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 interest received on a loan to a designated person reduces the deemed interest determined under subsection 74.4(2).
Position:
No.
Reasons:
The interest paid on the loan would not be considered to be interest in respect of a transfer of property to a corporation. The Act does not have a provision similar to subsection 74.5(1) that applies for subsection 74.4(2).
952869
XXXXXXXXXX A. Seidel
(613) 957-8974
Attention: XXXXXXXXXX
February 8, 1996
Dear Sirs:
Re: Attribution Rules and Deemed Interest
This is in reply to your letter dated October 23, 1995, in which you requested clarification with respect to the application of paragraphs 74.4(2)(d), (e) and (f) of the Income Tax Act (the "Act") in the situation where an individual transfers shares to a corporation in exchange for other shares of the corporation and subsequently sells some of these shares to one or more designated persons, as defined in subsection 74.5(5) of the Act.
The situation described in your letter appears to relate to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the application of paragraphs 74.4(2)(d), (e) and (f) of the Act which may be of some assistance.
Subsection 74.4(2) of the Act applies where one of the main purposes of a transfer or loan to a corporation by an individual may reasonably be considered to be to reduce the income of the individual and to benefit, either directly or indirectly, by any means whatever, a designated person in respect of the individual transferor or lender. Whether or not this purpose test is met in any particular situation is a question of fact that can only be determined after a review of all of the relevant details of the particular situation. We concur with your view that a reorganization of a corporation's share capital consisting of an exchange of shares and a subsequent fair market value sale thereof to one or more designated persons could meet the purpose test in subsection 74.4(2) of the Act.
In the situation where the purpose test in the preamble of subsection 74.4(2) of the Act and the conditions in paragraphs 74.4(2)(a), (b) and (c) of the Act are satisfied, the amount of interest that an individual will be deemed to have received for any taxation year will be the amount, if any, by which the amount referred to in paragraph 74.4(2)(d) of the Act exceeds the aggregate of the amounts referred to in paragraphs 74.4(2)(e) and (f) of the Act. Paragraph 74.4(2)(d) of the Act refers to an amount of interest, at the prescribed rate, on the outstanding amount of the loan or transferred property for any period in the year throughout which the conditions in subparagraphs 74.4(2)(a), (b) and (c) of the Act are met. Paragraph 74.4(2)(e) of the Act reduces the amount of interest included in the individual's income for a taxation year by the amount of "any interest received in the year by the individual in respect of the transfer or loan". It is generally our view that any interest received by an individual from a designated person by virtue of a debt of the designated person, which arose on the acquisition of shares from the individual, would not be considered to be interest received in respect of a transfer of property to a corporation. Accordingly, any interest received by the individual in respect of the debt would not reduce the amount of deemed interest included in the individual's income pursuant to subsection 74.4(2) of the Act.
Provided the other requirements of subsection 74.5(1) of the Act are satisfied, subsection 74.5(1) of the Act provides an exception to the application of subsections 74.1(1) and (2) and section 74.2 of the Act for a sale of property to a designated person in situations similar to that described above. However, there is no similar exception in the Act for those situations where subsection 74.4(2) of the Act is applicable.
Subsection 4(4) of the Act prevents the double inclusion or deduction of an amount that has been included or deducted in computing income under any other provision of Part I of the Act. In the above situation, it is our view that the interest received by the individual from a designated person in respect of a loan and the deemed interest on the transfer of property to a corporation required to be included in an individual's income pursuant to subsection 74.4(2) of the Act are two different amounts, neither of which is required to be included in income under any other provision of the Act, such that subsection 4(4) of the Act does not apply.
These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2.
Yours truly,
for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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