17 March 1994 External T.I. 9334025 - ATTRIBUTION OF INCOME

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.

933402
XXXXXXXXXX D. Zion

Attention: XXXXXXXXXX

March 17, 1994

Dear Sirs:

Re: Attribution of Income

We are replying to your letter of November 17, 1993 wherein you requested our views regarding the applicability of the attribution rules to the following hypothetical situation:

A taxpayer has, with his own funds, purchased a house and registered title to the property in his spouse's name. In a subsequent year, the taxpayer transferred shares of a corporation to his spouse for fair market consideration which was in excess of the adjusted cost base of the shares. This consideration consisted of a demand promissory note bearing interest at the prescribed rate. The taxpayer and his spouse elected not to have subsection 73(1) of the Income Tax Act (the Act) apply to the transaction. The interest payable on the note was paid within 30 days after the end of each taxation year after the transfer. The spouse subsequently pays off the promissory note by transferring ownership of the previously mentioned house which now has a fair market value equal to the amount of the promissory note to the taxpayer. They elect not to have subsection 73(1) of the Act apply to this subsequent transaction.

It would appear that this is a situation involving both specific taxpayers and contemplated transactions. Confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are fully described in Information Circular 70-6R2. We are, however, prepared to offer the following general comments.

In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993.

The rules in subsection 74.1(3) of the Income Tax Act (the Act) regarding the repayment of loans apply to attribute income earned on property acquired with the original loan or property substituted therefor. In reviewing the series of transactions described in your letter as a whole, it is our view that subsection 74.1(3) of the Act is applicable and attribution will apply. The taxpayer has transferred property (house) directly for the benefit of his spouse and the transferred property has been used to repay the borrowed money (promissory note) with which the income producing property (shares) was acquired. In the end, the result is the same as if the taxpayer had provided his spouse with the cash to acquire the income producing property at the outset.

Alternatively, as Mr. A's funds were used to acquire the principal residence, it is our view that a reasonable argument can be made that the shares which are subsequently transferred might be considered "substituted property" within the meaning of subsection 248(5) of the Act. Accordingly, section 74.1 or 74.2 of the Act could apply.

We would also like to mention that it is our view that the general anti-avoidance rules pursuant to section 245 of the Act may have application where it can be shown that the primary purpose of the transaction was to reduce the tax liability of one of the spouses. This of course, could not be determined until there is a thorough review of the facts in an actual situation.

In the event that your situation relates to actual taxpayers and a completed transaction, you may wish to submit all relevant facts and documentation to the appropriate District Taxation Office for their comments.

We trust this information will be of assistance to you.

Yours truly,

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