Attribution Rules

The attribution rules are provisions in the Income Tax Act that prevent income-splitting by attributing income or capital gains earned on transferred property back to the original owner, rather than allowing them to be taxed in the hands of the recipient. The rules apply when property is gifted or loaned to a spouse, common-law partner, or minor child at below-market terms.

In the context of business sales, attribution rules are most relevant when a business owner transfers shares to a spouse or family member in advance of a sale, with the intention of allowing each person to claim their own Lifetime Capital Gains Exemption (LCGE). Under ITA s.74.2, if shares are gifted to a spouse or transferred at below fair market value, the capital gain realized on the subsequent sale of those shares may be attributed back to the transferring spouse and taxed in their hands — eliminating the benefit of the transfer.

To avoid attribution, transfers must be made at fair market value, with consideration documented through a promissory note that bears interest at least equal to the CRA prescribed rate (currently 3% as of Q3 2026), with that interest actually paid by January 30 of the following year. Alternatively, planning through a family trust — in which the trustees hold the shares and have discretion over allocating gains to beneficiaries — can achieve LCGE multiplication without triggering attribution, provided the trust is structured correctly and well in advance of the sale.

See also: Promissory Note, Family Trust, LCGE, Estate Freeze.