ARCHIVED - Transfers and loans of property made after May 22, 1985 to a related minor
DATE: December 30, 1987
SUBJECT: INCOME TAX ACT
Transfers and loans of property made after May 22, 1985 to a related minor
REFERENCE: Subsection 74.1(2) (also section 74.3, subsections 74.1(3), 74.5(1), (2) and (6) to (11) and paragraph 74.5(12)(b))
Notice to the reader:
This bulletin applies to transfers and loans of property made after May 22, 1985 to related minors. For transfers of property made before May 23, 1985 to minors, see IT-260R, the Special Release thereto and subsection 75(1) of the Act.
This bulletin discusses a comprehensive set of rules intended to prevent a taxpayer and a related minor from splitting income from property so as to reduce the total amount of tax payable thereon. Except where fair market value consideration is paid by the related minor, income earned on property transferred or loaned from a taxpayer to a related minor (and on property substituted therefor) is generally deemed to be income of the taxpayer and not of the related minor.
The commentary below discusses the applicable rules in greater detail.
Discussion and Interpretation
1. For the purposes of this bulletin, the following terms and their meanings are explained:
Transferred or Loaned Property - means all transfers or loans of property whether accomplished directly or indirectly, by means of a trust or by any other means whatever. A transfer includes a sale whether or not at fair market value, as well as gifts but has never included a genuine loan. (Prior to May 23, 1985 loans that were not considered genuine (see IT-260R) were treated as transfers but this distinction is no longer necessary.)
Related Minor - a person who is under 18 years of age, and who
(a) does not deal with the individual at arm's length (e.g. a parent and a child or other descendant whether by blood relationship or adoption, do not deal at arm's length - see IT-419), or
(b) is a niece or nephew of the individual.
Beneficially Interested - An individual is "beneficially interested" in a trust if the individual has any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of a discretionary power by any person or persons) to receive any of the income or capital of the trust either directly from the trust or indirectly through one or more other trusts. See 12 below for examples of situations where an individual is beneficially interested in a trust.
Substituted Property - Paragraph 248(5)(a) provides that in the circumstances discussed in this bulletin, where a taxpayer has disposed of or exchanged a particular property and acquired other property in substitution therefor and subsequently, by one or more further transactions, has effected one or more further substitutions, the property acquired by any such transaction is deemed to have been substituted for the particular property.
Attribution of Income from Transferred or Loaned Property
2. Subsection 74.1(2) provides that where an individual has transferred or loaned property (including money) to a related minor or to a trust in which a related minor is beneficially interested at any time any income or loss from the property or property substituted therefor is deemed to be income or loss of the individual for a taxation year unless the minor has attained the age of 18 years before the end of the year; see 15 to 18 below for additional exceptions to the rule.
Application of Attribution Rules
3. It is necessary to distinguish between income or loss from property and income or loss from a business. Subsection 74.1(2) does not apply to attribute business income or losses even if the business operates with some or all of the property obtained originally from the transferor.
4. Income or loss derived from the investment or other use of the income from transferred property is not attributed to the transferor and thus for income tax purposes is income or loss of the transferee. For example, interest on any interest allowed to accumulate is not attributed to the transferor and is income of the transferee.
5. Pursuant to subsection 74.1(3) the attribution rules in subsection 74.1(2) apply to transferred or loaned property which is used either to repay, in whole or in part, borrowed money that was used, in whole or in part, to acquire property or to reduce an amount payable in respect of that property.
6. As it applies to a related minor (a "specified person" under subsection 74.5(8)) subsection 74.5(6) provides that where an individual has transferred or loaned property to a third party
(a) and that property or property substituted therefor is, or
(b) on condition that any property be
transferred or loaned directly or indirectly by the third party to or for the benefit of a related minor, pursuant to paragraph 74.5(6)(c), the property transferred or loaned by the third party is deemed to have been transferred or loaned by the individual to or for the benefit of the related minor, and pursuant to paragraph 74.5(6)(d) any consideration received by the third party is deemed to have been received by the individual.
