separation agreement, the attribution rules of sub-
section 74(1) I.T.A. will apply until the decree absolute.
Whether a lump sum payment or periodic payments will be more
attractive to the payer or the payee from a tax point of view will
depend upon the amounts involved in each case. The payee may
initially find a lump sum payment more attractive as it will be
received on a tax free basis and removes any worry about default in
periodic payments. However, the payee should first consider whether
the investment of the lump sum could yield an annual after-tax
profit of at least the same amount which would be realized in each
year from the receipt of periodic payments. The payer, on the other
hand, should compute whether a reinvestment of the lump sum
payment would yield an annual amount greater than the periodic
payment otherwise payable.
Maintenance for the Spouse and/or Children
Payments made for the support of the spouse and children will
qualify for the deduction. However, payments made in settlement of
the spouse’s property interests are regarded as capital and not as
maintenance payments.
It has been held that mortgage payments on a jointly owned
house do not constitute payments for the maintenance of a spouse
or children and are therefore not deductible by the payer.8 The
courts have held that payment for music lessons,s9 car and legal
expenses,.0 and education and insurance9′ are not periodic payments
made for the maintenance of a spouse and are therefore not
deductible.
An interesting question is whether payment of premiums for the
life insurance policy on the life of the payer may be deductible as
periodic payments made for the maintenance of the spouse, where
the spouse is a beneficiary under the policy. In order to ensure that
the payments will be deductible, where an insurance policy forms
part of the separation agreement, the amount of the periodic payment
should be increased to incorporate the cost of the premiums and
should be paid directly to the spouse.
87 Flett v. M.N.R. 65 D.T.C. 761.
88 Cussion v. M.N.R. 66 D.T.C. 297; Houg v. M.N.R. 71 D.T.C. 564; Grace
v. M.N.R. 74 D.T.C. 1248.
89 Taylor v. M.N.R. 71 D.T.C. 10.
9o Stafford v. M.N.R. 71 D.T.C. 247.
91 Golightly v. M.N.R. 70 D.T.C. 1120.
1975]
MARRIAGE – A TAX SHELTER?
Payments Made Directly to the Spouse
A strict reading of paragraphs 56(1)(b) and (c) and subsections
60(b) and (c) I.T.A. and a review of the earlier jurisprudence would
imply that payments, to be deductible by the payer and taxable to
the payee, must be made directly to the payee 2 However, the recent
addition of section 60.1 I.T.A. resolves this issue. This provision
provides that periodic payments of amnounts to “or for the benefit”
of the spouse, former spouse or children of the marriage are deemed
to have been paid to, and received by, the spouse or former spouse
at the time the payment was made.This amendment is complementary
to Interpretation Bulletin IT-118 and the recent jurisprudence decid-
ing that payments made directly to third parties with the con-
currence of the payee constituted payments to the payee. 3
Living Apart from the Spouse
It is possible for spouses to be living separate and apart while
residing in the same household.9 However, when the spouses are
living physically apart and co-habitation is resumed within a year,
no part of the alimony payments will be deductible to the payer.95
Other Tax Consequences of Dissolution of Marriage
A spouse making deductible alimony or maintenance payments
may no longer claim a deduction for his spouse and children.”,
In virtue of the interpretation of the phrase “ordinarily in-
habited” provided in paragraph 6 of Interpretation Bulletin IT-120, it
appears that following separation and until decree absolute, the
payer may continue to designate the home.occupied by a spouse and
children as his or her principal residence, notwithstanding the fact
that the payer no longer resides there. It is thus possible for the
payer to dispose of the principal residence, subsequent to the sepa-
ration, without incurring any tax liability.
The provisions of the Income Tax Act and the gift tax and suc-
cession duty legislation pertaining to spouses do not provide any
92Taylor v. M.N.R. 71 D.T.C. 10; Roper v. M.N.R. 71 D.T.C. 442; Sproston
v. M.N.R. 70 D.T.C. 6101.
93 Raymond v. M.N.R. 60 D.T.C. 469; Brown v. M.N.R. 71 D.T.C. 77; Belanger
v. M.NR. 74 D.T.C. 1130; Berlin v. M.N.R. 74 D.T.C. 1185; M.N.R. v. Hastie 74
D.T.C. 6114.
94 Boos v. M.N.R. 61 D.T.C. 520.
95 Wallace v. M.N.R. 63 D.T.C. 128; Griffith v. M.N.R. 66 D.T.C. 448.
96 I.T.A., s.109(4).
McGILL LAW JOURNAL
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relief for transfer of property made subsequent to the divorce.
However, the former spouses will be dealing at arm’s length and
need not concern themselves with the indirect transfer and anti.
avoidance provisions outlined above.
The timing of property transfers may have some interesting tax
consequences. If a spouse transfers capital property to his or her
spouse prior to decree absolute, no capital gain or recapture is
realized as a result of the transfer by virtue of subsection 73 (1) I.T.A.
Any income or capital gain derived from the property transferred
prior to decree absolute will be attributed to the transferor. Any
income or capital ,gain realized subsequent to decree absolute will
be taxable to the transferee. The timing of property transfers is
important in ensuring that any income or capital gains realized are
taxed in the hands of the spouse in the lower marginal tax bracket
and that any capital or non-capital loss is incurred by the spouse
in the higher tax bracket.
Miscellaneous Provisions
If the spouses own both a country and a city home, each spouse
should, at the time of disposition, designate a separate home as
his or her principal residence in order that all proceeds be received
tax free.97
Depending upon whether one or both of the spouses owns a home
in a given year, or has ever previously been a beneficiary under a
Registered Home Ownership Savings Plan, a maximum of ten annual
deductible contributions of $1,000 may be made to one or two such
Plans . 8
A spouse may, to the extent that he or she has not made the
maximum annual deductible contribution to a Registered Retirement
Savings Plan, make annual deductible payments to the Registered
Retirement Savings Plan of his or her spouse.9
Where a taxpayer would otherwise be able to claim the full
deduction for his or her spouse pursuant to paragraph 109(1) (a)
I.T.A. were it not for the taxable dividends received by the spouse,
the taxpayer may elect to personally pay tax on the dividends received
by the spouse. 00
97Ibid., ss.54(g) and 40(2)(b).
98 Ibid., s.146.2.
99 Ibid., s.146(5.1).
10O Ibid., s.82(3).
19751
MARRIAGE – A TAX SHELTER?
Each spouse may now claim an annual deduction of $1,000 invest-
ment income pursuant to section 110.1 of the Act.
If each spouse controls a corporation and upon marriage, one
spouse acquires a 10% interest or more in the other’s corporation,
the corporations will be deemed associated and the small business
deduction will have to be prorated.’0’
Conclusion
It is apparent from the foregoing that in addition to the many
serious consequences one normally considers
in contemplating
marriage, there may be significant fiscal advantages or disadvantages
to be considered before taking the step. Often the tax ramifications
may be turned to advantage if one is aware of the options and their
effect on tax liability. As has been seen, the legislators have assidu-
ously foreseen and prescribed the tax consequences of practically
every aspect of the matrimonial partnership, from gifts in a marriage
contract to the -disposition of property upon the surviving spouse’s
death.
101 Ibid., s256(1) (d).
