28 February 2000 External T.I. 1999-0013435 - Immigrant Trust-Spousal Attribution

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) Can the attribution rules in subsection 74.1(1) and 74.2(1) apply to a transfer of funds between spouses if both individuals are not residents of Canada?

2) Do the attribution rules apply if the tranferred funds are used by the transferee spouse to fund a non-resident trust?

Position: 1) No/Yest 2)No/Yes

Reasons: 1) Given the particular fact pattern in this hypothetical scenario subsections 74.1(1) and 74.2(1) will not apply at the time of the transfer as the transferor was not resident in Canada. However, when the transferor becomes a resident of Canada both subsections may have application.

2) Similarly, subsection 75(2) will not apply while the transferee spouse is not resident in Canada. However, when the transferee spouse immigrates and is resident in Canada subsection 75(2) would apply.

				980101
XXXXXXXXXX 				G.W. Keable
(613) 957-2046
Attention: XXXXXXXXXX 

February 28, 2000

Dear Sirs:

Re: Immigrant Trusts and Spousal Attribution

This is in reply to your letter requesting our views on the use of immigrant trusts (i.e., a non-resident trust that will be subject to tax in Canada pursuant to subsection 94(1) of the Income Tax Act (the "Act") when the conditions in subparagraph 94(1)(b)(i) of the Act are met) and potential spousal attribution. We apologize for the delay in responding.

In your letter you described a hypothetical situation for our consideration which has been restated as follows. A former Canadian resident ("Mr. A"), before returning to Canada, employs foreign matrimonial entitlement laws to transfer funds to his spouse ("Mrs. A") in order for her to fund an immigrant trust which will be used by her to shelter investment income. Mrs. A has never before lived in Canada and has never earned income. Specifically, you have asked whether the transfer of funds by Mr. A to Mrs. A, before they come to Canada, is subject to attribution where the funds have been used by Mrs. A to fund an immigrant trust (the "Trust") which pursuant to subsection 94(1) of the Act is not subject to tax during the first 60 months that Mrs. A is resident in Canada.

Our Comments

Although you have asked for a technical interpretation, the scenario described seems to involve proposed transactions. As explained in Information Circular 70-6R3, it is not the practice of the Canada Customs and Revenue Agency (CCRA) 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 actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the relevant Tax Services Office for their views. We are, however, prepared to offer the following general comments concerning the application of the attribution rules contained in subsections 74.1(1), 74.2(1) and 75(2) of the Act in the scenario described above.

In general terms, subsection 74.1(1) provides that where an individual has transferred property to a person who is the individual's spouse, any income or loss of the spouse for a taxation year from that property (or from property substituted therefor) that relates to a period in the year throughout which the individual is resident in Canada is deemed to be the income or loss of the individual for the year. Subsection 74.2(1) contains similar rules with respect to taxable capital gains and allowable capital losses that relate to property transferred to a spouse (or property substituted therefor). Subsection 75(2) provides that where property is held by a trust, the terms of which provide that the property may revert to the person from whom the property was directly or indirectly received, or where a certain degree of control of that property remains with that person, the trust's income or loss, or taxable capital gain or allowable capital loss, from that property is included in the income of that person provided that person is alive and resident in Canada.

Since Mr. A was not resident in Canada when he transferred the funds to Mrs. A neither subsections 74.1(1) nor 74.2(1) of the Act would be applicable at that time. Similarly, subsection 75(2) of the Act would not apply at the time Mrs. A used those funds to establish the Trust as she was not resident in Canada.

However, subsections 74.1(1) and 74.2(1) of the Act may be applicable to the transfer described above when Mr. A returns to Canada unless one of the exclusions set out in section 74.5 of the Act is applicable. For the purposes of the comments that follow it is assumed that none of these exclusions (i.e., transfers for FMV consideration, loans for value, or spouses living apart) are applicable in this case. Since the transferred funds were used by Mrs. A to fund the Trust, Mrs. A's interest in the Trust would be viewed as "substituted property" for the purposes of these subsections. As a result, subsections 74.1(1) or 74.2(1) of the Act would apply and any income or taxable capital gains of the Trust paid or payable to Mrs. A in a taxation year that relate to a period throughout which Mr. A was resident in Canada would be attributed to Mr. A. On the other hand, if such income or taxable capital gains were retained in the Trust and not paid, or made payable, to Mrs. A, these provisions would not be applicable.

Whether subsection 75(2) of the Act will apply in a particular situation is a question of fact and can only be determined after reviewing all of the terms and conditions of the trust agreement. However, with regard to the scenario described above, since Mrs. A used the funds transferred to her by Mr. A to settle the Trust (or at least contributed the funds to the Trust), and since she is also a beneficiary of the Trust, subsection 75(2) would apply by virtue of paragraph 75(2)(a)(i). As a result, any income or capital gains of the Trust derived from the transferred funds would be attributed to Mrs. A and excluded from the income of the Trust. In these particular circumstances, subsection 74.1(1) or 74.2(1) of the Act would apply to attribute to Mr. A the income or taxable capital gains included in Mrs. A's income by virtue of subsection 75(2) of the Act.

Also, in circumstances where the conditions for the application of both subsection 75(2) and subsection 94(1) of the Act are satisfied, we have previously opined that subsection 75(2) of the Act will apply first.

The above comments represent our view of the law as it generally applies. While we hope that it is of assistance to you, please note that it is not an advance income tax ruling and, accordingly, it is not binding on the CCRA.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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