4 June 1999 External T.I. 9907505 - APPLICATION OF 118.1(16)

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: Application of subsection 118.1(16) to a particular situation.

Position: No opinion provided.

Reasons: Application of this provision is a question of fact and can only be determined with a review of all relevant facts.

XXXXXXXXXX 990750

Attention: XXXXXXXXXX

June 4, 1999

Dear Sirs:

This is in reply to your letter of February 15, 1999 to the Department of Finance which was transferred to us March 19, 1999 requesting an interpretation of the provisions of subsection 118.1(16) of the Income Tax Act (“Act”).

You asked us to consider the following situation:

1. An individual, Mr. A, makes in 1997 a gift of cash to a private foundation.

2. The private foundation is an income beneficiary of a trust settled by Mr. A.

3. Mr. A, the private foundation and the trust do not deal at arm’s length with one another.

4. The trust allocates, in 1999, all of its income to the private foundation as income beneficiary.

5. The trust distributes its income to the private foundation via a demand note payable to the private foundation. We are assuming that the private foundation can enforce payment of the note at that time. This occurs within 60 months after the particular time in #1 above.

6. Since all the parties above are dealing at non-arm’s length, the demand note would be a “non-qualifying security” of Mr. A as defined in subsection 118.1(18) of the Act.

The income tax implications with respect to the application of subsection 118.1(16) of the Act can only be determined after a review of all the facts of a particular situation. For example, consideration would have to be given to the reason why the income allocation to the private foundation was made by way of note rather than cash. The connection between the cash contribution by Mr. A and the allocation of the income to the private foundation would also have to be ascertained. Without full disclosure and review of all of the pertinent facts we are not prepared to consider whether or not subsection 118.1(16) of the Act would apply in the situation described above. Should you wish to proceed with a request for an advance income tax ruling with respect to a particular proposed situation it should be submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996.

We trust that the above will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Industries Division
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch