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:
Grandparents make a loan to a trust settled by them for the benefit of their minor grandchildren. Would the attribution rules apply in a situation where the income earned by the trust is not distributed to the grandchildren.
Position:
General comments. In the situation where the amount included in the income of a grandchild, by virtue of paragraph 12(1)(m) of the Act, is nil, the income of the minor grandchild for the purpose of section 74.1 of the Act would be nil.
Reasons:
Application of paragraph 74.3(1)(a) of the Act.
5-972586
XXXXXXXXXX Sylvie Labarre, CA
Attention: XXXXXXXXXX
October 16, 1997
Dear Sir/Madam:
Re: Income attribution rules
This is in reply to your letter of September 19, 1997 wherein you requested our views with respect to the application of the attribution rules in the following situation.
An inter-vivos family trust is settled with a nominal amount by two grandparents for the benefit of the child and the grandchildren of the settlors. The grandchildren are minors. The trust is fully discretionary. The settlors make a non-interest bearing loan to the trust. The income earned by the trust is not distributed to the grandchildren.
As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Pursuant to subsection 74.5(9) of the the Act, where the grandparents have lent property to a trust in which a minor grandchild is beneficially interested, the grandparents shall, for the purposes of sections 74.1 to 74.5, be deemed to have lent the property to or for the benefit of the minor grandchild.
Subsection 74.1(2) of the Act would apply so that the income or loss of the minor grandchild for a taxation year from the property or from property substituted therefor (as computed under subsection 74.3(1) of the Act which is a specific provision concerning loans to a trust) would be attributed to the grandparents.
The income of the minor grandchild for a taxation year for the purpose of subsection 74.1(2) of the Act, determined pursuant to paragraph 74.3(1)(a) of the Act, is deemed to be the lesser of:
(a) the amount in respect of the trust that is included by virtue of paragraph 12(1)(m) of the Act in computing the income for the year of the minor grandchild, and
(b) income of the trust from the lent property before any deductions pursuant to subsection 104(6) or (12) of the Act times the income of the minor grandchild from the trust (amount (a) above) divided by the income of all designated persons from the trust.
The amount included in the income of a grandchild, by virtue of paragraph 12(1)(m) of the Act, may be nil in a situation where the income of the trust for a year is not payable to that minor grandchild. In that case, the income of the minor grandchild for the purpose of section 74.1 of the Act would be nil. (Subsections 104(18) and (24) may be useful in determining whether or not an amount is deemed to have become payable to the beneficiary in the year.)
This interpretation is based on the current legislation and is not based on an administrative position. The intent of the Department of Finance when drafting this legislation is expressed in the following extracts of the Technical Notes:
The income that is subject to the attribution rules in such a case is the income of the trust that would otherwise be taxed in the hands of the spouse or the person under 18 years of age. Income that accumulates and is taxed in the trust is not subject to the attribution rules.
(Extract from section 74.1)
However, the amount of income attributed in respect of a designated person cannot exceed the amount of that person's income from the trust.
(Extract from subsection 74.3(1))
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse, CA
Manager
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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