2 October 1995 External T.I. 9514355 - Par. 74.4(4)(b) Act - payment by a trust of proceeds of disposition

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:

Is the condition of paragraph 74.4(4)(b) of the Act met in the following fact situation:

-husband and wife each transfer a property to a corporation and receive preferred shares as consideration of the transfer;

-the wife gifts her preferred shares to a trust; the husband sells his preferred shares to the same trust;

-the husband is a beneficiary of the trust but during his wife's lifetime, the only payments that he will receive from the trust is his proceeds of disposition?

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

Paragraph 74.4(4)(b) of the Act is an exception to subsection 74.4(2) which is intended to prevent a taxpayer from splitting income among family members and thereby reducing the total amount of tax payable on that income. After a discussion with Mr. Rick Biscaro, director of Manufacturing Industries, Partnerships and Trusts Division, we concluded that the wording of paragraph 74.4(4)(b) is not satisfied for the following reasons: 1- the trust indenture permitted the trust to pay indebtedness owing to any person including the designated person, 2- technically, the repayment of the unpaid price could not be paid by the trust otherwise than from its income or its capital and 3- the purpose of the transaction is not clear and seems to be structured to avoid the application of 74.4(2) of the Act. Also, there is no exception in paragraph 74.4(4)(b) of the Act for payments received qua creditor.

								5-951435
XXXXXXXXXX								(613) 957-8953

Attention: XXXXXXXXXX

October 2, 1995

Dear Sirs:

Re: Subsections 74.4(2) and (4) of the Income Tax Act (the "Act")

We are replying to your letter dated May 19, 1995, wherein you requested our opinion as to whether we would consider the application of subsection 74.4(2) of the Act as it pertains to your particular fact situation. We apologize for the delay in responding to your inquiry.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Subsection 74.4(2) of the Act sets out the rules which apply where an individual loans or transfers property to a corporation, other than a small business corporation, for the benefit of a designated person - namely, the individual's spouse or a minor with whom he/she does not deal at arm's length. Where this subsection of the Act applies in respect of such a loan or transfer to a corporation, the individual is considered to have received an amount as interest income during any taxation year which includes a period throughout which the designated person is a "specific shareholder" of the corporation, the individual is resident in Canada and the corporation is not a small business corporation.

Subsection 74.4(4) of the Act provides an exemption from the attribution rules contained in subsection 74.4(2) where certain conditions are met. One of these conditions is stated in paragraph 74.4(4)(b) of the Act which requires that under the trust indenture a designated person may not receive or otherwise obtain the use of any of the income or capital of the trust while being a designated person in respect of the individual. Considering the situation described in your letter, it is our opinion that the condition in paragraph 74.4(4)(b) of the Act is not met as the trust indenture contains, inter alia, a clause which allows the trustees to pay from the income or the capital of the trust the unpaid purchase price of an asset sold by a designated person.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch