18 July 1995 External T.I. 9505245 - ATTRIBUTION OF INCOME OF A MINOR

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:

general discussion of attribution re trust for minor

Position:

general positions

Reasons:

N/A

						950524
XXXXXXXXXX					L. Holloway
(613) 957-8953

July 18, 1995

Dear Sir

Re: Attribution of Income of a Minor

This is in reply to your letter of February 24, 1995 concerning the attribution of income earned by a minor as provided in subsection 74.1(2) of the Income Tax Act (the "Act"). We apologize for the delay in our response to your enquiries.

While your questions are derived from a review of Interpretation Bulletin IT-510, Transfers and Loans of Property made after May 22, 1985 to a Related Minor, it appears that the interpretations you seek relate to proposed transactions to be undertaken by you on behalf of your son. We therefore bring to your attention Information Circular IC 70-6R2 dated September 28, 1990 which should be consulted when confirmation of proposed transactions is requested. If an advance income tax ruling is required with respect to specific contemplated transactions, a submission in accordance with IC 70-6R2 should be made. However, we can provide you with the following general comments on income attribution to address your concerns.

Under subsection 74.1(2) of the Act the attribution of income or losses but not capital gains or losses, will occur on the transfer or loan of property by the individual to a non-arm's length person (or to a niece or nephew) who was under the age of 18, until that person attains the age of 18. Attribution means that the income or loss earned by the minor is considered to be the income or loss of the transferor during the transferor's lifetime, as long as he/she is resident in Canada. (Whether a person is a resident of Canada is a question of fact; see

IT-221R2 for the Department's views on residency.) The use of a trust will not avoid the application of this rule.

Subsection 74.5(6) of the Act provides an anti-avoidance rule where transactions are undertaken to avoid the attribution rules by the use of "back-to-back" loans and transfers. The application of that provision is, as noted in your letter, explained in paragraph 6 of IT-510. Whether a series of transactions is subject to the application of subsection 74.5(6) is a question of fact. The Act does not specify that income earned from legitimate gifts (voluntary transfers of property without valuable consideration) from arm's length third parties to a minor will be automatically attributed to the parent where the parent and third party have a bona fide business relationship and funds are exchanged in the normal course of this relationship.

In response to the hypothetical scenario presented in your letter whereby your son would repay an amount equal to the initial amount transferred to him by you, we caution that the Act does not provide that attribution ceases when a low-interest/interest-free loan (or other indebtedness arising from the transfer of property) to which subsection 74.1(2) applies is repaid. Where a loan is repaid with property other than the original property loaned or property substituted, the attribution continues. Where cash is loaned, only the repayment of property substituted for the cash would serve to cease attribution. Subsection 74.5(1) of the Act provides exceptions to the attribution rule in subsection 74.1(2). The exception referred to in your letter is stated in the Act as follows:

"at the time of the transfer the fair market value of the transferred property did not exceed the fair market value of the property received by the transferor as consideration for the transferred property;"

Therefore, in order to qualify for this exception, "at the time of the transfer" fair market value consideration must be received from the transferee. Receipt of fair market value consideration at a date subsequent to the transfer date will not cease attribution unless as stated above, the original property, or property substituted is returned to the transferor.

If the transferor takes back a debt as consideration (ie. sale of an asset for a promissory note) then interest (equal to the lesser of a Revenue Canada prescribed rate or an arm's length rate) must be charged and paid within thirty days of the end of each year the debt is outstanding or attribution will occur. If funds are loaned directly, then interest at this same rate must be charged and paid on the loan or attribution will apply.

Where subsection 74.1(2) applies to attribute income to the transferor or lender of the property and funds are transferred or lent from a joint account, income would logically be attributed in the same ratio that the income on the joint account is divided for purposes of reporting income for tax purposes taking into account any other attribution rules that may be relevant (i.e. subsection 74.1(1) of the Act deals with attribution between spouses; see enclosed IT-511R).

Lastly, we enclose Information Circular 88-2 dealing with the general anti-avoidance rule, section 245(2) of the Act, which may be of interest to you. Where a specific anti-avoidance provision, such as subsection 74.5(6), applies to a particular transaction or series of transactions, then the provisions of subsection 245(2) would not be applied to that transaction. Where a specific anti-avoidance provision has been circumvented, then subsection 245(2) may apply to the transaction or series of transactions.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
A/Section Chief
Trusts Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosures