ARCHIVED - Transfer of Rights to Income
DATE: June 20, 1995
SUBJECT: INCOME TAX ACT
Transfer of Rights to Income
REFERENCE: Subsection 56(4) (also subsections 82(2), 147.3(5) and 212(12))
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Transfer of Rights to Income
This bulletin replaces and cancels Interpretation Bulletin IT-440R dated November 30, 1989.
This bulletin discusses subsection 56(4), which provides a rule directed against potential avoidance of tax through the transfer of a right to income between parties not dealing at arm's length. Generally, under this provision, the income in question continues to be taxed in the hands of the transferor. The comments below explain the application of subsection 56(4) and related tax consequences.
Discussion and Interpretation
¶ 1. Subsection 56(4) applies where a taxpayer (transferor) has transferred or assigned to a person (transferee) with whom the transferor was not dealing at arm's length (see ¶ 2 below) the right to an amount which, had the right not been so transferred or assigned, would be included in the income of the transferor. The amount that is included in income, for the 1992 and subsequent taxation years, is the part of the amount that relates to the period in the year throughout which the transferor is resident in Canada. See the current version of IT-221, Determination of an Individual's Residence Status, for more information on residency. The right to an amount as referred to in subsection 56(4) is commonly called a right to income. A transfer or assignment includes a sale whether or not the sale is at fair market value. The subsection serves as an obstacle to switching income from the transferor to the transferee by providing that the amount arising from the right be included in the transferor's income.
¶ 2. In determining whether a transferor and transferee are dealing with each other at arm's length, please refer to the current version of IT-419, Meaning of Arm's Length. Spouses are deemed, by virtue of their marital relationship, not to be dealing with each other at arm's length and thus subsection 56(4) would usually apply where a right to income is transferred from one spouse to another. Subsection 252(4), which applies after 1992, expands the meaning of "spouse" to include a person of the opposite sex who at a particular time lives with the taxpayer in a conjugal relationship and either has so lived with the taxpayer throughout a 12-month period ending before that time, or the two individuals are the natural or adoptive parents of the same child.
¶ 3. Subsection 56(4) does not apply to any portion of a retirement pension that the taxpayer assigns under section 65.1 of the Canada Pension Plan or under a comparable provision of a provincial pension plan as defined in section 3 of the Canada Pension Plan. The Quebec Pension Plan is the only provincial pension plan that has a comparable provision.
¶ 4. Generally, the pension benefits legislation of a province provides the terms under which a portion of the pension benefits of a member of a pension plan may be paid to a spouse or former spouse under a domestic contract, a written separation agreement, or a divorce decree or court order under a provincial family law act relating to the division of property on the breakdown of a marriage. Subsection 147.3(5) permits a direct transfer of a lump sum amount from one registered pension plan to another, or to a registered retirement savings plan or a registered retirement income fund for the benefit of the spouse or former spouse of a plan member. Subsection 147.3(5) applies where the spouse or former spouse is entitled to an amount under a decree, order or judgment of a competent tribunal, or under a written agreement, relating to the division of property between the member of the plan and the spouse or former spouse in settlement of rights arising out of, or on a breakdown of, their marriage. Where the spouse or former spouse of a plan member receives an amount from the registered pension plan, registered retirement savings plan or registered retirement income fund, subsection 56(4) will not apply to include the amount in the income of the plan member.
Subsection 56(4) Not Applicable
¶ 5. Subsection 56(4) does not apply to an amount that is income from property where the transferor has also transferred or assigned the property. Although a right to an amount constitutes property as defined in subsection 248(1) and could be assigned as such, in order to fall under this exempting provision of subsection 56(4) the property must be separate and distinct from the income which arises from it so that it would be possible to transfer one while retaining the other. For example, a life interest created under a trust or testamentary instrument is considered to be a property separate and distinct from the income which arises from it. Consequently, where a life tenant transfers a life interest in an estate to one or more of the persons entitled to the residual interest in the estate, subsection 56(4) does not apply since there is a transfer of property as well as a transfer of the right to income.
¶ 6. While subsection 56(4) does not apply to an amount that is income from property where the transferor has also transferred or assigned the property, other provisions of the Act, such as, section 74.1, may apply to attribute the income from the property to the transferor. For a discussion of section 74.1, see the current versions of IT-510, Transfers and Loans of Property made after May 22, 1985 to a Related Minor, and IT-511, Interspousal and Certain Other Transfers and Loans of Property.
¶ 7. The right to an amount in the context of ¶ 1 above refers to the right to income, as opposed to losses, from all sources. However, where an amount of income to which subsection 56(4) applies is invested or otherwise used by the transferee to earn further income, subsection 56(4) will not apply to include the further amount of income in the income of the transferor.
¶ 8. Where a taxable dividend received by the transferee from a taxable Canadian corporation is included in the transferor's income by virtue of subsection 56(4), the dividend is deemed by subsection 82(2) to have been received by the transferor for purposes of the gross-up and dividend tax credit provisions.
¶ 9. Where an amount paid or credited to a transferee who is a non-resident of Canada is included in the transferor's income by virtue of subsection 56(4) and is subject to tax under Part I of the Act, subsection 212(12) provides that the amount is not subject to non-resident withholding tax under Part XIII of the Act.
¶ 10. An amount to which subsection 56(4) applies could be included in the income of both the transferor and transferee. However, where the transfer or assignment of the right to an amount that is income does not constitute a deliberate attempt to evade or avoid tax, the amount will be included only in the income of the transferor.
Explanation of Changes
The purpose of the Explanation of Changes is to explain the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
Where a transferor transfers a right to receive income to a transferee with whom the transferor does not deal at arm's length, income received under the right generally is income of the transferor rather than the transferee.
The bulletin reflects amendments to subsection 56(4) resulting from S.C. 1994, c. 21 (formerly Bill C-27) and adds interpretative comments. The amendments to subsection 56(4) apply to the 1992 and subsequent taxation years.
Legislative and Other Changes
¶ 1 reflects a Bill C-27 amendment to subsection 56(4) to provide that only the income that relates to a period throughout which the transferor is resident in Canada is included in the transferor's income.
¶ 2 has been revised to incorporate the expanded meaning of "spouse" in subsection 252(4) and to delete the comments concerning the exemption from the application of subsection 56(4) when pension income is assigned by a taxpayer under section 65.1 of the Canada Pension Plan or under a comparable provision of a provincial pension plan.
¶ 3 contains the deleted comments from the former ¶ 2. It also reflects a Bill C-27 amendment to subsection 56(4), which repealed the reference to "prescribed provincial pension plan."
¶ 4 is a new paragraph to explain that, under the pension benefits legislation of a province, a portion of the pension benefits of a member of a pension plan may be paid to a spouse or a former spouse of the member on the breakdown of their marriage. The paragraph also describes subsection 147.3(5) which permits, on the breakdown of a marriage, the transfer of an amount from the registered pension plan of one spouse to the registered pension plan, registered retirement savings plan or registered retirement income fund of the other spouse.
¶ 6 is a new paragraph which observes that while subsection 56(4) does not apply to income from property if the transferor has also transferred or assigned the property, other provisions of the Act may require the transferor to report the income.
¶ 8 (former ¶ 5) has been revised to delete comments on the interest and dividend income deduction which applied before 1988.
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in this IT, please send them to:
Director, Business and Publications Division
Income Tax Rulings Directorate
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Ottawa ON K1A 0L5
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