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: Interpretation Bulletin IT-258 states that a genuine loan to a trust would not by itself result in property being "held" by the trust under one or more of the conditions under which subsection 75(2) of the Act applies, provided that the loan was outside and independent of the terms of the trust. However, CRA document 2000-0023997 seems to contradict this position. Can you clarify the CRA's current position on the application of subsection 75(2) of the Act when a beneficiary or trustee makes a genuine loan to the trust?
Position: The position set out at the 1991 CTF differs from the situation described in subsequent letters, including CRA document 2000-0023997 & 2000-001255.
Reasons: Our position with respect to the application of 75(2) of the Act to a cash loan remains as stated at the 1991 Canadian Tax Foundation, but various subsequent documents describe the result in other situations. Document 2000-0023997 distinguishes this position from the tax result that would occur an income-producing property other than cash were to be loaned to a trust. In such a case, the transaction fits squarely within the type of situation described in subparagraph 75(2)(a)(i) of the Act because the trust is holding the income-producing property on the condition and in full expectation of returning the property to the transferor. Similarly, while the CRA does not apply subsection 75(2) to a genuine loan of cash, including a conditional sales agreement for the sale of property, solely by reason of the fact that the outstanding debt will be repaid, subsection 75(2) of the Act does apply if a capital beneficiary of a trust transfers property to that trust, regardless of whether or not the capital beneficiary receives fair market value consideration.
2006 STEP Round Table
Q4. Application of subsection 75(2) to a Genuine Loan
Interpretation Bulletin IT-258 states that a genuine loan to a trust would not by itself result in property being "held" by the trust under one or more of the conditions under which subsection 75(2) of the Act applies, provided that the loan was outside and independent of the terms of the trust. However, CRA document 2000-0023997 seems to contradict this position. Can you clarify the CRA's current position on the application of subsection 75(2) of the Act when a beneficiary or trustee makes a genuine loan to the trust?
Response
The determination of whether subsection 75(2) of the Act applies in any particular situation can only be made after a full examination of all the relevant facts and circumstances. The apparent inconsistency in this case arises from the fact that the different interpretations are focused on different aspects of the issue and are based on different assumptions of facts.
Before addressing the question, it should be noted that a loan of property could give rise to attribution under various provisions, such as subsection 56(4) or section 74.1 of the Act.
Our position with respect to the application of 75(2) of the Act to a cash loan remains as stated at the 1991 Canadian Tax Foundation. That is, the CRA will not apply subsection 75(2) of the Act to a genuine loan of cash provided that the loan is made outside and independent of the terms of the trust. The CRA's position with respect to what is considered a genuine loan was originally set out in cancelled IT-260, Transfer of Property to a Minor. The bulletin stated that no all-inclusive statement could be made as to when a loan can be considered to be genuine, but a written and signed acknowledgment of the loan by the borrower and agreement to repay it within a reasonable period of time would ordinarily be accepted evidence that it was so. If, in addition, there is evidence that the borrower has given security for the loan, that interest on the loan has been paid, or that actual repayment has been made, the loan will be considered to be genuine. The fact that no interest is required to be paid does not in itself, mean that a genuine loan has not been made. If the loan is not considered a genuine loan, subsection 75(2) of the Act will apply in the same manner as for any other transfer of property. Our comments on what constitutes a genuine loan can also be found in CRA document 9811115.
In the context of subsection 75(2) of the Act however, a loan of an income-producing property other than cash, fits squarely within the type of situation described in subparagraph 75(2)(a)(i) of the Act. In such a situation, the trust is holding the income-producing property on the condition and in full expectation of returning the property to the transferor. Although subsection 75(2) of the Act would also apply to the loan of property that is not income-producing, such as a cottage for the use of the beneficiaries, there would be no income to attribute to the person who made the loan of that property.
That is the distinction which was being made in CRA document 2000-0023997.
Note that, while the CRA does not apply subsection 75(2) to a genuine loan of cash, including a conditional sales agreement for the sale of property, solely by reason of the fact that the outstanding debt will be repaid, subsection 75(2) of the Act does apply if a capital beneficiary of a trust transfers property to that trust, regardless of whether or not the capital beneficiary receives fair market value consideration. This is because, as stated in the first paragraph of Interpretation Bulletin IT-369R, Attribution of Trust Income to Settlor, the application of subsection 75(2) of the Act does not depend on the manner in which the property was acquired, but on whether the property is held under one or more of the conditions set out in subsection 75(2) of the Act. Thus, if a capital beneficiary of a trust transfers property to that trust pursuant to a conditional sales agreement, subsection 75(2) of the Act will apply to the income from that property on the basis that the property so transferred to trust may revert to that capital beneficiary. If, however, a person other than a capital beneficiary were to sell property to the trust pursuant to a conditional sales agreement, subsection 75(2) of the Act would not apply solely by reason of the fact that the property may be returned to the vendor pursuant to foreclosure proceedings.
Finally, we would like to offer a comment on the meaning of the word "revert". Some commentators have suggested that the term "revert" should be restricted to its legal meaning. Although the word "revert" has a particular meaning in a legal context, it is found in most dictionaries and has the ordinary meaning of "return to its former state". Thus, it is our position that subparagraph 75(2)(a)(i) of the Act may apply if, under the terms of the trust, there is a possibility, however remote, that the property held by a trust may be returned to the person who contributed the property to the trust.
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