8 April 1999 Internal T.I. 9830997 - ATTRIBUTION - MINORS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: We have been asked about transfers of property (investments in shares, mutual funds, and savings accounts) in respect of minors. In this regard information has been provided in respect of "in-trust" accounts (see 971747). In addition, comments have been provided on the meaning of "transfer" (see paragraph 13 of IT-325R2), and on RRSPs in relation to minors.

Position: See Principal Issues

Reasons: See Principal Issues

		April 8, 1999

	Winnipeg Tax Services Office 	HEADQUARTERS
	Susan Ward	M. Eisner
	Senior Technical Resource Officer	(613) 957-2138

983099

Attribution Rules - Minors

This is in reply to your memorandum concerning the above-noted subject which we received on November 25, 1998.

You have made a number of comments concerning the application of the attribution rules, which have been summarized below.

Birthday and Christmas Gifts made to a Minor

You have indicated that your office was of the understanding that the income from inconsequential birthday gifts would not attribute back to the transferor although it is not entirely clear when such a gift can be regarded as being inconsequential. For example, you indicate that a gift of $5,000 could be considered to be inconsequential by a transferor. You have indicated that one publication indicates that the income from birthday gifts to minors would not attribute back to the transferor. You have asked us for our comments in this regard.

Interest Earned on Canada Child Tax Benefit ("CCTB") Payments

You have indicated that it has always been the Department's position that if CTTB payments received in respect of a child are placed in a separate bank account, the interest earned would be considered to be that of the child. However, you have indicated that enquiries are being received concerning income earned on CCTB payments which are invested in shares or mutual funds and have asked for comments in that regard.

Minor - Contributions to a Registered Retirement Savings Plan ("RRSP")

You have asked us about the right of a minor to enter into a contract with respect to a registered retirement savings plan ("RRSP").

In relation to the above concerns, you have also asked us about any Manitoba provincial laws that may be relevant. You have also raised other issues that we have alluded to in our comments below.

Our Comments

In order to determine the tax consequences of an actual situation, it is necessary to review all the relevant facts and documentation. Accordingly, the following comments must be construed as being general in nature.

The Department's general position on transfers of property to minors is set out in Interpretation Bulletin IT-510 "Transfers and Loans of Property made after May 22, 1985 to a Related Minor". In light of your comments with respect to the attribution of capital gains and losses to minors, we would like to refer you to paragraph 19 of IT-510 that confirms that there is no attribution of capital gains or losses on property transferred to minors, except where section 75.1 of the Income Tax Act (the "Act") applies. We also note that you have referred to subsection 74.2(2) of the Act as the relevant provision with respect to the attribution of income of a minor; however, the relevant provision is subsection 74.1(2) of the Act.

Before commenting on the issues you have raised on CCTB payments, gifts, and RRSPs, we would like to provide general comments on "in-trust accounts" for minors which may be relevant to the acquisition of mutual funds and shares, as well as to funds that may be deposited in a bank account.

"In-Trust Accounts" for Minors

Subject to some exceptions (e.g., contracts for necessaries, education and service), the general rule at common law is that a contract, in respect of which a minor is a party, is voidable at his or her option. In other words, the contract is not binding on the minor but is binding on the other party. We are not aware of any provincial laws enacted by the Manitoba Government which address the issues you have raised. However, while it is our general understanding that since contracts are, for the most part, not binding on minors, there has been a tendency to enter into an arrangement involving "in-trust accounts" where the minor has beneficial ownership of property but not legal ownership. An adult would hold the legal ownership of the property. While it is a question of fact whether or not any particular arrangement has the attributes of an actual trust, this may not be the case with most "in-trust-accounts".

The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship may or may not be defined by a formal written document but is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present. That is, the attempt to establish a trust will fail unless it is certain that the settlor intended to bring a trust relationship into existence and both the property and the beneficiaries or other objects of the trust are described with sufficient certainty. Whether the three certainties are present or not is a question of fact which can only be determined on a case by case basis. However, given the requirement of these three certainties, a written trust document would serve as the best evidence of the existence of a trust and would resolve any ambiguities which may otherwise arise.

The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, or a transfer, or gift of property. The property, or property substituted therefor must be clearly identifiable in order for that certainty to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.

Where an "in trust account" is opened by a parent for his or her children, in absence of a formal trust document, the certainty of intention to set up a trust arrangement would be a difficult one to prove. On the basis that the children are minors, the arrangement is generally designed to accommodate the fact that minors do not have the legal capacity to enter into legally binding contracts and hence purchase financial instruments in their own name. Thus, the arrangement may be one akin to agency as opposed to a trust.

At this time, is our understanding that the use of "in-trust accounts" is widespread in respect of the acquisition of units of mutual funds and the Department generally accepts that the existence of an "in-trust account" does not, in and by itself, result in the existence of an actual trust. In addition, this can be the case with respect to bank accounts established for minors and the purchase of shares for minors. However, it is quite possible that some institutions are also reluctant to enter into an in-trust arrangement where minors are involved.

Gifts

In the case of your comments on gifts, it is the Department's view that the word "transfer" in subsection 74.1(2) of the "Act" includes gifts. The first sentence of paragraph 13 of Interpretation Bulletin IT-325R2 "Property Transfers After Separation, Divorce and Annulment" states that "The term "transfer" has a broad meaning that encompasses virtually any means by which ownership or title to property is conveyed from one person to another, or to a trust". Also, see paragraph 1 of IT-510 where the Department indicates that a transfer includes a gift. Accordingly, where gifts have been made to a minor by an individual, subsection 74.1(2) of the Act generally applies. The fact that the transferor considers a gift to be inconsequential is not relevant. It would be in the discretion of the tax services office, not the taxpayer, to decide not to apply the attribution rules on account of a nominal or inconsequential gift.

CCTB Payments

With respect to CCTB payments, subsection 74.1(2) of the Act specifically excludes from its application the income earned on property received by a minor as a consequence of the operation of subsection 122.61(1) of the Act. Subsection 122.61(1) of the Act establishes the CCTB payments. Whether the CCTB payments, that are transferred to the minor child, are invested in an interest bearing bank account or in shares or units of mutual funds is not relevant. All income earned on such property is not subject to attribution. However, in order for this exception in the attribution rules to apply to CCTB payments, it is our view that the minor must be the beneficial owner of the relevant funds (i.e., the CCTB payments transferred to the minor). In the case of interest bearing bank accounts, shares and mutual funds, the terms of an "in-trust account" agreement should be reviewed to determine whether property (e.g., the CCTB payments) has in fact been "transferred" by the transferor to the minor. This would not be considered to be the case where funds that accumulated in an "in-trust account" may, depending on future circumstances, be used for purposes otherwise than for the sole benefit of the minor transferee and the transferor has the right to withdraw funds in whole or in part from the "in-trust account". If the terms and conditions of an "in-trust account" do not serve to divest, deprive or dispossess the transferor to the deposited funds and to vest the property in the transferee's hands, then it may be concluded that a transfer of property has not been made as contemplated in subsection 74.1(2) of the Act.

The comments above regarding the determination of whether property has in fact been transferred by the parent to a minor are perhaps more important in the context of determining whether capital gains and losses are to be included in the parent's taxable income or the minor's taxable income. For example, since there is generally no attribution of capital gains or losses, it is important that the Department be satisfied that a transfer of property to the minor has taken place.

RRSPs

With respect to your comments on RRSPs, the term "retirement savings plan" is defined in subsection 146(1) of the Act. In broad and general terms, this definition refers to certain types of contracts or arrangements under which the individual or the individual's spouse pays amounts under the contract or arrangement which provides for the payment of a retirement income to the individual at maturity. The term "registered retirement savings plan" is defined in subsection 146(1) of the Act to mean a retirement savings plan accepted by the Minister for registration for purposes of the Act as complying with the requirements of section 146 of the Act. There is no minimum age and it our understanding that a minor can enter into a retirement savings plan that can be registered. However, it is also understanding that some institutions are reluctant to enter into such an arrangement where a minor is involved.

We trust you will find the above comments of some assistance. However, if you have a particular fact situation with which you are concerned, please forward the relevant documentation and we would be pleased to provide our comments.

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to

Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

Jim Wilson
Section Chief
Business, Property & Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch