TFSA 2014

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Re: TFSA 2014

Post by vince2 »

Attribution Rules/Tips
Tax-free savings accounts

The 2008 Federal Budget proposed to introduce the Tax-Free Savings Account (TFSA). Bill C-50, which included the TFSA introduction, received royal assent on June 18, 2008. Beginning in 2009, Canadians will be eligible to contribute up to $5,000[5] a year to a TFSA. Capital gains and other investment income earned in a TSFA will not be taxed, and Canadians will be able to withdraw the original capital on a tax-free basis.

Subsection 74.5(12) has been amended to add an exception for a transfer of property from an individual to the TFSA of their spouse or common law partner. In other words: Capital gains and other investment income earned in the transferee spouse’s TFSA will not be attributed back to the transferor. However, the exception will only apply when the transferred property remains in a TSFA, and only to the extent that the contribution is made using the spouse or common-law partner’s available TFSA contribution room.
Does this rule prevent the transfer of money/property into the Spousal TFSA and out into the spouse's hands without attribution?
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Re: TFSA 2014

Post by BRIAN5000 »

vince2 wrote:Attribution Rules/Tips
Tax-free savings accounts

The 2008 Federal Budget proposed to introduce the Tax-Free Savings Account (TFSA). Bill C-50, which included the TFSA introduction, received royal assent on June 18, 2008. Beginning in 2009, Canadians will be eligible to contribute up to $5,000[5] a year to a TFSA. Capital gains and other investment income earned in a TSFA will not be taxed, and Canadians will be able to withdraw the original capital on a tax-free basis.

Subsection 74.5(12) has been amended to add an exception for a transfer of property from an individual to the TFSA of their spouse or common law partner. In other words: Capital gains and other investment income earned in the transferee spouse’s TFSA will not be attributed back to the transferor. However, the exception will only apply when the transferred property remains in a TSFA, and only to the extent that the contribution is made using the spouse or common-law partner’s available TFSA contribution room.
Does this rule prevent the transfer of money/property into the Spousal TFSA and out into the spouse's hands without attribution?

Good question. So lets say my wife hadn't made any contributions. She has $31,000 in contribution room, I take "my money" give it to her to contribute to her TFSA, over the next 10 years it grows to $62,000, wife takes out $31,000 to buy a new car, is there a tax situation? Lets say wife takes out the $31,000 but decides not to buy the new car, do I claim the income on the $31,000 on my income tax now? What if she puts it back in in the following year?
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Re: TFSA 2014

Post by Shine »

Your wife's TFSA is hers alone. It is an "envelope" registered with CRA into which she puts funds, regardless of those funds. (Outside of money laundering.)

The limit of those funds was initially $5K per year and then, in in the past few years $5.5K per year.

A TFSA does not recognize spousal contributions - a TFSA is simply an individual savings vehicle. Should your wife use the money you give her and triple it in one year, it means nothing with respect to your taxes or claims. She could, however, take that tripled money out, give the funds to you, and then put the same amount of money back into her TFSA the next calendar year plus the new calendar year amount of $5.5K

There are no tax deductions at all with respect to a TFSA, gains or losses are irrelevant and are not applicable, in any way, to your financial situation. Nor would your cash contribution to your spouse in order for her to contribute to a TFSA be recognized by the CRA.

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Last edited by Shine on 03 Jun 2014 00:28, edited 1 time in total.
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Re: TFSA 2014

Post by BRIAN5000 »

Shine we're talking about the attribution rules and washing funds through a TFSA to avoid them. ( I did not say that out loud, mulligan) I just can't give my wife $31,000 and have no tax consequences any income earned on those funds is attributed back to myself. However if its put in a TFSA it won't be unless Subsection 74.5(12) applies and she removes the funds from her TFSA?

So maybe the loophole that was thought to be there isn't really there.
Last edited by BRIAN5000 on 03 Jun 2014 01:00, edited 1 time in total.
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Re: TFSA 2014

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Having mulled it over a number of times, I think the statement...
However, the exception will only apply when the transferred property remains in a TSFA, and only to the extent that the contribution is made using the spouse or common-law partner’s available TFSA contribution room.
....effectively prevents the transfer of funds to the spouse so that s/he can then use the funds to earn investment income in his/her own account. Attribution would return to the transferor once withdrawn. The part that is not clear to me is whether only: a) the capital equal to the total original contributions made to a spouse's TFSA is subject to attribution rules, or b) the full amount taken out (contributions + investment income).

