7 November 1990 External T.I. 901865 F - Attribution

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.

November 7, 1990

Dear Sirs:

Re:  Attribution

We are replying to your letter dated August 10, 1990, concerning the application of subsection 74.1 in the following situation:

Facts

1.     

2.     24(1)

3.     

4.     

5.     

You have asked whether the loan from the bank will be considered a loan for value as described in subsection 74.5(2) of the Act. In addition, you ask whether future income distributions to the designated persons who are beneficially interested in the trust will be subject to the attribution rules in sections 74.1 and 74.2.

We are unable to comment on actual proposed transactions other than by way of an advance income tax ruling. It is a question of fact as to whether attribution would apply to a particular situation which can only be determined upon review of all the relevant information and documentation. However, we would like to offer the following general comments concerning the application of the attribution rules.

Interpretation Bulletins IT-510 and IT-511 outline the circumstances under which attribution applies to a property transferred to a related minor or a spouse. The situation you describe involves a transfer of an income-producing property to a trust rather than a loan of that property to the trust. Accordingly, the basis for an exemption to the attribution rules in respect of that property is contained in subsection 74.5(1) and not in subsection 74.5(2).

Paragraph 74.5(1)(b) is similar to subsection 74.5(2) in that where the consideration for a transferred property includes indebtedness to the transferor, the income from that transferred property which would otherwise be subject to attribution will only be exempt from attribution if the loan bears an appropriate rate of interest and the interest on that loan is paid within 30 days after the end of the taxation year in which it was payable. Where the conditions of subsection 74.5(1) are not met, such as when the required interest is not paid within 30 days after the end of the taxation year, it is our view that subsection 74.1 or 74.2 will continue to apply to the transferred property, even though the loan may be fully discharged as long as the transferee retains the property transferred (or property substituted therefor).

Accordingly, in the situation described above, a second loan from the bank, whether considered a loan for value or not, would not affect the application of the attribution rules in respect of the shares transferred to the trust.

Nevertheless, we can advise that attribution would not normally apply to income earned on funds received by way of an arm's length loan from a bank to an individual or a trust. However, to the extent that an individual other than the borrower is obligated, either absolutely or contingently, to effect any undertaking such as a guarantee, covenant or agreement to ensure repayment of the loan to the bank, subsection 74.5(7) will deem the loan to have been made by that individual and not by the third party.

We caution that the foregoing represents our considered opinion only and is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch