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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
This is in reply to your letter dated February 10, 1993 requesting our interpretation of the application of subsection 56(4.1) of the Income Tax Act (the "Act") in the situation where an individual loans property to a corporation the shares of which are owned by the individual's adult children.
Subsection 56(4.1) of the Act sets out an anti-avoidance rule that applies where an individual becomes indebted, directly or indirectly, to another individual with whom the individual is not dealing at arm's length. One of the main reasons for incurring the indebtedness must be to reduce or avoid tax by having income included in the hands of the debtor individual which would otherwise be included in the hands of the creditor individual.
It is a question of fact whether a parent loaning property to a corporation whose shares are owned by the parent's adult children would result in the adult child becoming indebted to the parent and whether such indebtedness was created to reduce or avoid tax payable by the parent.
Generally, it is our view that the loaning of property to a corporation where the income will be taxed at the corporate level will not violate the purpose test in subsection 56(4.1) of the Act. However, if the corporation were to advance the property to the adult children, and the other requirements of subsection 56(4.1) of the Act were otherwise met, the subsection could apply. Furthermore, subsection 245(2) of the Act could apply where there has been a series of transactions designed to circumvent the application of the provisions of subsection 56(4.1) of the Act and they result in a tax benefit, as defined in subsection 245(1) of the Act, to the parent.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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