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:
Whether subsection 56(4.1) would apply in two scenarios.
Position TAKEN:
General comments provided.
Reasons FOR POSITION TAKEN:
It is a question of fact whether, as provided in subsection 56(4.1), one of the main purposes for a loan or indebtedness was to reduce or avoid tax. In addition, subsection 56(4.1) only applies to income from property, and it will be a question of fact whether, in the scenarios provided, the farm assets yield income from property or from a business. Consequently, all the facts in the circumstances of a particular situation have to be examined before such a determination can be made.
XXXXXXXXXX 1999-000834
M. Azzi
Attention: XXXXXXXXXX
February 9, 2000
Dear Sirs:
Re: Subsection 56(4.1) of the Income Tax Act (the "Act")
This is in reply to your letter of November 15, 1999, wherein you requested our views on whether subsection 56(4.1) of the Act would apply in two scenarios. In the first situation, you indicate that a taxpayer transfers his farming assets (real estate and quota) to his (adult) son, and holds a mortgage stating a zero percent interest charge, with only principal payments to be made. In the second situation, a taxpayer has agreed to take over his (adult) son's farm mortgage, currently held by a banking institution, and will be charging zero percent interest, with only principal payments to be made.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.
Subsection 56(4.1) of the Act sets out an anti-avoidance rule that applies where, inter alia, an individual (the "transferee") has, directly or indirectly, received a loan or become indebted to another individual (the "transferor") with whom he or she does not deal at arm's length, and one of the main reasons for the loan or indebtedness was to reduce or avoid tax by having included, in the transferee's hands, income from the loaned property, property that the loan or indebtedness assisted the transferee to acquire, or property substituted for such property. Where subsection 56(4.1) of the Act applies, the income is deemed to be income of the transferor and not of the transferee. In addition, by virtue of subsection 56(4.3) of the Act, the attribution rules in subsection 56(4.1) of the Act apply to loaned property or indebtedness which is used either to repay borrowed money that was used to acquire property or to reduce an amount payable in respect of that property.
It is a question of fact whether one of the main purposes for a loan or indebtedness was to reduce or avoid tax. In addition, as noted above, subsection 56(4.1) of the Act only applies to income from property, and it will be a question of fact whether the farm assets yield income from property or from a business. Consequently, all the facts in the circumstances of a particular situation have to be examined before such a determination can be made.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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