14 September 1995 External T.I. 9515775 - FAMILY MORTGAGE PLAN ARRANGEMENT - 56(2) & 56(4)

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.

RULINGS DIRECTORATE

CORRESPONDENCE SUMMARY

Principal Issues:

Whether the attribution rules, specifically subsection 56(2) or (4) will apply to a specific proposed arrangement.

Position TAKEN:

Did not specifically address the arrangement but offered general comments stating that either of subsections 56(2) or (4) would be applicable depending upon the facts.

Reasons FOR POSITION TAKEN:

Legislation and former position adopted in File E2M02135 (October 31/90)

		951577
XXXXXXXXXX             	G. Donell

Attention: XXXXXXXXXX
September 14, 1995

Dear Madam:

Re: Deposits and Lending of Money

This is in reply to your letter of June 14, 1995 in which you have requested our opinion on the application of subsections 56(2) and (4) of the Income Tax Act (the "Act") to a particular situation. We apologize for the delay of our response.

In your letter you have outlined the details of a particular proposed transaction. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where a taxpayer submits an advance ruling request, the request must include among other things a complete description of all the relevant facts and pertinent agreements. We offer the following general comments.

Subsection 56(2)

Subsection 56(2) of the Act provides that where a taxpayer directs or concurs in a payment or transfer of property to another person, that payment or transfer shall be included in the taxpayer's income where, had it been paid to him, it would have been so included. The purpose behind subsection 56(2) was examined in the Federal Court Trial Division case in Murphy v. HMQ (80 DTC 6314). In that case Judge Cattanach described the purpose as follows:

... Subsection 56(2) is to impute receipt of income to the taxpayer that was diverted at his instance to someone else. It is to cover cases where the taxpayer seeks to avoid the receipt of what in his hands would be income by arranging to transfer that amount to some other person he wishes to benefit or for his own benefit in doing so. Apart from any moral satisfaction the practical benefit to the taxpayer is the reduction in his income tax.

The Department's views on the application of subsection 56(2) of the Act are set out in Interpretation Bulletin IT-335R. Paragraph 1 of that bulletin describes four conditions considered necessary for the application of that subsection as follows:

(a) there is a payment or transfer of property to a person other than the taxpayer;

(b) the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer (this may be implicit);

(c) there is benefit to the taxpayer or a benefit the taxpayer wishes to confer on the other person,

(d) the taxpayer would have been taxable on the amount under some other section of the Act if it had been paid to the taxpayer.

The definition of "property" in subsection 248(1) of the Act includes "...a right of any kind whatever..." and accordingly would include a right to receive an amount that would otherwise be income in the hands of the transferor. Moreover a transfer would be considered to have been accomplished whether it has been made directly or circuitously. In this regard subsection 56(2) could apply to the situation you have described where the interest foregone by the parents could, on the facts, be considered to have been transferred to an adult child. In that case the four requisite conditions indicated above would appear to have been met.

Subsection 56(4)

Where a taxpayer has transferred or assigned to a person with whom the taxpayer was not dealing at arm's length, the right to an amount that would, if the right thereto had not been so transferred, have been received or receivable by him or her, subsection 56(4) of the Act will apply to tax the income in the hands of the transferor/assignor ("transferor") rather than the transferee/assignee ("transferee"). The subsection serves as an obstacle to switching income from the transferor to the transferee by providing that the amount arising from the right be included in the transferor's income. Subsection 56(4) does not apply to a right to an amount in circumstances where the underlying property has also been transferred or assigned - a question of fact. The Department's views with respect to subsection 56(4) are discussed in Interpretation Bulletin IT-440R2.

A transfer or assignment would, as indicated above, be considered to include direct as well as circuitous routes. Accordingly we would likely consider that the parents reduction in an entitlement to income as you have described and a concurrent offsetting reduction in a mortgage obligation of an adult child constitute a transfer or assignment of a right to an amount as described in subsection 56(4).

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch