[T]he rules were introduced in 2000 in response to certain tax planning scenarios that circumvented the income attribution rules and were sanctioned by the courts (e.g., Ferrell, 99 DTC 5111 (FCA)).
Split income includes dividends and taxable shareholder benefits received from a corporation, either directly or through a trust or partnership, but not including dividends from a corporation whose shares are listed on a designated stock exchange or a mutual fund corporation. Additionally, in response to certain schemes under which minor children would sell their shares to their parents (or other non-arm's length persons) as a way of avoiding the split income tax (and potentially claiming the capital gains exemption), amendments introduced in the 2011 federal Budget provide that the amount of a minor child's taxable capital gain from a disposition of shares to a non-arm's length person is deemed not to be a taxable capital gain, and twice the amount is deemed to be a dividend that is not an eligible dividend. The split income tax on dividends can therefore apply.
Although the attribution rules do not apply to transfers of property to adult family members other than a spouse, subsection 56(4.1) can apply where an individual (creditor) lends property to a non-arm's length individual, including an adult (debtor). Unlike the other attribution rules, this provision has a purpose element to it, in that it can apply only if it can be considered that one of the main reasons for the loan was to reduce or avoid tax by causing income from the loaned property or substituted property to be included in the income of the debtor.
Section 74.3 is intended to ensure that the income attribution provisions cannot be avoided where the individual transfers or loans the property to a trust rather than directly to the spouse or minor child. It can apply only if income or taxable capital gains of the trust are distributed to the spouse or the minor child as beneficiary of the trust (a "designated person") and otherwise included in the designated person's income. In other words, income taxed in the trust is not caught under this provision. The income from property subject to attribution for a taxation year will generally equal the lesser of the trust income included in the designated person's income for the year and a specified proportion of the income from the property for the year (the proportion equalling the designated person's income from the trust relative to all designated persons' income from the trust for the year; see paragraph 74.3(1)(a)). The taxable capital gains subject to attribution for a taxation year will equal the lesser of the trust's taxable capital gains designated as such to the designated person as beneficiary of the trust and the net taxable capital gains realized by the trust from the disposition of the property or substituted property (see paragraph 74.3(1)(b)). Since section 74.3 applies for the purposes of sections 74.1 and 74.2, any exceptions to those provisions will apply where the circumstances warrant.
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