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 a beneficiary of a family trust (the "Trust") is dealing at non-arm's length with a Canadian corporation ("Opco") where all the issued shares of Opco are held by the Trust.
Position TAKEN:
None. Question of fact.
Reasons FOR POSITION TAKEN:
Presently, there is no provision in the Act which specifically deems the Beneficiary to be dealing at non-arm's length with either the Trust or Opco. Thus, as with any relationship that the Act does not define as non-arm's length, it is a question of fact whether or not the Beneficiary and Opco are dealing at arm's length. However, as stated in paragraph 22 of IT-419R, the Agency considers a trust not to be dealing at arm's length with its beneficiaries unless the facts indicate otherwise. Moreover, draft paragraph 251(1)(b) (Notice of Ways and Means Motion tabled in the House of Commons on June 5, 2000) provides the Beneficiary and the Trust are deemed not to deal with each other at arm's length.
Whether or not the Beneficiary is in fact dealing at arm's length with Opco, the administrative positions in IT-445 are applicable only to loans by shareholders to corporations.
XXXXXXXXXX 2000-003323
P. Diguer CGA
Attention: XXXXXXXXXX
July 11, 2000
Dear Madam:
Re: Section 251 of the Income Tax Act (Canada)
This is in reply to your letter dated June 12, 2000 in which you request the Canada Customs & Revenue Agency's (the "Agency") views on whether a beneficiary of a family trust (the "Trust") is dealing at non-arm's length with a Canadian corporation ("Opco") where all the issued shares of Opco are held by the Trust. The expression "Canadian corporation" as referred to here and subsequently has the meaning assigned by subsection 89(1) of the Income Tax Act (Canada) (the "Act").
Specifically, in your letter you describe a situation where a family member who is a beneficiary (the "Beneficiary") of the Trust borrows money from a bank and lends the money to Opco interest free. In particular you ask:
Would the interest expense incurred by the Beneficiary on the bank loan be deductible, assuming all the other conditions set out in IT-445 are met?
Written confirmation of the tax implications inherent in particular transactions are 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 IC-70-6R3 dated December 30, 1996. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.
It is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.
In the situation described in your letter, Opco & the Trust are related persons by virtue of subparagraph 251(2)(b)(i) of the Act and as such are deemed not to deal with each other at arm's length. However, presently, there is no provision in the Act which specifically deems the Beneficiary to be dealing at non-arm's length with either the Trust or Opco. Thus, as with any relationship that the Act does not define as non-arm's length, it is a question of fact whether or not the Beneficiary and the Trust or the Beneficiary and Opco are dealing at arm's length. As stated in paragraph 22 of IT-419R, the Agency considers a trust not to be dealing at arm's length with its beneficiaries unless the facts indicate otherwise. Your letter suggests that the Beneficiary and the Trust are deemed not to deal with each other at arm's length by virtue of paragraph 251(1)(b) of the Act. The Minister of Finance released draft legislation regarding a proposed amendment to paragraph 251(1)(b) in a Notice of Ways and Means Motion tabled in the House of Commons on June 5, 2000 (the "Proposed Non-arm's Length Rule") which reads as follows:
b) a taxpayer and a personal trust (other than a trust described in any of paragraphs ( a) to ( e.1) of the definition "trust" in subsection 108(1)) are deemed not to deal with each other at arm's length if the taxpayer, or any person not dealing at arm's length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)( b)(iii)(A)(II) to (IV); and ...
Thus the Proposed Non-arm's Length Rule, if enacted as proposed, would apply to deem a beneficiary to deal at non-arm's length with a personal trust (other than a trust described in any of paragraphs ( a) to ( e.1) of the definition "trust" in subsection 108(1)). However, the Proposed Non-arm's Length Rule does not apply to a beneficiary of a personal trust and a corporation that is controlled by the personal trust.
As such, we cannot agree with the presumption as set out in your statement at the bottom of page 1 and top of page 2 of your letter which reads as follows:
... . Since the trust does not deal at arm's length with the corporation and the beneficiaries do not deal at arm's length with the trust, presumably the beneficiaries do not deal at arm's length with the corporation.
(Our emphasis added)
Furthermore, as stated in paragraph 3(a) of IT-445, interest expense on money borrowed and which is loaned interest-free or at less than a reasonable rate of interest is generally not deductible in whole or in part. The administrative exception to this rule as described in paragraph 7 of IT-445 applies only "when a taxpayer borrows money at interest to be loaned to a Canadian corporation of which he is a shareholder, or to its Canadian subsidiary, ... ." The expression "Canadian corporation" as it appears in IT-445 has the meaning assigned by subsection 89(1) of the Act.
We trust that our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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