Spousal attribution rules: gift income is taxed back; a 3% loan is not

What attributes back to your client, and what doesn't?

Subsection 74.1(1) deems income or loss from property your client transfers or lends to a spouse or common law partner, or from property substituted for it, to be your client's income laws-lois.justice.gc.ca. Subsection 74.2(1) does the same for taxable capital gains and allowable capital losses when the spouse sells it laws-lois.justice.gc.ca. The exceptions sit in section 74.5 laws-lois.justice.gc.ca.

Attribution also follows substituted property. If the spouse sells the gifted shares and buys a bond, the bond interest still attributes. Your client reports attributed dividends on line 12000, interest on line 12100 and gains on line 12700 of their own return canada.ca.

Who is taxed on dividends and gains from shares gifted to a spouse?

A gift of capital property to a spouse rolls over at cost by default. Under 73(1), your client is deemed to sell at adjusted cost base (or UCC for depreciable property) and the spouse is deemed to buy at that same amount, so the gift itself creates no gain laws-lois.justice.gc.ca. The CRA explains it the same way canada.ca.

The CRA's archived bulletin IT-511R confirms that the transferor grosses up attributed dividends and claims the dividend tax credit canada.ca. The $80,000 gain comes back to your client because 74.2(1) measures the whole gain from the spouse's sale, not just the growth after the gift laws-lois.justice.gc.ca. Capital losses come back too, which can help a client who has gains to offset.

Worked example: a $300,000 prescribed rate loan saves $1,140 of federal tax a year

Subsection 74.5(2) switches attribution off for a loan when the rate is at least the lesser of the prescribed rate when the loan was made and an arm's length rate, and interest for the year and every earlier year is paid no later than 30 days after year end laws-lois.justice.gc.ca. The prescribed rate is 3% for October 1 to December 31, 2026 canada.ca, and a loan made at 3% keeps that rate for life. See the full quarterly table on CRA prescribed interest rates for 2026.

Your client, with taxable income above $258,482, lends $300,000 to a spouse with taxable income under $58,523 on October 1, 2026, at 3%. The spouse buys bonds paying $15,000 a year. Interest owed for 2026 is $300,000 × 3% × 92 / 365 = $2,268.49, due by January 30, 2027. From 2027 it is $9,000 a year.

The couple saves $1,140 of federal tax a year before provincial tax. The rates come from the CRA's 2026 bracket table canada.ca. The spouse deducts the $9,000 because 20(1)(c) allows interest on borrowed money used to earn income from property laws-lois.justice.gc.ca.

The gotcha is the payment date. Because 74.5(2)(c) requires interest for each earlier year to have been paid on time, one late January 30 payment taints that year and every year after it. Have the spouse pay from their own account, by cheque or transfer you can trace, and keep the signed loan agreement on file.

When does a sale to the spouse escape attribution?

A sale escapes only if three conditions in 74.5(1) are met: the spouse pays at least fair market value, any debt in the price carries the prescribed rate with interest paid by January 30, and your client elects in the return for the year of sale that 73(1) not apply laws-lois.justice.gc.ca. Without the election, the sale rolls over at cost and attribution stays.

The election means your client reports the gain now. Selling the same shares (ACB $40,000) to the spouse for $100,000 cash from the spouse's own savings puts a $60,000 capital gain on your client's 2026 return, and later dividends and growth belong to the spouse. The CRA asks for a letter signed by both spouses, attached to the return, stating the property was sold at FMV and electing out of 73(1) canada.ca.

The money must really be the spouse's. IT-511R reads the exception as consideration paid by the spouse and not from property furnished by the transferor, so a spouse paying with cash your client gave them last year fails canada.ca.

Why second generation income and business income stay with the spouse

Only the first layer of income attributes. In IT-511R, the CRA says income from investing the income on transferred property is the transferee's, and that income from a business, as opposed to income from property, is not attributed canada.ca. The bulletin is archived, but 74.1(1) still speaks only of income from the property or substituted property laws-lois.justice.gc.ca.

In practice, sweep attributed income into a separate account in the spouse's name each year. If it stays mixed with the original capital, you cannot show which earnings are second generation, and the CRA can treat the whole account as attributed.

A transfer to a corporation is a different rule. Under 74.4(2), if a main purpose is to benefit a spouse who is a specified shareholder and the corporation is not a small business corporation, your client is deemed to receive interest at the prescribed rate on the amount outstanding, less certain interest and dividends received laws-lois.justice.gc.ca. Dividends caught by TOSI are not attributed again under 74.5(13); see TOSI rules.

When does attribution stop?

Income attribution under 74.1(1) applies only while your client is resident in Canada and the recipient is their spouse or common law partner laws-lois.justice.gc.ca. It stops automatically while the couple lives separate and apart because of a breakdown of the relationship laws-lois.justice.gc.ca.

Capital gains need a joint election. Under 74.5(3)(b), 74.2 is switched off for a sale during the separation only if both spouses elect, and the CRA says the election goes with the return no later than the year the spouse sells canada.ca. Gains attribute only for sales during your client's lifetime canada.ca, and IT-511R lists death, a final divorce and the transferor's non residence as ending attribution canada.ca.

Spousal plans run on their own clock. For when a spousal RRSP withdrawal is taxed to the contributor, see the spousal RRSP three year rule. Splitting eligible pension income after the fact is a separate election, covered in pension income splitting.