28 June 1995 Internal T.I. 9506047 - ATTRIBUTION - GIFTS TO CHILD

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:

whether attribution applies to gifts and family allowances/child tax benefit when placed in trust in name of the children. Gifts may be from parents or non-resident grandparent, uncles and aunts

Position TAKEN:

74. 1(2) of the Act attributes any income earned on property transferred to a minor and applies whether a trust is used or not. 74.1(2) carves out amounts rec'd by virtue of 122.61(1) of the Act. Administratively, the dept does/did not attribute family allowances where the family allowances are segregated in a separate bank account in the child's name or otherwise invested for the benefit of the child. The favourable treatment afforded to the child tax benefit/family allowances does not extend to cash gift to children under 18 years of age from certain related and non-arm's length individuals.

Reasons FOR POSITION TAKEN:

			June 28, 1995

	Calgary Tax Services	Headquarters
	Assistant Director, Client Assistance	Sandra Short
R. G. Burke			(613) 957-2136
Attention:  Tony Wong
	              Business Enquiries
			950604

Attribution: family allowances, gifts from family members

This is in reply to your memorandum of February 24, 1995 which asks for our comments on the application of the attribution rules in the following situations:

1.Funds have accumulated in trust for minor children. The source of all funds in the trust has been family allowance and other amounts gifted to the children by resident parents and uncles plus amounts from non- resident grandparents and uncles.

2.Funds are held in trust by resident parents solely for the benefit of the children (future education and upkeep). The source of the funds is cash gifts received solely from non-resident grandparents and uncles.

3.Non-resident grandparents, aunts and uncles wish to gift funds to minor children and the funds are to be held in trust by the resident parents.

4.The client has also asked whether there are any tax avoidance provisions which may apply in the above scenarios.

Our comments also address the issue of the investment of the child tax benefit by recipient parents as family allowances were discontinued after 1992. Prior to its discontinuance, the family allowance was an amount received by the parent and required to be included in the income of the supporting individual in accordance with subsection 56(5) of the Income Tax Act. The child tax benefit is deemed, under section 122.61 of the Act, to be an overpayment of tax by the parent taxpayer and as such is refunded to the tax paying parent. Both the former family allowance and the new child tax benefit are amounts to which the parent is entitled, for disposition at his or her discretion. Attribution issues relating to the investment of family allowances and the child tax benefit amount follow.

Subsection 74.1(2) of the Act attributes any income earned on property transferred to a minor back to the transferor. Subsection 74.1(2) applies when the property has been transferred "either directly or indirectly, by means of a trust or by any other means whatever...". Hence, the setting up of a formal or informal trust will not negate the application of the attribution rules.

However, having said that, subsection 74.1(2) carves out from its application any amount received as a consequence of the operation of subsection 122.61(1) of the Act. Also, administratively, the Department has a long standing practice that where family allowances received are clearly segregated from other funds received by the parent and that segregated amount is placed on deposit in a separate bank account in the child's name, or otherwise invested for the benefit of the child, the income generated from that investment will be treated as income of the child and not of the parent. To obtain this favourable tax treatment the source of funds for the investment must clearly be traceable to the family allowance receipts.

The favourable treatment afforded legislatively to the child tax benefit and administratively to family allowances does not extend to cash gifts to children under 18 years of age from certain related and non-arm's length individuals. Therefore, where a parent, grandparent, aunt or uncle transfers or gifts funds or property to a minor child, whether directly or indirectly, by means of a trust or by any other means, any income or loss from the property or property substituted therefor is deemed to be income or loss of the transferor for a taxation year unless the minor has attained the age of 18 years before the end of the year. Exceptions to this general rule can be found in paragraphs 15 through 18 of Interpretation Bulletin IT-510.

We do not believe that the provisions of section 245 of the Act would apply to the situations outlined by the client.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch