26 April 2004 External T.I. 2004-0064471E5 - Attribution Rules

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.

Principal Issues: How is the allocation made to the individual who has transferred property to a trust in which his spouse is beneficially interested. The trust also has other income and other beneficiaries who are not designated persons.

Position: Rules of 74.3 - income retains its character and is attributed to the transferor only up to the extent the designated person receives income from the transferred property.

Reasons: 74.3

							2004-006447
XXXXXXXXXX 						C. Tremblay, CMA
(613) 957-2139
April 26, 2004

Dear XXXXXXXXXX,

Re: Attribution of Dividend Income

This is in reply to your letter of February 24, 2004 concerning the attribution of dividend income. You describe a situation where an individual transfers shares to a trust of which his spouse is a beneficiary, and the trust's income for the year from the transferred property is $100,000 of dividend income such that sections 74.1 and 74.3 of the Income Tax Act (the "Act") are applicable. The trust also has $140,000 of interest income from an asset, which is not subject to the rules in sections 74.1 and 74.3 of the Act, and the trust has two beneficiaries including the spouse. The other beneficiary is not a "designated person" in respect of the transferor. If the trustees of the trust allocate $120,000 of income to the spouse, you ask what is the nature of the composition of that amount in the following three scenarios:

(a) $120,000 of interest income;

(b) $100,000 of dividend income (from the transferred property) and $20,000 of interest income;

(c) $50,000 of dividend income (from the transferred property) and $70,000 of interest income.

Our Comments:

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 advanced income tax ruling request and submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Revenue Agency (the "CRA").

Paragraph 2 of Interpretation Bulletin IT-511R states that subsections 74.1(1) and 74.3(1) of the Act provide that where an individual has transferred or loaned property (including money) to the individual's spouse or to a trust in which that spouse is beneficially interested at any time any income or loss from the property or property substituted for it is deemed to be the individual's income or loss for a taxation year.

Subsection 108(5) of the Act provides that the nature of income or deductions flowing through a trust to a beneficiary of the trust is retained only where the Act so provides. This rule does not, however, affect the attribution rules in sections 74.1 to 75 of the Act so that income from property (i.e. interest and dividend income) and the capital gains of the trust keep their nature for the purposes of these rules.

The amount determined under paragraph 74.3(1)(a) of the Act, in respect of a taxation year, to be income of the designated person from the loaned or transferred property is the lesser of:

" ...(i) the amount in respect of the trust that was included by virtue of paragraph 12(1)(m) in computing the income for the year of the designated person, and

(ii) that proportion of the amount that would be the income of the trust for the year from the lent or transferred property or from property substituted therefor if no deduction were made under subsection 104(6) or (12) that

(A) the amount determined under subparagraph (i) in respect of the designated person for the year

is of

(B) the total of all amounts each of which is an amount determined under subparagraph (i) for the year in respect of the designated person or any other person who is throughout the year a designated person in respect of the individual;..."

In the scenarios you present, the income attributed, if any, can only be from the transferred property, i.e. the dividend source and subsection 82(2) of the Act would apply such that it will be considered dividend income in the hands of the transferor. In scenario (a), it appears that the trust has chosen to be taxed on the dividend income, such that no attribution will apply. In scenario (b), all of the income from the transferred property allocated to the spouse ($100,000 of dividend income) will be attributed as dividend income in the hands of the transferor and in scenario (c) $50,000 of the dividend income from the transferred property will be attributed to the transferor. We assume that in scenario (c) the balance of the dividend income will be taxed in the trust.

We refer you to paragraph 14 of IT-511R, which provides an example of the operation of subsection 74.3(1) of the Act.

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 CRA.

We trust the above comments are of assistance.

Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch