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: Has the CRA changed its position with respect to the application of subsection 75(2) to loans as a consequence of the Howson decision?
Position: Absent the particular scenario where a loan to a trust is not outside and independent of the terms of the trust, we are of the view that a loan to a trust falls outside the ambit of subsection 75(2) of the ITA and should rather be dealt with under subsections 56(4.1) and 74.1(1) to (3) of the ITA.
Reasons: Although property held by a trust pursuant to a genuine or bona fide loan will eventually revert to the creditor, given that such reversion will usually not flow from the terms of the trust but by operation of the loan itself and the law of creditor rights, it follows that such property should not be subject to subsection 75(2) of the ITA.
2007 STEP Round Table
Q. 4 Subsection 75(2) and Loans: Implications of the Howson Decision
In the recent decision of Howson v. The Queen, 2007 DTC 141 (TCC), the taxpayer had transferred property to an "immigration" trust, of which she was the beneficiary. The issue was whether the property was transferred by way of gift or loan, and whether subsection 75(2) applied to attribute the income of the trust to the taxpayer. The Crown conceded that if there were a genuine loan, subsection 75(2) would not apply. In the past, the CRA has taken the view that to be a genuine loan, there must be: (1) a written and signed acknowledgment of the loan by the borrower and an agreement to repay it within a reasonable period of time; (2) evidence that the borrower gave security for the loan; (3) evidence that interest on the loan was paid; and (4) evidence that actual repayment was made. In Howson, no interest was charged and there was no security granted. The Court held that the transfer was made by way of loan and stated that neither interest nor security is required to have a loan. The Court also found that a bona fide loan is not subject to "reversion" by the terms of the Trust - it returns to the lender by operation of the loan itself and the laws affecting creditors.
Has the CRA changed its position with respect to the application of subsection 75(2) to loans?
Response
The CRA is prepared to provide a qualified change in position.
As background, we advise that the difficulty for the CRA has always been distinguishing between a loan and a contribution to the corpus of the trust fund. It would appear that the comments in paragraph 1 of IT-369R were developed in light of this difficulty. That paragraph asserts that a genuine loan to a trust would not by itself be considered to result in property being "held" by the trust under one or more of the conditions specified in subsection 75(2) of the ITA, if the loan is outside and independent of the terms of the trust.
In Howson, the issue at trial was narrowed to whether the funds were put in the trust by way of loan. Based on the evidence before the Court, the Court determined that the funds were put in by way of loan and that subsection 75(2) of the ITA did not apply.
At paragraph 15 of the decision, the Court states: "It stands to reason that a bona fide loan is on its face, not subject to reversion by the terms of the Trust. It returns to the lender by operation of the loan itself and the law of creditor rights." Later, in paragraph 21, the Court states: "A finding of a loan does not require interest nor security."
To the CRA these comments mean that something called loan must be regarded as a loan at law. As acknowledged by the Court in Howson, although property held by a trust pursuant to a bona fide loan will eventually revert to the creditor, given that such reversion will usually not flow from the terms of the trust but by operation of the loan itself and the law of creditor rights, it follows that such property should not be subject to subsection 75(2) of the ITA. Therefore, absent the particular scenario where a loan to a trust is not outside and independent of the terms of the trust, we are of the view that a loan to a trust falls outside the ambit of subsection 75(2) of the ITA and should rather be dealt with under subsections 56(4.1) and 74.1(1) to (3) of the ITA.
June 8, 2007
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