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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether income earned by individual through a partnership would be considered split income as defined in subsection 120.4(1) of the Act.
Position: It is possible.
Reasons: Question of fact.
XXXXXXXXXX 2003-003998
Shaun Harkin, CMA
December 3, 2003
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Subsection 120.4(1) and 120.4(2)
This is in reply to your facsimile of September 22, 2003 wherein you asked about the application of section 120.4 of the Income Tax Act (the "Act") to the income allocated from a partnership to a trust, which distributes the income to minors. The trust is a member of a partnership. The beneficiaries of the trust are the minor children of the shareholder of Corporation A. The partnership will receive a loan from a bank and lend these funds out to customers of Corporation A. The customers of Corporation A will use these funds to pay the premiums on insurance policies purchased from Corporation A. We assume, for the purpose of this letter, that the beneficiaries are "specified individuals" as that term is defined in subsection 120.4(1) of the Act.
Specifically, you asked if the interest paid on the loan by customers of Corporation A to the partnership would be considered "split income" as that term is defined in subsection 120.4(1) of the Act, assuming that the phrase "property or services" replaces the phrase "goods or services" as proposed in the technical bill released by the Department of Finance on December 20/02.
Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transaction(s) are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are prepared to provide the following comments.
Section 120.4 of the Act imposes a special tax, known as the "kiddie tax" on the split income of specified individuals. A specified individual is an individual who is under 18 years of age at the end of the year, who was resident in Canada throughout the year, and who had a parent who was resident in Canada at any time during the year. Split income includes:
? income derived from the provision of "goods or services" (to be replaced by the phrase "property or services") by a partnership or trust to or in support of a business carried on by:
i) a person related to the specified individual at any time during the taxation year,
ii) a corporation of which a person related to the specified individual owns directly or indirectly, at any time in the taxation year 10% or more of the shares of any class of the corporation or related corporation, or
iii) a professional corporation (defined as a corporation that carries on the professional practice of an accountant, lawyer, dentist, medical doctor, veterinarian or chiropractor) of which a person related to the specified individual is a shareholder at any time in the year.
We are of the view that the lending of funds from the partnership to the customers of Corporation A constitutes the provision of property or services in support of a business carried on by a person described in (ii), above. Thus, if the proposal contained in the technical bill becomes law, any portion of the interest earned by the partnership and allocated to the trust for fiscal periods beginning after December 20, 2002 from the loan to customers of Corporation A that is included in the minor children's income pursuant to subsection 104(13) or 105(2) of the Act would be split income.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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