Interspousal Attribution rules for dividends received from 1985 to 1990

Issue 1: What are the inter-spousal attribution rules for dividends received during the years 1985 to 1990 where a) Una buys dividend producing shares at a fair market value (FMV) from Tim on January 1, 1985, and b) Una buys dividend-producing shares using monies received from an interest free loan from the Tim on January 1, 1985.

a) Una’s dividend income from Adventure Tours will be attributed back to Tim. At the start of 1985, s. 74 of the Federal Income Tax states any income, gains and losses arising from property transferred between married individuals is attributed to the spouse who originally owned the property.[1] Although new subsection 74.5[2] carves an exception to this rule where income from property would not be attributed back to the original spouse who owned the property if the property was exchanged at fair market value between the spouses, this subsection is applicable to transfers of property made after May 22, 1985.[3] Una’s and Tim’s transaction occurred on January 1, 1985. The original section 74 applies to transfers before May 23, 1985.

b) Una’s dividend income received from Organic Research Inc. will be attributed back to Tim for the years 1988 to 1990. The dividend income she received during the years 1985 to 1987 will be reflected in her income.

The reason behind this is subsection 74(1), which states income from a dividend would not be attributed back to a spouse who lent the other spouse the money to buy those shares. However, loans outstanding on or after May 22, 1985, have two possible situations: Subsection 74.1(1), will not be apply with respect to loans repaid before 1988; and in the case of a loan not repaid before 1988, subsection 74.1(1), as amended, does not apply to any income or loss relating to any period ending before 1988, but applies after 1987. Since the facts do not mention when Una paid the money back to Tim, it is assumed she paid the loan back after 1990 to her husband, making new subsection 74.1(1) applicable to her situation.[4]
Although there are exceptions to loans made at prescribed or commercial rates[5], these exceptions will not apply where the loan is interest free.

[1] “Department of Finance, Explanatory Notes to s. 74.1. Transfers and loans to spouse (History),” 13 February 15, 2005, (obtained on CCH online).
[2] “Department of Finance, Explanatory Notes to s. 74.5. Transfers for fair market consideration (History),” 13 February 15, 2005, (obtained on CCH online).
[3] Ibid.
[4] Supra note 1.
[5] Supra note 2.