27 March 2014 External T.I. 2013-0504261E5 - 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: Whether the purpose test in 74.4 would be satisfied.

Position: Question of fact.

Reasons: Depends on the facts of the particular situation.

XXXXXXXXXX
Lara Friedlander
2013-050426

March 27, 2014

Dear XXXXXXXXXX:

Re: Section 74.4

This is in response to your email of September 10, 2013 concerning the application of subsection 74.4(2) of the Income Tax Act (the "Act") in the hypothetical scenario outlined below.

Opco is a taxable Canadian corporation. There is currently only one outstanding class of shares of Opco such that 50% of the shares are owned by the husband and 50% of the shares are owned by the wife. The husband and wife undertook certain transactions that you have indicated are for the purpose of creditor-proofing Opco's operations by transferring excess cash from Opco to a holding company.

The husband and wife created a new taxable Canadian corporation ("Holdco"). Holdco has four classes of shares: two classes were preferred shares and two were common shares. The husband and wife transferred their shares of Opco to Holdco. In consideration for the transfer of the Opco shares, the husband and wife each received preferred shares of a class. The husband and wife had all of the outstanding preferred shares and common shares of a class, except that 2% of the common shares were issued to their children for no consideration. The children are over 18 years of age. They are all residents of Canada.

You have asked for our comments regarding the purpose test in subsection 74.4(2) of the Act.

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. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we have provided some general comments below.

Our Comments

Generally, subsection 74.4(2) of the Act applies where an individual transfers or loans property, directly or indirectly, by means of a trust or otherwise, to a corporation and one of the main purposes of the transfer or loan may reasonably be considered to reduce the income of the individual and to benefit, directly or indirectly, by means of a trust or otherwise, a person who is a "designated person" in respect of the individual.

With respect to the purpose test in subsection 74.4(2) of the Act, you have indicated that the purpose test would not be satisfied because the designated person (i.e., the husband in respect of the wife, and the wife in respect of the husband) would not benefit from the relevant transfer.

It is a question of fact whether the purpose test in subsection 74.4(2) of the Act has been met. We cannot provide definitive comments as to whether the purpose test in subsection 74.4(2) of the Act is met without examining all of the facts in a particular situation.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch