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.
960940
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
September 11, 1996
Dear Sir:
Re: Fiscal Period
This is in response to your letter of March 5, 1996, in respect of the new legislation concerning fiscal periods.
The situation described in your letter involves a corporation that acts as a bare trustee for its beneficial owner, which is another corporation that acts a trustee for a group of investors in a particular real property whom are referred to as co-tenants. These co-tenants include corporations, partnerships, trusts and individuals. Financial statements have been prepared for these corporations based on a fiscal period that ends on September 30, and each participant has been allocated their respective share of the income.
In light of the new legislation requiring individuals to have fiscal periods that end on December 31, you have asked us whether financial statements must be prepared for the three-month period that ends on December 31, 1995.
In your letter you have outlined an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of the Tax Services Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide the following general comments which we hope will be of assistance to you.
The Department, in a presentation given at the annual conference of the Canadian Tax Foundation held on November 29, 1995, made the following comment concerning Bare Trusts:
"Revenue Canada stated in a paper entitled "Bare Trusts" at the 1989 Corporate Management Tax Conference that, pending a review of our position, where property is held by a bare trust, we will ignore the trust for income tax purposes and will consider the transferor/settlor to be the owner of the property for all purposes of the Act.
We generally view a trust under common law to be a bare trust when:
-the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;
-the trustee's only function is to hold legal title to the property; and
-the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.
Our review of this matter has been completed and the above position remains unchanged."
Interpretation Bulletin IT-216, entitled "Corporation holding property as agent for shareholder" states:
"A corporation may hold in trust, as agent for a shareholder, property that was acquired specifically to be held in this way. This situation, however, will only be accepted as fact where there is an agreement of declaration of trust entered into before or at the time the property was acquired, between the corporation and the shareholder, which clearly sets out the intention of the parties to the agreement and the degree of participation of the shareholder in the property so held in trust.
Where the foregoing is established to be the situation, the corporation will be looked upon as merely an agent for the shareholder who will be considered to be the beneficial owner of the property....
In so far as the shareholder is concerned, all the normal consequences of ownership of property will flow from the above arrangement. Any income or loss arising in respect of property...will be considered to be the income or loss of the shareholder..."
A taxpayer's income for a taxation year is determined under section 3 of the Income Tax Act (the "Act"). A taxpayer's income from each office, employment, business and property must be included under paragraph 3(a) of the Act. Section 249 of the Act provides that in the case of an individual, which includes a trust, the taxation year is the calendar year. In the case of a corporation, the taxation year is a fiscal period. The definition of a "fiscal period", found in section 248 for periods that began prior to 1995, pertained to the business of a taxpayer. Section 11 of the Act only allows an individual that is a proprietor to report income from a business on a fiscal period basis, not income from property. Where a taxpayer is a member of a partnership, for certain purposes including determining the taxpayer's income, subsection 96(1), inter alia, deems the partnership to be a person whose taxation year is its fiscal period with the taxpayer being allocated a share of the partnership's income from each source to the extent of the taxpayer's share thereof to be included in the taxpayer's income for the taxation year during which the partnership's taxation year ends.
Although it is a question of fact whether the rental of property would constitute a business, it appears that in the situation you describe the income is from property and therefore should have been reported by each participant that is an individual or a trust on a calendar year basis.
On March 28, 1996, the Honourable Paul Martin, Minister of Finance, retabled the Notice of Ways and Means Motion to implement changes to the Act introduced in the February 27, 1995 budget including legislation in respect of fiscal periods. The original motion was tabled on December 12, 1995. This legislation was included in Bill C-36, which received Royal Assent on June 20, 1996.
The definition of "fiscal period" in section 248 was repealed and replaced by a new definition of that term in new section 249.1. New paragraph 249.1(1)(b) applies to certain individuals, partnerships and professional corporations and will provide that no fiscal period may end after the end of the calendar year in which the period began. As a result, even if the income is from business, in our view, the provisions of paragraph 249.1(1)(b) would apply if the settlor/transferor of the bare trust or shareholders of an agent corporation as described above are persons referred to in that paragraph.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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