What Are Attribution Rules? (And Why You Need to Understand Them)

These tax laws are key to understand! People have been jailed for breaking them! (Not really—we’re going click-bait, baby!)

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What are attribution rules and why should you care? Those are questions I’m sure you’ve asked yourself many times… if you’re a really boring person. Seriously, the attribution rules are important and come into play quite frequently in Canada. And many people mess up here, run afoul, as my dad says. Then you may have to deal with the CRA. Maybe even the CIA, if you’ve really screwed up. Kidding about the CIA, don’t comment,

“Why would the CIA care? How would they even know?” They know, trust me. Attribution rules are basically tax laws that stop people from shifting income to family members just to save on taxes. That’s a bit oversimplified, but captures well the essence of what they are. Now, this is one concept that is definitely best illustrated with an example.

A dentist has saved up a cool $100,000 in a non-registered account. The money is earning a few thousand a year in interest, and they are paying a very high tax rate on that. Hmm. Annoying. So they put the $100,000 in GICs in their seven-year old’s name. With no other income,

it’s reasoned that the child will pay no tax. But you guessed it, here come the attribution rules. The CRA attributes that interest back to the parent, and no taxes were saved in the making of this movie. These rules make a lot of sense when you think about it. They really do. What are the various scenarios that come into play?

Well, check the formal rules online, but here’s a quick but not detailed enough summary. If you gift money or property to a spouse or common law partner, interest in dividends earned going forward, unless it’s from the receiving person’s active business, is attributable back to the giver. As are capital gains and losses.

But here’s a bit of a twist. If the money’s given to a non-arm’s-length-minor — say your child, grandchild, niece, nephew — the same rules apply on income — interest and dividends — but not on capital gains and losses. It’s important to note that — could be some opportunities there. What about your adult kids or for that matter, any adult?

What if Mo just up and gives me one of her many millions? No attribution whatsoever! Woo-hoo. Thank you, Mo. Your generosity knows no bounds. At least in made-up examples. Now, clever listeners — that’s you — wonder, “What if instead of gifting the money I loan it to my spouse or kids at zero interest or a very low rate, can I avoid the attribution rules that way?”

No, nice try. The CRA wasn’t born yesterday and if you try that with adult children or adult friends, the income is now attributable back to you. Capital gains aren’t, but any income is. Otherwise rich people would keep lending their less fortunate friends big money and having them gift back the lower taxed income.

Rich people are sneaky. We can get into prescribed rates here and tricky strategies, but I’m golfing soon, so that’s gonna have to wait. Try to contain your excitement. 📍