If a), then there would be a step up (defacto transfer of funds equal to the gains while in the TFSA). Example: Total contributions $30k. Investment income is $5k before withdrawal. Full withdrawal of $35k. Only the $30k of original contribution that generates new investment income in the future is subject to attribution rules. The $5k belongs to the spouse, with no attribution back to the original contributor. Damned if I know.
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Re: TFSA 2014

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If only the gains in a TFSA can serve to contravene the income attribution rules, we are getting pretty small amounts. Seems smarter and way easier just to lend her/him a fairly big chunk of money, charge her/him the prescribed rate (1% now?) and let her/him pay lower taxes on the difference between 1% and his/her actual returns. You can get most of the income splitting benefit once and for all this way.
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Re: TFSA 2014

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Something like this has been discussed before.
EmperorCoder wrote:However this wouldn't work as the attribution rules kick back in once the money is taken out of the TFSA. I asked that same question to Tim Cestnick a while ago (a tax expert that also writes articles in the Globe & Mail). He confirmed to me that this strategy doesn't work.
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Re: TFSA 2014

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BRIAN5000 wrote:maybe the loophole that was thought to be there isn't really there.
Bingo ... the loophole doesn't exist, and never has ... while its true there are some things in the legislation that are somewhat ambiguous, and perhaps subject to some creative interpretation, this is not one of those things ... the legislation is crystal clear.

I seem to recall this alleged dodge being discussed a number of times over the past 5 or 6 years, and having been shown to be false long before this. The clear language limiting the attribution exemption to funds that remain within the TFSA dates back to at least April 2008 ... IOW, they anticipated that people might come up with this, and they slammed the door on it before the TFSA even existed.
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Re: TFSA 2014

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That seems reasonable, but per my prior post, are the investment gains exempt, e.g. my point a), or is everything taken out attributable back to the transferor, e.g. my point b)?
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Re: TFSA 2014

Post by Peculiar_Investor »

When in doubt, wouldn't the provisions of the General Anti-Avoidance Rule - Section 245 of the Income Tax Act and Tax Avoidance come into play?
CRA in Tax Avoidance wrote:Tax avoidance and tax planning both involve tax reduction arrangements that may meet the specific wording of the relevant legislation. Effective tax planning occurs when the results of these arrangements are consistent with the intent of the law. When tax planning reduces taxes in a way that is inconsistent with the overall spirit of the law, the arrangements are referred to as tax avoidance. The Canada Revenue Agency's interpretation of the term "tax avoidance" includes all unacceptable and abusive tax planning. Aggressive tax planning refers to arrangements that "push the limits" of acceptable tax planning.

Tax avoidance occurs when a person undertakes transactions that contravene specific anti-avoidance provisions. Tax avoidance also includes situations where a person reduces or eliminates tax through a transaction or a series of transactions that comply with the letter of the law but violate the spirit and intent of the law. It was to address these latter situations that the general anti-avoidance rule was enacted in 1988.
(CRA's bolding, not mine)

Given the general application of attribution rules, it seems plausible to me that GAAR would apply because the suggested strategy "reduces taxes in a way that is inconsistent with the overall spirit of the law".

I concur with the suggestion of using a spousal loan as an Income splitting technique.
SQRT wrote:Seems smarter and way easier just to lend her/him a fairly big chunk of money, charge her/him the prescribed rate (1% now?) and let her/him pay lower taxes on the difference between 1% and his/her actual returns. You can get most of the income splitting benefit once and for all this way.
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AltaRed
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Re: TFSA 2014

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SQRT wrote:If only the gains in a TFSA can serve to contravene the income attribution rules, we are getting pretty small amounts.
True, but some savvy?reckless?lucky? investors have 6 digit TFSAs. Still may be small potatoes in the overall scheme of things even at 6 digits. That said, I agree spousal loans are the tried and true (and effective) way to split future income.
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Re: TFSA 2014

