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 a loan/indebtedness has been made that does not meet the "interest rate" requirement in subsection 74.5(2)/(1) does attribution continue under subsection 74.1(2) even when the loan is repaid?
Position:
Yes.
Reasons:
The "interest rate" requirement must be met at the time the loan/indebtedness is incurred. See response to question 36 of the 1993 Revenue Canada Round Table.
XXXXXXXXXX 952114
March 8, 1996
Dear Sir:
Re: Subsection 74.1(2) of the Income Tax Act (the "Act")
This is in reply to your letter of June 26, 1995, concerning the above provision of the Act in the context of the following scenario:
1.The grandfather settles a trust for the benefit of his son's children and also loans a sum of money to the trust.
2.The trust uses the money to acquire shares of a management company which provides management services for a law firm. The father of the children is a partner of the law firm.
3.The parents of the children are the trustees of the trust.
4.The trust receives annual dividends from the management company.
5.The loan from the grandfather is repaid from the dividends received by the trust from the management company.
In your opinion, the above scenario is subject to the attribution rule contained in subsection 74.1(2) of the Act and attribution continues notwithstanding that the loan has been repaid.
You advised that the above scenario was discussed with your local Tax Services Office who suggested that you write to us for our opinion.
We agree that the above scenario would result in attribution of income to the grandfather. Subsection 74.3(1) of the Act would determine the amount of income that is subject to attribution pursuant to subsection 74.1(2). We also agree that attribution will continue while the children are minors notwithstanding that the loan has been repaid.
In response to the issue of whether the loan would be excluded from subsection 74.1(2) by virtue of subsection 74.5(1) of the Act, we first note that this provision generally applies to sales of property for fair market value consideration, while subsection 74.5(2) of the Act, another exception to subsection 74.1(2), applies to loans for value. With both provisions, the indebtedness or loan must satisfy certain criteria, namely, that interest was charged at a rate not less than the lesser of the rate of interest prescribed for purposes of subsection 161(1) of the Act and the rate that would be agreed upon between arm's length parties under similar circumstances at the time the indebtedness was incurred, and all such interest was paid not later than 30 days after the end of the year in which it became payable.
If the indebtedness or loan does not satisfy the "interest rate" requirement at the time the indebtedness or loan is incurred, subsection 74.1(2) will be applicable and will continue to be applicable even if the indebtedness or loan has been repaid (unless it is repaid with the original property or property substituted therefor). In this regard, you may wish to refer to the response provided to question 36 of the Revenue Canada Round Table reported in the 1993 Conference Report of the Canadian Tax Foundation regarding a similar situation.
We trust our comments will be of assistance to you and we apologize for the delay in responding to your letter.
Yours truly,
T. Murphy
Section Chief
Trusts Section
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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