5 September 1996 External T.I. 9622465 - GIFT OF SHARES TO GRANDCHILD

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:

Tax consequences where shares are gifted.

Position:

Shares would be considered to have been disposed of at fair market value. Attribution rules may apply if recipient is related minor.

Reasons:

69(1)(b) and 74.1(2).

									5-962246
XXXXXXXXXX							C. Chouinard

September 5, 1996

Dear Sir/Madam:

Re: Gift of Shares

We are writing in response to your letter of January 8, 1996, addressed to the Toronto North Tax Services Office, which was forwarded to us for reply on June 24, 1996. You inquire about the tax consequences of gifting shares to a grandchild or alternatively to a friend's child. You also inquire whether our answer would be different if the shares were placed in the corporation's reinvestment plan.

Our Comments

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. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Subparagraph 69(1)(b)(i) of the Income Tax Act (the "Act") applies where a taxpayer has disposed of anything to a person with whom the taxpayer was not dealing at arm's length for proceeds of less than fair market value. Since you and your grandchild are not considered to be dealing at arm's length, subparagraph 69(1)(b)(i) of the Act would apply in respect of the gift of the shares to the grandchild. In addition, subparagraph 69(1)(b)(ii) of the Act provides that where anything is disposed of by a taxpayer by way of a gift, the taxpayer is deemed to have received proceeds of disposition equal to the fair market value of the property. Accordingly, whether the shares are gifted to a grandchild or to an unrelated person, you would be deemed to have disposed of the shares for proceeds equal to fair market value and would therefore have to account for any capital gain or loss or income, as the case may be, in respect of the disposition at fair market value.

You should note also that, as regards the gifting of the shares to the grandchild, the attribution rules of subsection 74.1(2) of the Act may apply if the grandchild is under 18 years of age. Subsection 74.1(2) of the Act generally provides that where an individual has transferred or loaned property to a related minor, any income or loss from the property or property substituted therefor is deemed to be income or loss of the individual. Thus, any dividends paid in respect of the shares owned by the grandchild would be attributed back to you, unless the grandchild attains the age of 18 during the year.

As regards the part of your query that relates to the corporation's reinvestment plan, it is not clear to us what this plan entails. However, if you are referring to a dividend reinvestment plan whereby the dividends declared by the corporation are reinvested in shares of the corporation, our response above would not be different.

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

cc. Joanne Grant

Toronto North Tax Services Office