3 March 1995 External T.I. 9427115 - "transfer"? Dad invests $ in "trust" a/c for KIDS

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.

Principal Issues:

whether funds invested in equity mutual fund on sons' behalf constitute a transfer of property as discussed in IT-510 and tax consequences of such a transfer

Position TAKEN:

"in trust for" account (informal trust arrangement) permits parent to withdraw the investment or a portion thereof for parent's personal benefit hence no "transfer" appears to take place. If a trust is considered to have been established then the comments in IT-369R apply (income/loss from property and taxable capital gain or allowable capital loss from the disposition of the property will attribute to the parent)

Reasons FOR POSITION TAKEN:

meaning of "transfer" is to "divest, deprive or dispossess of title" and this test is not met.

		942711
XXXXXXXXXX	Sandra Short

March 3, 1995

Dear Sir:

Re: Investment in Mutual Funds for the benefit of your children

This is in reply to your October 20, 1994 request for an advance income tax ruling concerning the tax consequences of investing funds in an equity mutual fund for the benefit of your now minor aged sons. It appears that your questions are of a sufficiently general nature that they may be answered without a formal ruling. Your cheque for $481.50 will be returned to you under separate cover. We apologize for the delay in our reply.

You have asked that we consider the following situation and questions:

1.$100 per month may be invested in an equity mutual fund investment which is not part of a Registered Education Savings Plan. Funds will be contributed each month by you in respect of each son until each child reaches the age of eighteen years. Upon reaching the age of majority, each child will be given the opportunity to convert each trust account into a personal account in their own name. As the children are now minors, you have been advised to set up informal trust accounts on their behalf. You have queried whether your contribution each month to such an informal trust account for your children constitutes a "transfer of property" as discussed in paragraph 19 of Interpretation Bulletin IT-510.

2.The equity type mutual fund should grow in two ways: by way of dividends (interest component, dividend component and capital gains component) and through capital growth whereby a gain is only realized upon the redemption of the units held. Your second question, which assumes that your monthly contribution to the informal trust account does constitute a transfer of property, is whether the annual distributions by the fund of interest, dividends and gains are considered a subsequent disposition. Do the capital gains attribute back to you the transferor or are they taxed in the children's hands?

3.You have asked that we address a related query. While it is your intention that the money contributed to these funds be used solely and fully for the benefit of your children, future circumstances may or could require that you withdraw the investment or a portion thereof for purposes other than for the sole benefit of your children. You have asked the tax consequences of such an action, specifically whether the children would declare any capital gains to date.

4.It is anticipated that a second separate "in trust for" account will be set up to receive the annual dividend distributions of the mutual fund (interest, dividend and capital gains portions). You have queried whether it is true that there is no attribution of interest on interest, dividends on dividends, or capital gains on capital gains back to the transferor.

We respond to your questions in the order presented:

1.The word "transfer" is not defined in the Income Tax Act but it is broadly interpreted to mean all transfers or loans of property including gifts. The terms of the "in trust for" agreement between you and the mutual fund in question will clarify whether property has in fact been "transferred" by you. However, it is our view that a "transfer" will not take place. You have stated that the funds which accumulate in the "in trust for" accounts may, depending on future circumstances, be used for purposes otherwise than for the sole benefit of your children and that you will have the right to withdraw funds in whole or in part from the trust account. If the terms and conditions of the "in trust for" accounts do not serve to divest, deprive or dispossess you of title to the deposited funds and to vest the property in your children's hands, then it may be concluded that a transfer of property has not been made as contemplated in Interpretation Bulletin IT-510.

2.Your second question assumes that the monthly contribution to the informal trust account constitutes a transfer of property. As discussed in 1. above, it is our view that it does not. If the provisions of the "in trust for" arrangement between you and XXXXXXXXXX establish that a trust is established, then we refer to the comments found in the enclosed copy of Interpretation Bulletin IT-369R entitled "Attribution of Trust Income to Settlor" which discusses the application of subsection 75(2) of the Income Tax Act. The provisions of subsection 75(2) of the Act essentially provide that any income or loss from property, as well as any taxable capital gain or allowable capital loss from the disposition of the property, is attributed to the person from whom the property was directly or indirectly received if the terms of the trust are such that the property may revert to that person, may be distributed to beneficiaries determined by that person at a time after the trust was created or may only be disposed of with the consent of, or at the direction of, that person while alive.

3.As discussed in 1. above, the fact that you have the right to withdraw the contributions or income from the account results in a finding that a "transfer" of property has not or will not take place.

4.This query assumes that a transfer of property has or will take place. If an actual "transfer" did take place then, as discussed in paragraph 4 of Interpretation Bulletin IT-510, income or loss derived from the investment or other use of the income from the transferred property will not attribute to the transferor and, for income tax purposes, will be income of the transferee.

We trust our comments will be of assistance to you. We would remind you that this is not an advance income tax ruling and as such these comments are not binding on the Department.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch

Encl.