Income Tax Act subsections 74.1(1), 74.2(1), 74.5(2)

The rules of attribution come into play when income-producing property is transferred or loaned to a non-arms length party with certain exeptions (directly or indirectly or by means of a trust). The income from the property will be attributed back to the person who originally gave it to the non arms length party.

This occurs even if money was transferred and then the non arms length party used that money to purchase an income-producing asset.

If capital gains is earned on the property/asset, then those gains will be taxable to the non arms length party.

A non-arm’s length party is typically a related minor child under the age of 18, a niece or nephew, or a spouse.

Secondary income, that being income earned on the original income (interest for example) will be considered income of the non arms length party.

The rules of attribution only apply to property income. So business income does not apply here.

There are methods of getting around the rules of attribution but they are quite technical and professional advice should be sought prior to attempting such a thing. See our articles found here (insert link) regarding income splitting through loans.

CRA Resources:

http://www.cra-arc.gc.ca/E/pub/tp/it511r/README.html