28 January 1997 External T.I. 9635055 - attribution under 74.4(2) if 74.1(1) and 74.2(1) apply

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 74.4(2) applies when the "regular" attribution rules already apply.

Position:

Question of fact whether the "one of the main purposes" test is met. Given that there is already attribution, it would not appear that a purpose would be to transfer income or a benefit to the spouse, since in fact any such amount is being attributed back to the transferor.

Reasons:

		963505
XXXXXXXXXX	V. Plant

Attention: XXXXXXXXXX

January 1, 1996

Dear Sirs:

Re: Attribution of income and capital gains

This is in reply to your letter of August 27, 1996 which was received by the Income Tax Rulings and Interpretations Directorate on October 17, 1996. We apologize for the delay in responding. You have requested our comments regarding a hypothetical situation.

You have described a situation in which a taxpayer transferred a variety of capital properties to a newly incorporated company ("Newco") and elected, pursuant to subsection 85(1) of the Income Tax Act (the "Act"), such that any inherent capital gain was deferred. The taxpayer received common shares as consideration and, from the date of transfer to the present time, the taxpayer has been the sole shareholder of the company. The assets of the company have always been investment in nature and there is no reason to anticipate that this will change in the future. Accordingly, Newco has not been, and is never expected to be, a "small business corporation" as defined in subsection 248(1) of the Act.

The taxpayer is contemplating a gift of all the issued and outstanding shares of Newco in favour of his spouse. There would be no consideration received for this gift. This transfer of shares to the spouse will occur at their adjusted cost base, such that there would be no capital gain arising as a result of the gift. You are of the opinion that the attribution rules contained in subsections 74.1(1) and 74.2(1) of the Act will apply to any income or loss or taxable capital gain or allowable capital loss generated in the future by such shares to attribute such amounts to the taxpayer and not to his spouse.

You have indicated that such a transaction might be undertaken in order to provide some creditor protection, or in a situation where a taxpayer is terminally ill and wishes to transfer the shares directly to his spouse so that probate fees are not incurred.

Your question is whether subsection 74.4(2) might apply to deem an amount to be included in the taxpayer's income. You are of the opinion that there would be no such income inclusion. Since the attribution rules in subsections 74.1(1) and 74.2(1) already apply, then you believe that the "one of the main purposes" test found in subsection 74.4(2) is not satisfied.

Our comments

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments, which may not be applicable to your specific scenario.

In a situation where subsections 74.1(1) and 74.2(1) of the Act apply to attribute to an individual the income or loss from transferred property and the taxable capital gain or allowable capital loss arising from the property, it would appear to us that one cannot generally say that one of the main purposes of the transfer of the property by the individual to his or her spouse is to reduce the income of the individual and to benefit the spouse. Therefore, provided that subsections 74.1(1) and 74.2(1) of the Act apply, and subsection 74.5(11) of the Act does not apply, then subsection 74.4(2) of the Act would not normally apply to deem the individual to have received an amount as interest.

We trust our comments will be of assistance to you.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch