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. Transfer to a related minor - Attribution of income after the transferor's death.
2. Transfer to a related minor - Attribution of income from property transferred.
3. Transfer to a related minor - Attribution of income from income from property transferred.
4. Tax consequences where a property is transferred to an informal trust.
5. Tax consequences where a property is transferred to a formal trust.
Position:
1. Income of the related minor after the transferor's death.
2. Income of the transferor.
3. Income of the related minor.
4. and 5. None.
Reasons:
1. Par. 15 IT-510.
2. Subsection 74.1(2) of the Act.
3. Par. 4 IT-510.
4. and 5. General comments. Question of fact.
Sylvie Labarre, CA
XXXXXXXXXX 5-972132
October 27, 1997
Dear Madam:
Re: Attribution rules
Trust fund
This is in reply to your letter of July 30, 1997 wherein you requested our views on the attribution of income from property transferred to a related minor child.
As explained in Information Circular 70-6R3 (copy enclosed), it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
The following comments do not constitute a legal opinion on either transactions already undertaken or any proposed transactions. We comment on the fiscal consequences under the Income Tax Act (the "Act") where the legal nature of the transactions have already been determined.
As discussed in Interpretation Bulletin IT-510, "Transfers and Loans of Property made after May 22, 1985 to a Related Minor", subsection 74.1(2) of the Act generally provides that where an individual has transferred or loaned property (including money) to a related minor or to a trust in which a related minor is beneficially interested at any time, any income or loss from the property or property substituted therefor is deemed to be income or loss of the individual for a taxation year. An exception is made for a minor who has attained the age of 18 years before the end of the year. Where property is transferred to a related minor or to a trust where a related minor is beneficially interested, subsection 74.1(2) does not apply to attribute to the transferor, taxable capital gains or allowable capital losses arising from a subsequent disposition of the transferred property or property substituted by the minor or the trust.
Income or losses derived from the investment or other use of the income from the transferred property is not attributed to the transferor and thus, for income tax purposes, is income or loss of the transferee. For example, interest on any interest allowed to accumulate is not attributed to the transferor and is income of the transferee.
Subsection 74.1(2) of the Act does not apply to attribute income or losses to a transferor that relates to a period following the death of the transferor.
Our understanding of the first situation you described in your letter is that your father gave a guaranteed investment certificate to your son. For the period following your father's death, the interest earned on the guaranteed investment certificate would be income to your son. If you are required to invest the guaranteed investment certificate in joint with your son when it matures, the fiscal consequences would depend on whether or not that transaction involves a change in the beneficial ownership of the investment. In a situation where your son remains the beneficial owner of the investment, the interest earned on that investment would be income to your son.
In the second situation you described, the guaranteed investment certificates are properties substituted for the money given by your father to your son. For the purpose of our comments on that situation, we assume that no valid trust was created to purchase the investments and that the arrangement was an agency relationship as opposed to a trust relationship. If your son has been the beneficial owner of the investments since he received the gift from your father, the interest earned on the guaranteed investment certificates would be income to your son for the period following your father's death.
Our understanding of the third situation you described in your letter is that you made a gift to your son so that he is the beneficial owner of the guaranteed investment certificate. In that case, the interest earned on the guaranteed investment certificate would represent your income. You mentioned that interest is reinvested in a separate guaranteed investment certificate that is beneficially owned by your son. In that case, the interest earned on it would represent income to your son.
We are enclosing Interpretation Bulletin IT-510 that discusses some of the concepts described above in greater detail.
Transfer to a trust
You have asked for our comments on the tax implications where a property is transferred to an informal trust and you further requested whether the tax implications would be different in a case of a transfer to a formal trust. Our view on the tax consequences would depend on whether or not a valid trust was created under the relevant laws of the province or whether the arrangement constitutes an agency relationship.
The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship may or may not be defined by a formal written document but is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present. That is, the attempt to establish a trust will fail unless it is certain that the settlor intended to bring a trust relationship into existence and both the property and the beneficiaries or other objects of the trust are described with sufficient certainty. Whether these three certainties are present or not is a question of fact and particular to the circumstances of each case. However given the requirement of these three certainties, a written trust document would serve as the best evidence of their existence and would resolve any ambiguities which may otherwise arise.
