6 July 1998 External T.I. 9811115 - ATTRIBUTION & GENUINE LOAN

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 and genuine loan

Position: Generally no attribution where there is a genuine loan and terms of trust are such that subsection 75(2) is not applicable.

Reasons: Genuine loan in and by itself is not considered to result in property held by the trust under the conditions set out in subsection 75(2).

XXXXXXXXXX 981111
T. Murphy
(613) 957-8283

July 6, 1998

Dear Sir:

Re: Attribution of Taxable Capital Gains

We are writing in response to your letter of April 30,1998 in which you queried the application of the attribution rules with respect to taxable capital gains where a parent loans money to a trust which was established for the benefit of the parent’s minor child. In your letter you also queried the meaning of a genuine loan.

In the above scenario, the attribution rules in subsections 56(4.1), 74.1(2) and 74.3(1) would not attribute taxable capital gains to the parent.

The attribution provision that may result in taxable capital gains being attributed to the parent is subsection 75(2). It applies where a trust has directly or indirectly received property from a person and the terms of the trust are such that the property or substituted property may revert to that person, be distributed to beneficiaries determined by that person at a time after the trust was created, or only be disposed of with the consent of, or at the direction of, that person while alive. An amount attributed to a person under subsection 75(2) is normally excluded from the income of a beneficiary to whom it was paid or payable in the year and from the income of the trust where it was not paid or payable in the year. The attached copy of IT-369R outlines the parameters of the provision in more detail. As you will note, paragraph 1 states:

Unlike (for example) section 74.3, the application of subsection 75(2) does not depend upon a “loan” or “transfer” of property, but upon the fact that property is “held” under one or more of the conditions described in 3(a), (b) and (c) below. A genuine loan to a trust would not by itself be considered to result in property being “held” by the trust under one or more of these conditions (i.e., would not by itself result in the application of subsection 75(2)), if the loan is outside and independent of the terms of the trust. For a discussion of when a loan can be considered genuine, see the current version of IT-260, Transfer of Property to a Minor.

Paragraph 3 of IT-260 states, in part:

No all-inclusive statement can be made as to when a loan can be considered to be “genuine”, but a written and signed acknowledgment of the loan by the borrower and agreement to repay it within a reasonable period of time ordinarily is accepted evidence that it was so. If, in addition, there is evidence that the borrower has given security for the loan, that interest on the loan has been paid, or that actual repayment has been made, it is accepted that the loan is genuine. The fact that no interest is required to be paid does not mean, in itself, that a genuine loan has not been made.

Thus, where a genuine loan has been made, the fact that the loan will be repaid to the parent will not in and by itself result in the application of subsection 75(2). Where, however, for example, the loan proceeds are used to acquire a property from the parent and the parent controls the trust property as trustee under the terms of the trust, subsection 75(2) would apply.

If the loan is not a genuine loan the Department considers that there has been a transfer of property to the trust and subsection 75(2) would therefore apply.

You have queried whether a loan would be accepted as genuine if the principal is to be repaid by the trust only after the child reaches the age of majority. The determination of what is a “reasonable period of time” would be based on the facts of a particular case and we cannot advise that repayment only after the child reaching the age of majority is reasonable.

You have also queried whether there could be a genuine loan to a child given that legal experts have opined that a minor cannot be a party to any enforceable agreement and, indeed, may be too young to sign a document. In our opinion this is not relevant if the loan is made to a trust, as the trustee of the trust would be the person signing the loan agreement on the trust’s behalf.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

Yours truly,

R.S. Biscaro
Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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