13 October 1999 External T.I. 9832385 - ATTRIBUTION TO CONTRIBUTOR TO A TRUST

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: Where an Individual settles a trust and the trust uses the settled funds to purchase treasury shares from a corporation owned by the trustee/beneficiary, would 75(2) apply?

Position: Under the described circumstances, no.

Reasons: The "person" referred to in 75(2) is the person from whom the property was directly or indirectly received. This would include the Individual in the hypothetical scenario on the presumption that the settled funds were not indirectly received from someone else. Thus, if the funds or property substituted therefor will not revert to the Individual and if the Individual has no involvement in the trust, subsection 75(2) would not apply to the Individual.

In the hypothetical scenario, the trust would acquire new common shares from treasury of a corporation. Provided that such acquisition of shares would be at fair market value, a transfer of economic interest in the corporation from the shareholder to the trust could not be said to have occurred and thus subsection 75(2) would not apply to the shareholder (even though the shareholder is the trustee and a beneficiary). However, if the trust were to acquire the shares for an amount that is less than their fair market value, the Department would generally apply the reasoning in Kieboom (92 DTC 6382 (FCA)) with the result that subsection 75(2) could apply to the shareholder.

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J. D. Brooks
Attention:  xxxxxxxxxx

October 13, 1999

Dear Sirs:

Re: Subsection 75(2) of the Income Tax Act

This is in reply to your letter of December 4, 1998 in which you requested our opinion on the application of subsection 75(2) of the Income Tax Act in a hypothetical situation. We apologize for the delay in replying.

Our Comments

Although you have asked for a technical interpretation, the scenario presented appears to be an actual fact situation. You should be aware that we do not provide binding interpretations of the Income Tax Act except by way of advance income tax rulings, as discussed in our Information Circular 70-6R3. If your situation involves proposed transactions and you wish to receive confirmation of the income tax consequences, we invite you to submit a request for an advance income tax ruling. If, on the other hand, your situation involves completed transactions, you should direct your enquiries to your local tax services office. Nevertheless, we are prepared to provide some general comments with respect to a generalized description of the scenario which seems to capture the essence of your concern.

An individual (the "Individual") settles $100 of the Individual's own money on a personal trust of which the beneficiaries are the Individual's adult son (the "Son") and the Individual's minor grandchildren (the "Grandchildren") and the sole trustee is the Son. The trustee uses the trust funds to acquire, at fair market value, shares from treasury of a corporation of which he currently owns all of the shares. Your concern is whether subsection 75(2) could apply.

One of the main attribution provisions contained in the Income Tax Act that is relevant with respect to transfers of property to trusts is contained in subsection 75(2). The provisions of subsection 75(2) essentially provide that any income or loss from property (or property substituted therefor), as well as any taxable capital gain or allowable capital loss from the disposition of the property (or property substituted therefor), is attributed to the person from whom the property was directly or indirectly received during the lifetime of the person while the person is resident in Canada if the terms of the trust are such that the property may revert to that person, may be distributed to beneficiaries determined by that person at a time after the trust was created or may only be disposed of with the consent of, or at the direction of, that person. The "person" is the person from whom the property was directly or indirectly received. This would include the Individual in the scenario described above on the presumption that the $100 was not indirectly received from someone else. Thus, if the $100 or property substituted therefor will not revert to the Individual and if the Individual has no involvement in the trust, subsection 75(2) would not apply to the Individual.

In the hypothetical scenario you described, prior to the trust's acquisition of new common shares from treasury of the Son's corporation, the capital of the corporation would be reorganized whereby the Son would freeze the value of his 100% interest in the corporation by exchanging his common shares for preferred shares in accordance with subsection 86(1). Such a reorganization of the corporation's capital could result in the application of subsection 74.4(2) since that subsection applies where an individual (the Son) transfers property to a corporation and one of the main purposes of the transfer may reasonably be considered to be to reduce the income of the individual (the Son) and to benefit, either directly or indirectly, a person who is a designated person (the Grandchildren) in respect of the individual (the Son). Subsection 74.4(2) will not apply in any taxation year throughout which the corporation is a small business corporation as defined in subsection 248(1). Also, subsection 74.4(4) provides relief from subsection 74.4(2) if the stated criteria are met. These criteria require that, under the terms of the trust, the Grandchildren may not receive or otherwise obtain the use of any of the income or capital of the trust while they are minors, and that no deduction is made by the trust under subsection 104(6) or (12) in respect of the Grandchildren while they are minors.

In the hypothetical example, it was assumed that the acquisition of shares from treasury would be at fair market value. Where this is the case, a transfer of economic interest in the corporation from the Son to the trust cannot be said to have occurred and thus subsection 75(2) would not apply to the Son. However, if the trust were to acquire the shares for an amount that is less than their fair market value, the Department would generally apply the reasoning in Kieboom (92 DTC 6382 (FCA)) with the result that subsection 75(2) could apply to the Son.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance income tax ruling and consequently, is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch