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: Whether the rental income received by the Trust from the franchisor under the head lease and distributed by the Trust to specified individuals would be income-derived from provision of property by the Trust to or in support of a business carried on by Opco (the sub-lessee) under clause 120.4(1)(c)(ii)(C) of the definition of "split income".
Position: Yes.
Reasons: See response.
2009-030854
XXXXXXXXXX André Gallant
(613) 957-8961
July 15, 2009
Dear XXXXXXXXXX :
Re: Income splitting - the kiddie tax
This is in response to your letters of January 27, 2009 and July 10, 2009, regarding proposed clause (c)(ii)(C) of the definition of "split income" in subsection 120.4(1) of the Income Tax Act (Canada) (the "Act") (the definition is herein referred to as the "Definition").
Our understanding of the facts is as follows:
1. A corporation (Opco) carries on an active business as a franchisee selling the franchisor's products. The franchisor and Opco are dealing at arm's length.
2. The original shareholder of Opco carried out an estate freeze of Opco whereby a family trust (the "Trust") acquired the participating shares of Opco and the original shareholder became the owner of the freeze shares. The Trust was established by the original shareholder of Opco in favor of his minor children and grand-children, who are the beneficiaries of the Trust.
We assume that the original shareholder is a "specified shareholder" of Opco, as defined in subsection 248(1) of the Act, and accordingly Opco is a corporation as described in subclause (c)(ii)(C)(II) of the Definition.
3. At one time, Opco was leasing its premises from the franchisor where it carried on its business.
4. Subsequently, the Trust purchased the building from the franchisor and financed the purchase by a mortgage held by the franchisor. The franchisor, as part of its standard business practice, required as condition of the purchase that the Trust sign a head lease with the franchisor. The franchisor then sub-leased the building to Opco on the same terms and conditions as those under the head lease.
Rental income is paid by Opco to the franchisor and the franchisor in turn pays rent to the Trust. The Trust wishes to distribute all or a portion of the rental income to its beneficiaries, namely the minor children and grand-children of the original shareholder, each of whom is a "specified individual" as defined in subsection 120.4(1) of the Act.
5. The rental income received by the Trust from the franchisor and distributed by the Trust to the minor children and grand-children would meet all requirements of the Definition, if it is found that the Opco's premises (building) leased from the franchisor can be considered to be property that the Trust provides "to or in support of" Opco's business, as required by clause (c)(ii)(C) of the Definition.
Your question concerns the application of clause 120.4(1)(c)(ii)(C) of the Definition, and in particular whether Opco's leased premises can be considered to be property that the Trust provides "to or in support of" the business of Opco, or only "to or in support of" the business of the franchisor.
Your Position
The rental income received by the Trust from the franchisor and distributed by the Trust to specified individuals would not be income derived from the provision of property by the Trust to or in support of a business carried on by Opco under the Definition. The property is leased by the Trust to the franchisor under the head lease and is therefore not provided "to or in support of" Opco's business.
The dictionary meaning of the word "support" is to promote the interest of or to assist or to corroborate or maintain the cost of, to hold up or serve as a foundation, to keep something going. Since the Trust is required to lease the building to the franchisor, the Trust does not promote the interest of Opco and does not assist or keep Opco going.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
Proposed clause 120.4(1)(c)(ii)(C) of the Definition reads as follows:
"... to be income derived from the provision of property or services by a partnership or trust to, or in support of, a business carried on by ... a corporation of which a person who is related to the individual is a specified shareholder at any time in the year ..."
In our view, when the Trust leases the building to the franchisor it is not only providing property "to" the franchisor, but it is also providing property "in support of" the business of Opco.
The Canadian Oxford Dictionary provides the following meanings of the word "support":
"1 Carry all or part of the weight of. 2 keep from falling or sinking or failing. 4. enable to last out; give strength to; encourage. 6a give help to, back up. [...] in support of in order to support ..."
The same dictionary provides the following definition of the words "in order to":
"with the purpose of doing; with a view to."
Based on the presumption of statutory interpretation that every word must be given a meaning (that Parliament does not speak in vain), the expression "in support of" must have a different meaning and purpose than the word "to". Based on the common meanings of the word "to" and the words "in support of", we are of the view that the expression "in support of" has a broader meaning than the word "to", which generally implies a direct link.
The expression "in support of" contemplates an indirect link. It would encompass not only a situation where, for example, a person's property comes under the direct use of another person in that other person's business after an intermediate step. It would also encompass a situation where, for example, a person's property or services (e.g. management services) are regarded to be in support of another person's business because they are provided to the business clients of that other person.
The foregoing is consistent with the meaning of the French equivalent to the English expression "in support of" ("à l'appui d'") in the French version of Definition.
In our view, the Trust in this case leases the building to the franchisor under the head lease "in order to support", "with the purpose to support", "with a view to support" or in order to contribute to the performance of the business carried on by Opco. Accordingly, the income that the Trust distributes to the minor children and grand-children qualifies as split income under the Definition.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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