Families, Relationships and Taxation

In life, circumstances can provide timely reminders of things we should remain aware of. Recently our family discovered we had missing relatives and have begun getting to know and connecting with them. On TV3 there have been a few versions of the program that seeks to connect families together, including the most recent version Lost & Found, premiering Thursday at 8.30. These highlight the importance of and special nature of families and family connections.

This connection also applies in a tax and income situation. Special rules for Related Parties or Associated Persons permeate the Income Tax Act. When these rules apply different treatment is required for certain transactions that differ from how the transactions would be handled by unrelated, independent people.

For instance, when buying an asset from an associated person, you may be limited to the depreciation deduction the seller would have enjoyed. This limit applies to transactions in general. But in land transactions (which have complicated rules at the best of times) two people will only be associated if they are married or in a civil union or de facto relationship. 

In some cases, fringe benefits provided to an associate of an employee may be treated as being received by the employee. Buying second-hand goods from an associated person and claiming GST also has limitations.

There are several different kind of relationships that may be affected by limitations which arise from the relationship. The Tax Act defines 12 categories of relationships that may be subject to limitation. There is even the possibility of a relationship between two people when they share an association with a third person.

Generally, two people are considered as relatives and are associated persons for tax purposes when they are:

• within two degrees of blood relationship
• married, in a civil union or de facto relationship
• one person is within two degrees of blood relationship to the other person’s spouse, civil union partner or de facto partner

But for our newly discovered family, there is an exception for a person who cannot reasonably be expected to know that he or she is within two degrees of relationship of another person.

Before completing a transaction with a family member, associated company, partnership or trust keep these restrictions in mind and feel free to contact us for advice.