7. Subsection 74.5(7) provides that where an individual is obligated either absolutely or contingently to effectively ensure repayment in whole or in part of a loan or any interest in respect thereof made by a third party directly or indirectly to or for the benefit of a related minor,
(a) the property loaned by the third party is deemed to have been loaned by the individual to or for the benefit of the related minor, and
(b) interest paid on the loan by the individual is ignored for the purposes of paragraphs 74.5(2)(b) and (c) (see 17 below).
8. Subsection 74.5(9) provides that where an individual has transferred or loaned property to a trust in which a related minor is beneficially interested the transfer or loan is deemed to be for the benefit of the related minor.
9. As it applies to a related minor (a "designated person" under subsection 74.5(5)), paragraph 74.3(1)(a) applies where an individual has transferred or loaned property to a trust in which a related minor is beneficially interested at any time and determines an amount that is deemed to be the income of the related minor which is included in the individual's income pursuant to subsection 74.1(2).
10. Pursuant to paragraph 74.3(1)(a) the income of the minor described in 9 above is the lesser of
(a) the minor's income under paragraph 12(1)(m) from the trust, and
(b) the proportion of the income earned by the trust from the transferred or loaned property that
(i) the minor's income under paragraph 12(1)(m) from the trust is of
(ii) the aggregate income from the trust of all persons each of whom is throughout the year a related minor or the individual's spouse.
In (b) the "income earned by the trust" excludes capital gains and is calculated before deductions are made under subsections 104(6) and (12).
11. An example of the operation of paragraph 74.3(1)(a) follows:
An individual transfers, for no consideration, bonds which pay interest of $1,200 per annum to a family trust the beneficiaries of which are the individual's three children, two of whom are less than 18 years of age throughout the year. The trust's income prior to any deductions under subsections 104(6) or (12) is $1,500. Each beneficiary has an equal entitlement to the trust income all of which is payable in the year.
The two related minors are designated persons.
The income from the transferred bonds in respect of each of the related minors is the lesser of:
(a) the income of the designated person from the trust ($500, i.e., 1/3 of $1,500), and
(b) A × (B ÷ C),
A is the income of the trust from the transferred property ($1,200),
B is the income of the relevant minor from the trust ($500), and
C is the income of all the designated persons from the trust ($1,000).
$1,200 × ($ 500 ÷ $1,000) = $600
Thus the amount of income attributed to the individual in respect of each related minor is $500.
12. The following are examples of situations where an individual is beneficially interested in a trust:
(a) trust income is payable to the individual;
(b) income is held in trust and will be paid upon the individual's attaining a certain age;
(c) the individual is one in respect of whom a preferred beneficiary election may be made;
(d) the individual is one of a class who has a remaindership interest under the trust.
The individual is beneficially interested in the trust in (b) even if the right to receive the income ends should the individual die before attaining the specified age and in (c) even if the trustees have full discretionary powers concerning the distribution of the capital or income of the trust so that the individual may in fact receive nothing from the trust.
13. Where depreciable property is transferred to a related minor and the minor has no other property of the same class as the property transferred, the income or loss from the property attributed to the transferor should reflect any amount of capital cost allowance, terminal loss or recapture of capital cost allowance in respect of the class which would otherwise be taken into account in computing the income of the minor. Where depreciable property is transferred to a related minor and the minor has other property of the same class as the property transferred, in computing the income or loss from the property attributed to the transferor
(a) a reasonable portion of the capital cost allowance claimed by the minor in respect of the class (which portion may not exceed the maximum capital cost allowance that would be deductible in respect of the transferred property if the property were in a separate class) may be deducted, and
(b) a terminal loss or recapture of capital cost allowance which arises and would otherwise be included in computing the income of the minor in respect of the class of depreciable property should be taken into account to the extent that such amount can reasonably be considered to relate to the transferred property.
After the year of disposition of the transferred property and provided a substitute depreciable property is not acquired by the minor, there is no attribution of capital cost allowance, terminal loss or recapture of capital cost allowance that arises in respect of the class.
14. Where income arises from depreciable property transferred to a trust the amount attributed to the transferor is determined as described in 10 above, even though the trust's income calculation includes amounts in respect of capital cost allowance, terminal loss and recapture of capital cost allowance in respect of the class.
15. Subsection 74.1(2) does not apply to attribute income or loss to a transferor that relates to a period
(a) following the death of the transferor or transferee or
(b) throughout which the transferor is not resident in Canada.
16. Pursuant to subsection 74.5(1), income or loss from transferred property does not attribute to the transferor where
(a) the sale or other transfer is made for consideration equal to fair market value of the transferred property, and
(b) the sale price or other consideration for the transfer is
(i) fully paid by the transferee in cash or kind (and not from property furnished by the transferor), or
(ii) satisfied in whole or in part by indebtedness in respect of which interest is charged at a rate not less than the lesser of the rate of interest prescribed for the purposes of subsection 161(1) and the rate that would be agreed upon between arm's length parties under similar circumstances at the time that the indebtedness is incurred, if all such interest is paid not later than 30 days after the end of the year in which it becomes payable.
17. Pursuant to subsection 74.5(2), subsection 74.1(2) does not apply in respect of loans where interest is charged on the indebtedness at a rate not less than the lesser of the rate of interest prescribed for the purposes of subsection 161(1) and the rate that would be agreed upon between arm's length parties under similar circumstances at the time the indebtedness is incurred, if all such interest is paid not later than 30 days after the end of the year in which it becomes payable. When such a loan is forgiven the exemption in subsection 74.5(2) ceases to apply and section 80 becomes applicable.
18. Pursuant to paragraph 74.5(12)(b), the attribution rules described in 2 above do not apply to a transfer of property to a related minor when transferred as or on account of an amount paid that is
(a) deductible in determining the payer's income for the year, and
(b) required to be included in the payee's income.
For example, the payment of money to a related minor as remuneration for services provided in a business conducted by the payer is a transfer of property, but, where conditions (a) and (b) are satisfied, not a transfer to which attribution applies. In such cases, any income or loss arising from any subsequent investment of the remuneration by the minor is not attributable to the payer.
Capital Gains and Losses
19. Where property is transferred to a related minor or to a trust where a related minor is beneficially interested, subsection 74.1(2) does not apply to attribute to the transferor any taxable capital gain or allowable capital loss arising from a subsequent disposition of that transferred property by the minor or the trust. However, in respect of the inter vivos transfer of certain farm property to a child under 18 years of age, section 75.1 may apply to attribute to the transferor any taxable capital gain or allowable capital loss from the disposition of the transferred property by the child (see IT-268R3).
20. Any taxable capital gains and allowable capital losses on dispositions of property which are attributable to a transferor by virtue of section 75.1 may be included in computing the transferor's lifetime capital gains deduction under section 110.6.
21. Subsection 74.5(11) provides that the attribution rules do not apply where one of the main reasons for a transfer or loan of property or a series thereof is to reduce the amount of income tax that would be payable on the income or gains.
Dividend Tax Credit
22. Subsection 82(2) provides, in effect, that where the transferor of property includes in income a dividend received or deemed to be received by the transferee from a taxable Canadian corporation, the transferor is required to gross-up the dividend and is entitled to the dividend tax credit.
23. Where an amount paid or credited to a non-resident of Canada is included in another taxpayer's income by virtue of sections 74 to 75 and is thereby subject to tax under Part I of the Act, subsection 212(12) provides that non-resident withholding tax is not exigible on such amount.
Liability For Payment Of Tax
24. Where as a result of a transfer of property an amount (including a taxable capital gain from the disposition of the transferred property) has been included in the income of a transferor for a taxation year by virtue of sections 74 to 75.1, the transferee and transferor are jointly and severally liable under paragraph 160(1)(d) for and increase in the transferor's Part I tax liability resulting from the inclusion of that amount in income. Furthermore, paragraph 160(1)(e) provides that the transferee and transferor are jointly and severally liable for any liability of the transferor under the Act in respect of the year in which the transfer took place or any preceding taxation year, to the extent that, at the time of the transfer, the fair market value of the transferred property exceeded the fair market value of any consideration received for it. Notwithstanding the joint and several liability described above, section 160 does not limit the liability of the transferor under the Act.
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