Section 74.5

Subsection 74.5(1) - Transfers for fair market consideration

Administrative Policy

29 April 1994 T.I. 933662 (C.T.O. "Attribution Rules")

Where an individual (the transferee) has acquired an income-producing property from his spouse and given to the transferor a demand promissory note bearing interest at the prescribed rate in effect at the time of the transfer, a subsequent lowering of the interest rate to the prescribed rate in effect at the subsequent time would result in the condition in s. 74.5(1)(b)(i) no longer being satisfied. Accordingly, the attribution rules would apply in respect of the property from the time of the resetting of the interest rate.

If, instead, the promissory note was forgiven, the requirement in s. 74.5(1)(b)(i) would no longer be satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(2) 105

15 June 1992 T.I. 921368 (December 1992 Access Letter, p. 18, ¶C56-208)

No payment will be considered to occur pursuant to an agreement between the parties to the effect that interest on a promissory note will be deemed to be paid and then loaned back to the borrower.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt 36


Summerville, "Income Splitting may be Implemented by Transferring Residential Property to Spouse", Taxation of Executive Compensation and Retirement, December 1989/January 1990

In a 24 August 89 Technical Interpretation, RC passed favourably on a transaction whereby a high income spouse transfers to his low income spouse an investment portfolio in exchange for a 25% interest in their residence which had been paid for (through contributions to the mortgage) by the low income spouse.

Subsection 74.5(2) - Loans for value

Administrative Policy

10 June 2013 STEP Canada Roundtable, 2013-0480271C6 - Prescribed Rate Loan - 2013 STEP Roundtable Q 2

locking in prescribed rate

Can the interest rate on a loan to a spouse or other family member remain fixed at the current prescribed rate of 1% (so that there is no income attribution) where the loan is a demand loan with no term, or it has a term of say 20 years? CRA stated:

Income and gains will not be attributed to the transferor (pursuant to subsections 74.1(1) and (2), and section 74.2) if the loan is set at the prescribed rate "at the time the indebtedness was incurred" as stated in subsections 74.5(1) and 74.5(2).

29 April 1994 T.I. 933662 (C.T.O. "Attribution Rules")

Where an individual (the transferee) has acquired an income-producing property from his spouse (the transferor) in consideration for a demand promissory note bearing interest at the prescribed rate in effect at the time of the transfer, a subsequent agreement of the transferor to make a loan to the transferee at the lower prescribed rate prevailing at the time of the loan, with the loan proceeds being used to repay the demand promissory note, would not result in the exception in s. 74.5(2) being applicable because the proceeds of the loan would be used to repay the note rather than to generate any income or produce gain.

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Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(1) 105

21 October 1991 T.I. (Tax Window, No. 12, p. 20, ¶1544)

Where a loan is made on September 30, 1991 with interest payable annually, the exemption will apply only if the interest due on September 30, 1992 is paid within 30 days after the end of the 1992 calendar year.

19 July 1989 T.I. (Dec. 89 Access Letter, ¶1047)

No attribution of income will be made in the situation where father loans a newly-established trust with his minor children as beneficiaries the sum of $100 at a commercial rate of interest, followed by the trust buying common shares of a small business corporation for $100 which then pays a dividend on its common shares which enables the trust to repay the loan plus the accrued interest thereon.

79 C.R. - Q.5

Re criteria for a "genuine" loan.

Paragraph 74.5(2)(b)

Administrative Policy

5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 10, 2018-0761551C6 F - Attribution rules and promissory note

accrued interest cannot be “paid” for s. 74.7 purposes by issuing a promissory note

On June 1, 2018, Mrs. B lent $500,000 to Mr. B at the prescribed rate of interest (2%) and, at the beginning of January 2019, Mr. B issued a demand promissory note as absolute payment of the accrued interest of $5,863.01. Banner Pharmacaps stated that “delivery of a promissory note may itself be payment of a particular obligation.” Does the issuance of this note satisfy the requirement in s. 74.5(1)(b) that the 2018 interest on the loan be paid no later than 30 days after the end of 2018?

After noting that since the indebtedness at issue was a loan, the applicable requirement instead was in ss. 74.5(2), CRA stated;

Paragraphs 74.5(2)(b) and (c), as with subparagraphs 74.5(1)(b)(ii) and (iii), are part of a set of rules intended, inter alia, to prevent a taxpayer and the taxpayer’s spouse from sharing income from property (including by means of loans bearing insufficient or no interest) to reduce the total amount of tax payable on that income. In that context, a textual, contextual and purposive interpretation of paragraphs 74.5(2)(b) and (c) and subparagraphs 74.5(1)(b)(ii) and (iii) favours a more restrictive interpretation of the word "paid", according to which the issuance of a note, although irrevocable, unrestricted and payable on demand, does not satisfy the requirement provided for in those paragraphs and subparagraphs.

It follows that … the exception provided for in subsection 74.5(2) could not apply.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt promissory note could not be issued as payment in context of income attribution rules 74

Subsection 74.5(3) - Spouses or common-law partners living apart

Administrative Policy

5 October 2012 Roundtable, 2012-0453201C6 F - Règles d'attribution- séparation & décès

s. 74.5(3) busting of attribution occurs even if they were living separate and apart for under 90 days before the death to the transferee common-law spouse

Two common-law partners - within the meaning of s. 248(1) - separated on June 1, 2012 and started living separate and apart because of a breakdown of their common-law relationship. On separation, a rental property was transferred between them for no consideration on common-law spouses, and the transferee (the “Transferee”) died on August 14, 2012.

1. Is the 90-day limit stated in the definition of "common-law partner" in subsection 248(1) applicable to subsection 74.5(3)?

2. Which of the transferor ("Transferor") or the Transferee is taxed on the rental income from June 1, 2012 to August 14, 2012, on the taxable capital gain and recapture of depreciation from the deemed disposition on death?

CRA responded:

1. Subsection 74.5(3) does not require a minimum time for individuals to be considered as living separate and apart from one another because of the breakdown of a common-law relationship. Thus, in the particular situation, the two taxpayers could, according to the facts, be considered as living separate and apart from each other for the purposes of subsection 74.5(3), notwithstanding the fact that they are deemed living together in a conjugal relationship for the purposes of the definition of "common-law partner" in subsection 248(1).

Respecting Q.2, CRA noted that, in light of s. 74.5(3)(a), s. 74.1(1) would not apply to the 2 ½ months’ of rental income and the recapture, so that it would be included in the Transferee's income; and that provided a s. 74.5(3)(b) election was made, s. 74.2(1) would not apply to attribute the amount of the taxable capital gain to the Transferor.

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Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) recapture from rental property is property income from that property 68

88 C.R. - Q.54

RC is aware that the provision may not be workable, because spouses typically are unable to settle the terms of their separation agreement in the year of separation, and until then they will not know whether they wish to elect.

Subsection 74.5(5)

Administrative Policy

6 October 2017 APFF Roundtable Q. 9, 2017-0709071C6 F - Corporate Attribution Rules

unborn children and spouse not designated persons re freezer trust

As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (“Initial Trust”), with spouse and children as beneficiaries, holds the non-voting common shares. Now a further freeze is implemented under which Initial Trust exchanges its shares for preferred shares, and New Trust, with spouse children, grandchildren and family corporations as beneficiaries, subscribes for new non-voting common shares. CRA stated:

[O]nly a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.

In light of the foregoing, Mr. A’s spouse cannot be a designated person in respect of Initial Trust.

After indicating that s. 74.4(2) nonetheless potentially might apply respecting A’s spouse viewed as a designated person in respect of A, on the basis “that the transfer of property made during this [2nd] estate freeze was made indirectly by Mr. A by means of Initial Trust,” CRA also noted:

[A]n unborn child is not a person for the purposes of section 74.4 and subsection 74.5(5) and cannot constitute a designated person under paragraph 74.5(5)(b). In contrast, from birth, a grandchild may be a designated person in respect of an individual.

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Tax Topics - Income Tax Act - Section 74.4 - Subsection 74.4(2) a second freeze transaction by a family trust could be viewed as an indirect transfer by the original freezor 396

Subsection 74.5(7) - Guarantees

Administrative Policy

86 C.R. - Q.44

RC will apply s. 74.5(7) where a third-party lender requires a spouse to guarantee a loan, except where s. 74.5(11) applies.

Subsection 74.5(11) - Artificial transactions


Swirsky v. The Queen, 2013 TCC 73, 2013 DTC 1078 [at 431], aff'd 2014 FCA 36

For creditor-proofing reasons, the taxpayer sold shares in a family real estate development company ("Torgan") to his wife, and used the sales proceeds to satisfy shareholder loans owing by him to Torgan. Torgan, in turn, used the proceeds to purchase a GIC, which it pledged (as security for a guarantee) to a trust company which had lent the shares' purchase price to the taxpayer's wife. He sought to have his wife's related losses (mostly due to interest on the loan) attributed to him pursuant to s. 74.1(1).

After finding that the loan interest was not deductible, Paris J. went on to address the Minister's argument that if, in fact, losses had arisen on the wife's share investment, the attribution of such losses should be denied pursuant to s. 74.5(11) as the shares had been transferred in order to reduce the taxes payable on income derived from the Torgan shares. In dismissing this alternative argument, Paris J. (after referring, at para. 52, to the reference in para. 28 of Canada Trustco to an "objective assessment of the relative importance of the driving forces of the transaction") accepted the taxpayer's evidence that the transactions were carried out in order to pay off the shareholder loans to him and for creditor proofing, and that tax reduction was not one of the main reasons for the transactions.

See Also

Mady v. The Queen, 2017 TCC 112

transfer from wife to higher-income husband was infused with his income-splitting purpose (as well as regulatory breach if she didn’t transfer)

As a result of a rule change of the Dental College, it was necessary for ownership of all the voting common shares of the professional corporation through which the taxpayer carried on his dental practice (“MDPC”) to be transferred from a family trust to him. This was accomplished by those shares being distributed out of the trust to his wife qua capital beneficiary in 2002, followed by their immediate gifting to him. Dividends paid by MDPC to the taxpayer in 2010 and 2011 were reported as his wife’s income under s. 74.1(1), but the Minister assessed to include those dividends in his income under s. 74.5(11).

Hogan J first noted (at paras 111-112):

… The Appellant observes that subsection 74.5(11) does not refer to a “series” of transactions ... [and] that subsection 74.5(11) dictates that the purpose of the transfer from Mrs. Mady to Dr. Mady must be determined solely by reference to that transaction. …

[T]he transfer of the shares from her to Dr. Mady could not have been intended to reduce tax payable on the dividends received on the shares. She was already the shareholder and the lower income earner.

In rejecting this argument, he stated (at paras. 114-116):

…[Lehigh Cement] accepts that, even in the absence of a “series of transactions” concept, the entire series of transactions may form part of the relevant circumstances in determining the purpose of the transfer of property.

… The rules of the Royal College of Dental Surgeons prohibited Mrs. Mady from owning the shares. If she could not own the shares she could not receive dividend income thereon. Therefore, dividends could not be subject to tax in her hands at a lower tax rate than that which applied to Dr. Mady. …

… [Per] Groupe Honco … “one of the main purposes” … “…implies that a taxpayer may have more than one main motive in acquiring shares”. Even if I accept that one of the purposes of the transfer from Mrs. Mady to Dr. Mady was to ensure compliance with the new [Dental College] share ownership restriction…, this does not override…that the other main purpose of structuring the transaction … was to trigger the application of the attribution rules… .

Words and Phrases
one of the main purposes
Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership wife and children did not acquire beneficial interest in shares the taxpayer was to transfer to them, under tax plan, until the share transfer occurred 253
Tax Topics - Income Tax Act - Section 86 - Subsection 86(2) family members did not acquire beneficial interest in new shares until after completion of s. 86 reorg 285
Tax Topics - General Concepts - Fair Market Value - Shares arm’s length sales price established FMV for closing-date internal transfer of same shares 470
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) - Subparagraph 69(1)(b)(i) contemporaneous arm’s length sale price established that shares previously transferred at undervalue 468
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) was not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor 658
Tax Topics - General Concepts - Price Adjustment Clause no jurisdiction to comment on application of price adjustment clause where the affected taxpayers are not appellants 223

Administrative Policy

24 March 2014 External T.I. 2014-0519661E5 - Subsection 74.5(11) Attribution

attribution to income-split with professional's spouse

A professional who formerly operated an unincorporated professional practice formed a corporation with him and his spouse each subscribing for shares, and her then gifting her shares to him so that he then was able to comply with a requirement that professional corporations be solely owned by professionals. Did s. 74.5(11) prevent attribution of dividend income to her on the shares which she had gifted to him?

After noting the submission that "the sole reason for the transfer of the shares from the spouse to taxpayer was to comply with the requirements of the corporation to qualify as a professional corporation," CRA stated that:

[I]t is possible that subsection 74.5(11) may apply… if one of the main reasons was to reduce the amount of tax that would…be payable under Part I on the income… derived from the property… .


Kevyn Nightingale, "American Professionals in Canada", Canadian Tax Journal, (2017) 65:4, 893-937

use of gift of discretionary shares to address PFIC issues

Although there may be significant advantages for a Canadian-resident professional to incorporate, challenges arise where the professional (or a spouse) is also an American citizen. Perhaps the most significant challenges arise where there is a “mixed” marriage between a US citizen and a (Canadian) non-resident “alien.” If the professional is the American, the professional corporation (PC) is a controlled foreign corporation (CFC). If a family member (other than the professional) is an American, the PC may be a passive foreign investment company (PFIC) given its control by the professional. (Medical and legal corporations often qualify as PFICs because they rarely hold much in the way of active business assets.)

Ontario, Alberta and Newfoundland generally prohibit corporate ownership (e.g., through a holding company set up by alien family members) of a PC. In this context, a possibility for dealing with the PFIC issues in the second situation is to issue Neuman (discretionary) shares, having a modest value, to the U.S. spouse, who then gifts them to the professional. From a U.S. perspective, dividends paid on the shares are legally the property of the non-resident alien professional, and thus not subject to U.S. tax.

For Canadian tax purposes, the gift will cause dividends on the shares to be subject to attribution under s. 74.5(1). However (p. 935):

There is a risk that the CRA would see this gifting strategy as abusive, and apply an anti-abuse rule [in s. 74.5(11) that would void the attribution.

…It could be argued [however] that in this case, the family ,member would retain the shares but for the US tax consequences of doing so. The attribution merely puts the family member in the same position as he or she would be absent the gift.

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Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) 1543