26 November 1998 External T.I. 9809035 - INVESTMENTS HELD IN TRUST FOR CHILD

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: attribution re: child tax benefit and capital gains

Position: no attribution

Reasons: wording of 74.1(2)

XXXXXXXXXX 									D. Duff
										980903
Dear XXXXXXXXXX:

Re: Investments Held In Trust for your Child

Your letter dated March 29, 1998 delivered to the Ottawa Tax Services Office has been forwarded to this Directorate for reply. You requested the Department’s opinion on the reporting of investment income from investments held in an account for your son. We apologize for the delay in our response.

You indicated that your son was born in 1991 and this account was established when he was about three months old. Initially, monthly contributions were made which represented the Child Tax Benefit received on his behalf. In 1997, contributions exceeded the amount of the Child Tax Benefit with such contributions consisting of gifts from relatives to your son. You were concerned with the comment on Line 121 of the Special Income Tax Guide, 1997 with respect to such income.

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. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should handled by the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

Line 121 of the aforementioned guide states “Generally, when you invest your money in your child’s name, you have to report the income from those investments. However, if you deposited Child Tax Benefit payments into a bank account or trust in your child’s name, the interest earned on those payments is your child’s income.” This statement is referring to the attribution rules in subsection 74.1(2) of the Income Tax Act (the “Act”) which provides that where an individual transfers property to or for the benefit of a non-arm’s length person under 18 years of age any income or loss from that property is deemed to be income or loss of the individual that transferred the property. This rule applies for each year the property is owned by the child up to the year before the year during which the child turns 18. However, there is a specific exemption in the legislation for the Child Tax Benefits received for that specific child. Consequently where the Child Tax Benefit payments you received on behalf of your child are given to him and held in his account, the income earned on those funds is not attributed back to you.

Also the attribution rules do not apply to attribute back to the transferor any capital gains realized on the disposition of the transferred property or property substituted for the transferred property. Consequently, where the property, or substituted property, is sold resulting in a capital gain, the capital gain remains that of the minor child. Where the property is units of a mutual fund trust and the trust earns income that consists of capital gains, the trust can designate these capital gains to be that of the unit holders. The unit holders then include these capital gains in their income for the year. Where the property transferred, or substituted property, is units of a mutual fund trust and the mutual fund makes such a designation with respect to its capital gains, these gains are to be reported by the minor child and are not deemed to be those of the transferor.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch