15 January 1992 Income Tax Severed Letter 260

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: ATTRIBUTION SUBSTITUTED PROPERTY CAPITAL GAINS PORTION Section(s): 74.1(2), 248(5), 73(5)]

913417
R.B. Day
(613) 957-2136

XXX

January 15, 1992

Dear XXX

Re: Subsection 74.1(2) of the Income Tax Act (the Act)

We are writing in reply to your letter of November 11, 1991, wherein you requested our opinion regarding the phrase “... from property or from property substituted” in the subject provision as it relates to the attribution of income on property transferred to a minor where a capital gain has resulted from the subsequent disposition of that property. You are particularly concerned with a situation where a taxpayer previously utilized subsection 73(5) of the Act as illustrated in the following example.

A father transferred the shares of an operating company to a minor son in 1987 and, pursuant to subsection 73(5) of the Act, the capital gain (up to $200,000) on the disposition was deferred and transferred to the child.

Five years later, the minor son disposed of the shares and reported the capital gain in his return and utilized the capital gains deduction permitted under section 110.6 of the Act. The proceeds, received by the son, on the disposition of the shares were invested in guaranteed investment certificates.

Specifically, you have requested our opinion as to whether or not the interest income earned on these guaranteed investment certificates and received by the minor son would be attributed to the father pursuant to subsection 74.1(2) of the Act.

You noted that prior to December 30,1987, any capital gains realized by a spouse which accrued subsequent to the date of transfer, were not attributed to the transferor. However, for spousal transfers of property occurring subsequent to December 30 1987, all capital gains on the transferred property or substituted property will attribute to the transferor. You are uncertain as to whether this administrative position could be applied to a transfer to a minor. In your opinion, it would appear logical to exclude the income earned on the capital gains portion of the proceeds of disposition invested in the guaranteed investment certificates.

Our Comments

The definition of “substituted property” in subsection 248(5) of the Act as amended, was broadened with respect to exchanges of property occurring after November 21, 1985, such that any income or loss from the transferred property, including any capital gains or losses attaching to the original property or a series of properties substituted therefor, would attribute to the transferor.

With respect to spousal transfers, this amendment was inconsistent with the position set out in paragraph 22 of IT-258R2 regarding the attribution of capital gains or losses on transferred property and property substituted therefor. As a transitional measure, taxpayers were allowed to follow the guidelines in paragraph 22 until December 30,1987, the date of the Special Release to IT-258R2.

Where transfers to minors are concerned, capital gains related to the transferred property or property substituted therefor, does not attribute to the transferor. As a consequence, this transitional position had no application to transfers to minors. Accordingly, the amendments to subsection 248(5) of the Act would have immediate application with respect to transfers to minors subsequent to November 21, 1985, for purposes of the administration of subsection 74.1(2) of the Act.

In view of the forgoing, it is our opinion that the interest on the guaranteed investment certificates would be attributed to the transferor, in the scenario described in your letter, until the year in which the minor reaches the age of 18. Our views in this regard would not be altered where the transfer of the shares to the minor occurred subsequent to 1987.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch