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:
1. The application of subsection 12(10.2) when a NISA Fund No. 2 is transferred to an inter vivos trust (in two situations) and when amounts are subsequently withdrawn from the fund by the trust.
2. Do the attribution rules in section 74.1 apply to the funds withdrawn by the trust?
Position TAKEN:
1. When an interest in a NISA Fund No. 2 is transferred to an inter vivos trust, the balance in the fund will be deemed to have been paid out of the fund at that time to the transferor (and when a portion of a NISA Fund No. 2 is transferred, a corresponding portion of the balance in the fund will be deemed to have been paid out of the fund at that time to the transferor). This amount will constitute "A" of the formula "A - B" in subsection 12(10.2) and, to the extent that it exceeds the amounts described in "B" of the formula, will be included in the transferor's income.
When the trust subsequently withdraws an amount from the NISA Fund No. 2, the amount withdrawn will be included in "A" of the formula in subsection 12(10.2) in computing the amount to be included in the trust's income. However, the amount deemed to have been paid out to the transferor, on the transfer to the trust, will be included in establishing "B" of the formula.
2. Generally no. However, the funds withdrawn by the trust from the NISA Fund No. 2 will constitute "property substituted" for the property transferred to the trust (i.e., the NISA Fund No. 2), for purposes of section 74.1 and subsection 74.3(1), to the extent of the balance in the fund at the time of the transfer. Consequently, any property income subsequently earned on these withdrawn funds will be subject to attribution to the extent provided in section 74.1 and subsection 74.3(1).
If the provisions of subsection 75(2) are satisfied, the attribution rules contained therein will apply.
Reasons FOR POSITION TAKEN:
1. Under subsection 73(5), when a taxpayer disposes of an interest in a NISA Fund No. 2, the balance in the fund so disposed of is deemed to have been paid out of the fund at that time to the taxpayer, subject to the exceptions contained in paragraphs 73(5)(a) and (b). These exceptions do not apply to the situations described in the letter submitted.
"B" of subsection 12(10.2) includes amounts deemed by subsection "73(5) to have been paid out of another person's NISA Fund No. 2 on being transferred to the taxpayer's NISA Fund No. 2", to the extent that these amounts have not previously been claimed by the taxpayer as a reduction under "B".
2. For the attribution rules under section 74.1 to apply, there must be a transfer (or loan) of property and property income:
Is a NISA Fund No. 2 property? Yes, given the wide scope of the definition of "property" in subsection 248(1). Other provisions which support this conclusion are subsection 70(6.1) and paragraphs 70(7)(b) and 85(1)(c.1).
Is income from a NISA Fund No. 2 property income? Yes per subsection 12(10.2).
When property is transferred to a trust, the amount to attribute is determined under subsection 74.3(1). As a general rule, by virtue of this provision, an amount is not subject to attribution when it is taxed in an inter vivos trust (such a trust is taxed at the high rate under subsection 122(1)). By virtue of paragraph 104(6)(b), subsection 104(12) and the definition of "accumulating income" in subsection 108(1), the amounts included in an inter vivos trust's income under subsection 12(10.2), in respect of a NISA Fund No. 2, must be taxed in the trust. Where such amounts are payable to a beneficiary under the trust, a designation may be made by the trust, as provided under subsection 104(13.1), so that the beneficiary will not be required to also include these amounts in his or her income. By virtue of subsection 74.3(1), since these amounts are taxed in the trust and not in a beneficiary's hands (assuming a designation is made under subsection 104(13.1), where applicable), they will generally not be subject to the attribution rules under section 74.1.
Darell Pack
Director, Planning and Public Affairs
NISA Administration
Agriculture Canada
P.O. Box 6100
Winnipeg, Manitoba 5-951741
R3C 3A4 M. Azzi
November 1, 1995
Dear Sir:
Re: Transfer of NISA Fund No. 2 to an Inter Vivos Trust
This is in reply to your letter of July 4, 1995, requesting our views on the application of subsection 12(10.2) of the Income Tax Act (the "Act") in two situations. The first situation involves an individual who transfers his or her interest in a NISA Fund No. 2 to an inter vivos trust. In this situation, you also inquire as to whether the attribution rules in section 74.1 of the Act would apply, when amounts are subsequently withdrawn by trust from the NISA Fund No.2. In the second situation, a communal organization (the "old organization") transfers a portion of its NISA Fund No. 2 to a group of members who are separating from the organization to establish a separate communal organization (the "new organization"). We understand that both communal organizations file trust returns and we assume that they meet the requirements of section 143 of Act, which deems an inter vivos trust to exist.
We apologize for the delay in responding to your request.
Situation 1
Under subsection 73(5) of the Act, when a taxpayer disposes of an interest in a NISA Fund No. 2, the balance in the fund so disposed of is deemed to have been paid out of the fund at that time to the taxpayer, subject to the exceptions contained in paragraphs 73(5)(a) and (b) of the Act. Essentially, these exceptions relate to a disposition to a spouse or former spouse on the breakdown of a marriage and to a rollover to a corporation under section 85 of the Act, and do not apply to the situations described in your letter. Consequently, when an individual transfers his or her interest in a NISA Fund No. 2 to an inter vivos trust, the balance in the fund will be deemed to have been paid out of the fund at that time to the individual. This amount will constitute "A" of the formula "A - B" in subsection 12(10.2) of the Act and, to the extent that it exceeds the amounts described in "B" of the formula, will be included in the individual's income.
When the trust subsequently withdraws an amount from the NISA Fund No. 2, the amount withdrawn will be included in "A" of the formula in subsection 12(10.2) of the Act, in computing the amount to be included in the trust's income. However, the amount deemed to have been paid out to the individual under subsection 73(5) the Act, on the transfer to the trust, will be included in establishing "B" of the formula. Consequently, in determining the amount to be included in the trust's income under subsection 12(10.2) of the Act, the amount withdrawn by the trust is reduced by the amount deemed to have been paid out to the individual on the transfer, to the extent that this amount has not previously been claimed as a reduction by the trust.
By virtue of paragraph 104(6)(b), subsection 104(12) and the definition of "accumulating income" in subsection 108(1) of the Act, the amounts included in the trust's income under subsection 12(10.2) of the Act, in respect of the NISA Fund No. 2, must be taxed in the trust. Where such amounts are payable to a beneficiary under the trust, a designation may be made by the trust, as provided under subsection 104(13.1) of the Act, so that the beneficiary will not be required to also include these amounts in his or her income. By virtue of subsection 74.3(1) of the Act, since these amounts are taxed in the trust and not in a beneficiary's hands (assuming a designation is made under subsection 104(13.1), where applicable), they will generally not be subject to the attribution rules under section 74.1 of the Act.
However, in our view, the funds withdrawn by the trust from the NISA Fund No. 2 will constitute "property substituted" for the property transferred to the trust (i.e., the NISA Fund No. 2), for purposes of section 74.1 and subsection 74.3(1) of the Act, to the extent of the balance in the fund at the time of the transfer. Consequently, any property income subsequently earned on these withdrawn funds will be subject to attribution to the extent provided in section 74.1 and subsection 74.3(1) of the Act.
It should also be noted that if the terms of the trust are such that property (including substituted property) is held on the condition that it may revert to the person from whom it was directly or indirectly received, it may be distributed to beneficiaries determined by that person at a time after the trust was created or it may only be disposed of with the consent of, or with the direction of, that person while alive, the attribution rules of subsection 75(2) of the Act will be applicable. Pursuant to this provision, any income or loss from the property, as well as any taxable capital gain or allowable capital loss from the disposition of the property, will generally be attributed to the person from whom the property was directly or indirectly received.
Situation 2
By virtue of subsection 73(5) of the Act, when the old organization transfers a portion of its NISA Fund No. 2 to the separating members, a corresponding portion of the balance in the fund will be deemed to have been paid out of the fund at that time to the old organization. This amount will constitute "A" of the formula in subsection 12(10.2) of the Act and, to the extent that it exceeds the amounts described in "B" of the formula, will be included in the old organization's income.
As the portion of the NISA Fund No. 2 is transferred to the separating members, who will immediately (we assume) transfer their interests in the NISA Fund No. 2 to the new organization, the amount in "A" and "B" of the formula in subsection 12(10.2) of the Act, as it relates to the transfer from each separating member, should be identical. That is, by virtue of subsection 73(5) of the Act, when a separating member transfers his or her interest in the NISA Fund No. 2 to the new organization, the balance in the fund transferred will be deemed to have been paid out of the fund at that time to the separating member and, as a result, will constitute "A" of the formula in subsection 12(10.2) of the Act in computing the amount to be included in the member's income. However, this amount will also constitute "B" of the formula, as this amount was deemed to have been paid out to the old organization under subsection 73(5) of the Act on the transfer to the separating member. Consequently, no amount will be included in a separating member's income under subsection 12(10.2) of the Act as a result of the transfer to the new organization.
When the new organization subsequently withdraws an amount from its NISA Fund No. 2, the amount withdrawn will be included in "A" of the formula in subsection 12(10.2) of the Act, in computing the amount to be included in the new organization's income. However, the amount deemed to have been paid out to the separating members under subsection 73(5) of the Act, on the transfer of the NISA Fund No. 2 to the new organization, will be included in establishing "B" of the formula. Consequently, in determining the amount to be included in the new organization's income under subsection 12(10.2) of the Act, the amount withdrawn by the new organization is reduced by the amount deemed to have been paid out to the separating members on the transfer to the new organization, to the extent that this amount has not previously been claimed as a reduction by the new organization.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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