3 October 1986 Income Tax Severed Letter 5-1817 - [Inter-vivos Family Trust]

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.

G. Kauppinen Tel: (613) 957-3493

Attention:

October 3, 1986

Dear Sirs:

This is in reply to your letter dated June 26, 1966 wherein you requested our opinion with respect to the operation of subsection 74.3(1) of the Income Tax Act ("Act") assuming the following:

1. An inter-vivos family trust is settled by two grandparents for the benefit of four grandchildren. Three grandchildren are over 18 years of age. One grandchild is a minor. The minor will reach the age of majority in 1988.

2. The settlor make two loans to the trust. Assume that each loan is for $100,000. One loan is made prior to May 23, 1985. The second loan is made after May 23, 1985.

3. The trust acquires a rental property (land and building) for $700,000. It makes a down payment of $200,000 and obtains a mortgage on the property for the remaining $500,000. Assume that the property yields net rental income of $100,000 per year.

We have made the following additional assumptions for the purpose of addressing your query:

4. The four grandchildren are to share equally in the income of the trust and paragraph 104(13)(b) of the Act applies.

5. The exception contained in subsection 74.5(2) of the Act is not applicable.

6. The net rental income of the trust is arrived at aster the deduction of the mortgage interest and this income is "income from property" as opposed to "business income" (which would not be subject to the attribution rules).

7. The loan outstanding on May 22, 1985 is not repaid prior to 1988.

8. No income is earned by the trust for the 1985 taxation year.

Assuming the foregoing, it is our view that the attribution rules would operate as follows:

A. The minor grandchild would be a "designated person" pursuant to subsection 74.3(2) of the Act for the taxation years 1986 and 1987. The attribution rules would not be applicable after 1987 since all beneficiaries of the trust would be 18 years of age or older at the end of 1988.

B. The calculation of the income of the minor grandchild for each of the taxation years 1986 and 1987 for the purpose of subsection 74.1(2) of the Act is determined pursuant to paragraph 74.3(1)(a) of the Act and is deemed to be the lesser of:

(a) the income of the grandchild pursuant to paragraph 12(1)(m) of the Act. (In this example, because of our assumption 4 above, this amount is 1/4 x $100,000 or $25,000).

(b) Income of the trust before any deductions pursuant to subsection
104(6) of the Act times the income of the minor grandchild from
the trust divided by the income of all designated persons from
the trust. (In this example, this amount would be
$100,000 x $25,000 or $100,000).
           $25,000

Therefore, the lessor of (a) and (b) above is $25,000.

C. The income from property substituted for the loan proceeds relates 50% to the pre-May 23, 1985 loan and 50% to the post May 22, 1965 loan.

The attribution rules in subsection 74.1(2) of the Act do not apply to income on property substituted for a pre-May 23, 1985 loan for any taxation year ending before 1988. Therefore, in your example, # of the $25,000 which would otherwise be taxable in the minor grandchild's hands for the 1986 and 1987 taxation years will not be subject to subsection 74.1(2) of the Act. Consequently, $12,500 would be taxable to the minor grandchild for the 1986 and 1987 taxation year and $12,500 would be attributable to the settlor of the trust in each of those years.

We trust the foregoing is of assistance.

These opinions are our best interpretation of the law as it applies generally. They may, however not always be appropriate in the circumstances of a particular case and as stated in paragraph 24 of Information Circular 70-6R, they are not binding on this Department.

Yours truly,

Original Signed by Original signé par A. DULUDE

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

GK/md