19 May 2000 External T.I. 2000-0008455 - EXEMP. FROM ATTRIB. IN FORM OF LOAN PAID

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 the interest payable in respect of the particular year under consideration and each preceding year must be paid no later than 30 days after each such year in order to qualify for the exemption from the attribution rules in subsection 74.5(1).

Position: Yes.

Reasons: In our view, it is clear from the words in subparagraphs 74.5(1)(b)(ii) and (iii) (as well as the Technical Notes)

XXXXXXXXXX 	J. Gibbons
		2000-000845
May 19, 2000

Dear XXXXXXXXXX:

We are replying to your letter of February 17, 2000, in which you requested our views on the application of subsection 74.5(1) of the Income Tax Act (the "Act") in 4 different scenarios. This provision provides an exemption from the attribution rules in subsections 74.1(1) and (2) and section 74.2 of the Act if certain conditions are met. You are specifically concerned with the condition in subparagraph 74.5(1)(b)(iii), which must be met if the consideration received by the transferor includes indebtedness.

As requested, we have considered the scenarios outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless 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. Thus, our comments are of a general nature only.

According to subparagraph 74.5(1)(b)(iii), the exemption in subsection 74.5(1) will apply only if "the amount of interest that was payable in respect of each taxation year preceding the particular year in respect of the indebtedness was paid not later than 30 days after the end of each such taxation year." In all four of your scenarios, the amount of interest payable on the indebtedness in at least one of the years (preceding the particular year in question) was paid later than 30 days after the end of such year.

As you know, our views on the interpretation of subparagraph 74.5(1)(b)(iii) are described in paragraph 21 of IT-511R, "Interspousal and Certain Other Transfers and Loans of Property." This paragraph states: "If the interest in (b)(ii) is not paid within the described time then the indebtedness will not meet the requirements for exemption from the attribution rules under subsection 74.5(1) in the particular year or in any later year." According to "(b)(ii)", all interest must be paid no later than 30 days after the end of each calendar year in which it becomes payable. You are of the view that the position in paragraph 21 is contrary to the Act and to the November 1985 Technical Notes (the "Technical Notes").

In our view, it is clear from subparagraphs 74.5(1)(b)(ii) and (iii) (and the Technical Notes) that the interest payable in respect of the particular year under consideration and each preceding year must be paid no later than 30 days after each such year. Hence, once a transferee fails to pay the interest payable for a particular year within 30 days of that year, the exemption under subsection 74.5(1) is no longer available, in that year or any other subsequent year, and the attribution rules will apply.

In conclusion, the exemption in 74.5(1) will not apply to any of the four scenarios outlined in your letter since, in each of the scenarios, the transferee failed to pay the interest payable in at least one of the taxation years within the required time.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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