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: Application of attribution rules
Position: See letter - numerous positions taken
Reasons: See letter
XXXXXXXXXX 1999-001061
D. Boychuk
Attention: XXXXXXXXXX
April 13, 2000
Dear Sirs:
Re: Corporate Attribution Rules/Other Anti-Avoidance Rules
We are writing in response to your letter of August 12, 1998 wherein you requested our views on the application of section 74.1 and subsections 15(1), 56(2), 246(1) and 245(2) of the Income Tax Act (the "Act") to the situation described in your letter.
In your letter, you have outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request for an advance income tax ruling cannot be considered where the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments which we hope will be of assistance to you.
1. Subsection 74.4(2) applies to attribute a notional amount of interest income to an individual who has transferred or lent property directly or indirectly to a corporation where one of the main purposes of the transfer or loan is to reduce the income of the individual and benefit either directly, or indirectly, a designated person. The purpose of section 74.4 is to prevent a taxpayer from splitting income among designated persons by transferring property to a corporation in which such persons are specified shareholders for the purpose of paragraph 74.4(2)(a).
2. Subsection 74.5(6) is an anti-avoidance provision which applies where transactions are undertaken to avoid the attribution rules in sections 74.1 to 74.4 by the use of "back-to-back" loans and transfers. We would consider applying subsection 74.5(6), for example, if an individual transfers property to a corporation and that property or property substituted therefor is subsequently transferred to another corporation and the subsequent transfer is directly or indirectly to or for the benefit of a specified person in respect of the individual and the main purpose of the subsequent transfer is to reduce the income of the individual.
3. We would draw your attention to proposed section 120.4 which imposes a special 29% tax on individuals under the age of 18 years in respect of taxable dividends and other benefits on unlisted shares of Canadian and foreign companies (received directly or through a trust). New section 120.4, when enacted, will apply to the 2000 and subsequent taxation years.
4. Generally speaking, subsections 15(1) and 246(1) will not apply in circumstances where property is transferred to a corporation in exchange for redeemable/retractable preferred shares provided that the fair market value of the preferred shares is equal to the fair market value of the property transferred. In addition, subsection 56(2) will not generally apply to income splitting arrangements involving the payment of dividends by a corporation. Subsection 56(2) may be applicable, however, where dividends are paid to shareholders who, having regard to the dividend entitlements of their shares as set out in the articles of incorporation, receive dividends to which they are not entitled.
5. The composition of the trustees of a family trust will not generally be relevant for the purposes of applying section 74.1 or any of subsections 15(1), 74.4(2) or 246(1). However, in the absence of a more specific inquiry, we are unable to comment further.
We trust that our comments will be of assistance.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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