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P_I wrote:it seems plausible to me that GAAR would apply because the suggested strategy "reduces taxes in a way that is inconsistent with the overall spirit of the law".
I don’t think GAAR applies in this case … GAAR seems meant to address those grey-area situations where a strategy reduces taxes in a way that is inconsistent with the overall spirit of the law, while not necessarily violating the letter of the law … (bolding mine) … the shuffle proposed in this thread violates the letter of the law, there doesn’t seem to be much “grey” about it.
AltaRed wrote:That seems reasonable, but per my prior post, are the investment gains exempt, e.g. my point a), or is everything taken out attributable back to the transferor, e.g. my point b)?
I would expect the answer to lie somewhere between points a) and b). Returns earned in the form of income (ie. interest & dividends) would no longer be subject to attribution, while returns earned through capital growth would be. In other words, when the conditions of the TFSA exception are no longer met, the attribution rules revert to normal application.
AltaRed wrote:SQRT wrote:If only the gains in a TFSA can serve to contravene the income attribution rules, we are getting pretty small amounts.
True, but some savvy?reckless?lucky? investors have 6 digit TFSAs. Still may be small potatoes in the overall scheme of things even at 6 digits. That said, I agree spousal loans are the tried and true (and effective) way to split future income.
I doubt that any 6-digit TFSAs exist as a result of interest or dividend returns ... the vast majority of such growth would likely be of the capital variety ... hence, would (most likely) not escape ongoing attribution.
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Re: TFSA 2014

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I doubt that any 6-digit TFSAs exist as a result of interest or dividend returns ... the vast majority of such growth would likely be of the capital variety ... hence, would (most likely) not escape ongoing attribution.
Not sure what you mean here. There is no attribution from income earned within a TFSA regardless of source. Am I misinterpreting what you meant?

AFAIK If I give my wife $5,500 in 2014 and she invests in a TFSA, makes a shrewed investment in a penny stock and turns it into 100,000 and then takes out the whole 100K, there is no attribution to me. Her new TFSA contribution room for the next year year would be 100,000K plus the 5500 new room for 2015. I could then give her up to 105,500 from my funds to invest in her TFSA and she would still have the 100K tax free outside of her TFSA - according to the letter of the law. I am ignoring other years accumulated contribution room in this example.

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Re: TFSA 2014

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John, that was the original point by Brian5000 that prompted all this discussion. Cardhu says that is against the rules. Original capital and cap gains growth would attribute back to you. Possibly on the investment income (interest, dividends) is the spouses' money to keep free and clear with no strings attached. If not, that would be a gaping hole in income splitting, something foreseen by Ottawa from the get go.
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Re: TFSA 2014

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twa2w wrote:Not sure what you mean here. There is no attribution from income earned within a TFSA regardless of source. Am I misinterpreting what you meant?

AFAIK If I give my wife $5,500 in 2014 and she invests in a TFSA, makes a shrewed investment in a penny stock and turns it into 100,000 and then takes out the whole 100K, there is no attribution to me. Her new TFSA contribution room for the next year year would be 100,000K plus the 5500 new room for 2015. I could then give her up to 105,500 from my funds to invest in her TFSA and she would still have the 100K tax free outside of her TFSA - according to the letter of the law.
So far, so good, I believe. The debate is whether she can use the $105k she took out of her TFSA, invest it in a non-registered account, without the income being attributed to you. If the source of the money can be attributed to you, it seems that the response is negative.
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Re: TFSA 2014

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twa2w wrote:Not sure what you mean here
Think of it this way ... if you gift property to your spouse, the general attribution rules will forever (until death or divorce) apply ... the ITA grants an exception from the attribution rules, for gains & income that occur within the TFSA, but that’s all it does ... nothing else changes. So if the money comes out of the TFSA, then from that moment on, attribution rules are back on the table just as if the money had never seen the inside of a TFSA in the first place. The ITA exception merely interrupts the attribution rules, it doesn’t cancel them forever.
twa2w wrote:I could then give her up to 105,500 from my funds to invest in her TFSA and she would still have the 100K tax free outside of her TFSA
Sure, you could do that if you wanted to, but it seems like a lot of contortions for no benefit … why not just give her $100k cash, and have her leave the TFSA alone? … the result, from an attribution point of view, would be the same.


The bottom line is that if one is looking for significant income splitting opportunities, look elsewhere ... the TFSA doesn't offer much in that regard.
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Re: TFSA 2014

Post by twa2w »

Yes but the TFSA rules specifically say you can gift the money to a spouse to contribute to his/her TFSA. There is no attribution on withdrawal - regardless of the gains. GAAR does not apply - at least according to a senior person I spoke to at Rev Can. Thats why I was wondering why you were talking about attribution.
So the OP is right in that this would be a good way to move investment funds to a spouse.

At least until enough people do this to create a problem and RevCan catches on. - Unlikely until total TFSA accumulated limits become more substantial.
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Re: TFSA 2014

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twa2w wrote:Yes but the TFSA rules specifically say you can gift the money to a spouse to contribute to his/her TFSA. There is no attribution on withdrawal - regardless of the gains. GAAR does not apply - at least according to a senior person I spoke to at Rev Can. Thats why I was wondering why you were talking about attribution.
So the OP is right in that this would be a good way to move investment funds to a spouse.

At least until enough people do this to create a problem and RevCan catches on. - Unlikely until total TFSA accumulated limits become more substantial.
Don't think so. Read the posts more carefully.
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Re: TFSA 2014

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Now I am confused.
I have been using CIBC Woodgundy’s Income splitting with spouse and kids (over 18) information to fund my daughter’s TFSA by gifting to her her yearly contribution limit with my after the taxes have been paid assets.

“Normally, the attribution rules contained in the Income Tax Act block attempts at splitting either income or capital gains between spouses or partners by attributing such income or gains back to the original spouse or partner.
The TFSA rules provide a specific exception to the attribution rules, stating that the rules will not apply to any income or gains earned in a TFSA derived from a spouse or partner’s gift to the TFSA Holder which the TFSA Holder contributes to their own TFSA. This provides a significant opportunity for a high income spouse or partner to give an amount up to the annual contribution limit, for example $5500 for 2013, to a lower income or zero income spouse or partner to contribute to their own TFSA, thus effectively accessing a combined $11,000 tax-free contribution limit for that year.

Also, if you’ve got kids who are at least 18 years of age, you can consider giving them an amount up to their contribution limit annually to contribute to their own TFSAs. (You cannot set up a TFSA jointly or “in trust” for a child.)”


My daughter is also listed as the beneficiary of my TFSA. This will allow the proceeds from my TFSA to bypass my estate and flow directly to her, avoiding probate taxes where provincially applicable. Any increase in value of the TFSA after death would be taxed to her.
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Re: TFSA 2014

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All that Wood Gundy is talking about is what happens while the money is in the spouse's TFSA. There is no attribution while in the TFSA. What we are talking about in the thread is if the spouse takes that money out of the TFSA. It is after the money comes out that attribution becomes the issue/question.

Regarding children over the age of 18, funds can be gifted to them without attribution at any time regardless of the type of account anyway. The Wood Gundy comment on that with respect to a TFSA is a 'throwaway' comment.... i.e. meaningless.
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Re: TFSA 2014

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Let me be clearer. Are you folks stating if I gift money to my spouse to put into a TFSA and she subsequently takes that money out of the TFSA and invests it, the attribution rules then apply to interest and div income she earns on all the money taken out of the TFSA.

Can you point me to a source. I certainly can`t find anything in Rev Can that would even imply this.

I don`t believe there is attribution on this at all. I don`t think it is any different than a spousal RSP - the money then belongs to the spouse to do with as she wishes (barring the specific 3 year withdrawal rule on spousal RSPs). If she withdraws the funds she does pay tax but any further income earned on that money is not attributed back to me.

And if there was attribution on the TFSA, why wouldn`t it only be on the income earned on the funds that I gave her that she withdrew,
IOW, if I gave her 5K and she put in TFSA and turned in into 100 K then withdrew it all and invested it, then only the income on the 5K I gave her would attribute to me - the income on the 95K wold be hers.
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Re: TFSA 2014

Post by AltaRed »

That is the question... is attribution back to the transferor on the income and cap gains, or only cap gains, or none of those two?

Think this thread has established that the amount of capital (contribution) contributed to the spouse's TFSA IS attributable back to the transferor when withdrawn and so the game of contributing and then having the spouse withdraw, to rinse and repeat the above indefinitely as a form of asset transfer is not acceptable.

I am guessing some of your former colleagues would be able to confirm/deny/clarify this :wink:
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Re: TFSA 2014

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AltaRed wrote:All that Wood Gundy is talking about is what happens while the money is in the spouse's TFSA. There is no attribution while in the TFSA. What we are talking about in the thread is if the spouse takes that money out of the TFSA. It is after the money comes out that attribution becomes the issue/question.
Then what does Woodgundy mean with this statement..
The TFSA rules provide a specific exception to the attribution rules, stating that the rules will not apply to any income or gains earned in a TFSA derived from a spouse or partner’s gift to the TFSA Holder which the TFSA Holder contributes to their own TFSA.

Plus this information concerning attribution is being reported at http://www.rbcroyalbank.com/tfsa/tfsa-faq.html

Contribution Questions
Question 17. Can I contribute to my spouse or common-law spouse's TFSA?
No. However, money you give to your spouse to contribute to his or her TFSA will not be subject to CRA's income attribution rules. The TFSA allows both you and your spouse to earn tax-free investment income, regardless of which spouse contributed the funds.

Question 18. If I give funds to my spouse to contribute to his or her TFSA, who will get the income, me or my spouse?
Your spouse owns the TFSA and will earn any investment income and capital gains in the account.

Additional Questions

Question 23. If there is a breakdown of a marriage or common-law partnership, what will happen to my TFSA?
TFSA assets may be transferred between spouses or common-law partners upon marriage or relationship breakdown. However, it's important to understand the implications of transferring TFSA funds; the spouse who gives some or all of their TFSA funds (due to the divorce/separation agreement) will lose his or her TFSA accumulation room that they've acquired since the launch of TFSA because the transferred amount will not be added back to contribution room.

On the other hand, if a plan holder withdraws assets from the TFSA before giving the funds (due to the divorce/separation agreement), then the amount of the withdrawal will be added back to the contribution room of the transferring spouse for the following year, allowing the plan holder to continue to benefit from tax-free investing. The receiving spouse will be able to contribute to their TFSA, but only to the extent that they have their own contribution room.

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Re: TFSA 2014

Post by AltaRed »

The key point in 17 and 18 is gains within the TFSA (same as the Wood Gundy description). There is no question about that. The issue is when the spouse withdraws the funds (some/all of the original capital and/or gains) from the TFSA. The Wood Gundy/RBC materials do NOT say anything about that, i.e. it is left for us to infer what would/could/might be the case for income and gains when withdrawn from the TFSA, but the comments do not specifically say that.

I would be inclined to believe this is simply an omission/poor wording and that the income and gains are not attributable to the transferor upon withdrawal by the spouse. The spouse could then invest the income and capital gains in his/her own taxable account without attribution. If I understood Cardhu correctly, he was saying income would not be attributable back to the transferor, but capital gains (in addition to the original capital would be). It is this latter point that I would still be stuck on.

But going back to the original thought by Brian5000 about rinsing and repeating, that is what Cardhu is saying is not permissible and was recognized from the get to when TFSAs were originally conceived. That is, a transferor can not then provide the funds to the spouse to replace that "total" withdrawal the following year (the full withdrawal of capital/income/gains and then replacement of that the following year, plus the new $5500 contribution space). All a transferor can do is give money to the spouse, e.g. $5500 each year, to fund to those contribution limits.
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Re: TFSA 2014

Post by CommanderT »

The text of the Income Tax Act dealing with this exception from the attribution issues is as follows:

74.5(12) Where subsections 74.1 to 74.3 do not apply

Sections 74.1, 74.2 and 74.3 do not apply in respect of a transfer by an individual of property

(a) as a payment of a premium under a registered retirement savings plan under which the individual's spouse or common-law partner is, immediately after the transfer, the annuitant (within the meaning of subsection 146(1)) to the extent that the premium is deductible in computing the income of the individual for a taxation year;

(a.1) [Repealed]

(a.2) as a payment of a contribution under a registered disability savings plan;

(b) as or on account of an amount paid by the individual to another individual who is the individual's spouse or common-law partner or a person who was under 18 years of age in a taxation year and who

(i) does not deal with the individual at arm's length, or

(ii) is the niece or nephew of the individual,

that is deductible in computing the individual's income for the year and is required to be included in computing the income of the other individual, or

(c) to the individual's spouse or common-law partner,

(i) while the property, or property substituted for it, is held under a TFSA of which the spouse or common-law partner is the holder, and

(ii) to the extent that the spouse or common-law partner does not, at the time of the contribution of the property under the TFSA, have an excess TFSA amount (as defined in subsection 207.01(1)).



Note that 74.1, 74.2 and 74.3 are the attribution rules for income, capital gains, and transfers to trusts respectively. From the text of the act it is clear that when the funds are withdrawn from the TFSA the attribution rules will reengage and you will have attribution on the money the money gifted to the other spouse.
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