The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, or a transfer, or gift of property is intended. The property, or property substituted therefor must be clearly identifiable in order for that certainty to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.
Where an "in trust" account is opened by a parent for his or her children, in absence of a formal trust document, the certainty of intention to set up a trust arrangement would be a difficult one to prove. As the children involved are most likely minors, often the arrangement is designed to accommodate the fact that minors do not have the legal capacity to enter into legally binding contracts and hence purchase financial instruments in their own name. Thus, the arrangement may be one akin to agency as opposed to a trust.
We refer you to the above-noted comments in respect of a transfer to a related minor for the tax consequences where the arrangement constitutes an agency relationship.
In the case of a trust relationship under the relevant laws of a province, the provisions of the Act concerning the taxation of trusts and their beneficiaries would apply even if the trust is informal. The tax implications may be different if the terms and conditions of the formal trust are not identical to those of the informal trust.
A trust is a separate person under the Act. It should be noted that where property is transferred to a trust and where there is a change in the beneficial ownership of the property, the transferor is deemed to have received proceeds of disposition therefor equal to the fair market value of the transferred property pursuant to paragraph 69(1)(b) of the Act and thus may have a capital gain for income tax purposes. Depending on the facts of a particular situation, the transfer could be done without any change in the beneficial ownership where the transferor is the sole income and capital beneficiary of the trust. In that case, there would not be any disposition of the property under the Act.
One of the main attribution provisions contained in the Act that is relevant with respect to transfers of property, including gifts, to trusts is contained in subsection 75(2) of the Act. The provisions of subsection 75(2) of the Act essentially provide that any income or loss from property, as well as any taxable capital gain or allowable capital loss from the disposition of the property, is attributed to the person from whom the property was directly or indirectly received if the terms of the trust are such that the property may revert to that person, may be distributed to beneficiaries determined by that person at a time after the trust was created or may only be disposed of with the consent of, or at the disposition of, that person while alive. We refer you to the comments found in the enclosed Interpretation Bulletin IT-369R which discusses the application of subsection 75(2) of the Act.
In the last situation you described in your letter, assuming a trust exists, our understanding of the facts is that the property that would be transferred to the trust belongs to your son and, as such, the trust would receive the property from your son. If subsection 75(2) of the Act applies to the situation, your son would be taxed on the income from the property that he received from your father or from property substituted therefor and you would be taxed on the income from the property that you gave to your son or from property substituted therefor (before your son attains the age of 18 years). In that situation, the taxable capital gain from the disposition of the property or the property substituted therefor would be added to your son's taxable income. Depending of the facts of the particular situation, the trust or the income beneficiary of the trust would be taxable on the income or loss derived from the investment or other use of the earnings from property.
In a situation where subsection 75(2) of the Act does not apply, the general rules concerning the taxation of trusts and beneficiaries would apply. Furthermore, rules attributing income from property to the initial transferor of the property or the property for which it was substituted for could apply. We would require additional facts and would review the terms and conditions of the trust in order to determine the proper tax implications for the trust and its beneficiary.
We are enclosing Interpretation Bulletins IT-286R2, IT-342R and IT-406R2 that provide general comments on the taxation of trusts. Since the publication of these Bulletins, there has been some changes to subsection 104(18) of the Act concerning trusts for minors that are not reflected in these Bulletins. Subsection 104(18) of the Act now reads as follows:
(18) Trust for minor Where any part of the amount that, but for subsections (6) and (12), would be the income of a trust for a taxation year throughout which it was resident in Canada
(a) has not become payable in the year,
(b) was held in trust for an individual who did not attain 21 years of age before the end of the year,
(c) the right to which vested at or before the end of the year otherwise than because of the exercise by any person of, or the failure of any person to exercise, any discretionary power, and
(d) the right to which is not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years),
notwithstanding subsection (24), that part of the amount is, for the purposes of subsections (6) and (13), deemed to have become payable to the individual in the year.
With respect to your last question, it is our view that the costs incurred in establishing a formal trust would not be deductible from income at any time.
Should you have any further questions regarding this matter, we suggest that you contact your local Revenue Canada Tax Services Office. Upon disclosing all the relevant facts pertaining to your situation, they will be in a position to assist you.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse, CA
Manager
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
Att.
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