Principal Issues: [TaxInterpretations translation] Would the attribution rules in subsection 74.2(1) apply to a particular situation?
Position: Question of fact
Reasons: Legislative analysis
XXXXXXXXXX 2010-036558 I. Landry, M. Fisc. June 23, 2010
Dear Sir,
Subject: Section 74.2 Attribution Rules
This is in response to your letter of April 23, 2010, in which you requested our opinion on the application of subsections 74.2(1) and 74.5(1) of the Income Tax Act (the "Act") in the following hypothetical situation.
An individual disposed of capital property to a discretionary trust in consideration for property other than a debt obligation having a fair market value ("FMV") equal to the FMV of the property. The beneficiaries of the trust were the individual, the individual's spouse and their children. One year after the sale, the trust disposed of the capital property to a third party and realized a taxable capital gain on the disposition. The amount of this taxable capital gain was allocated by the trust to the individual's spouse by virtue of subsection 104(21).
You asked us to assume that subsection 75(2) would not apply in this case.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the Canada Revenue Agency ("CRA") not to issue written opinions with respect to proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when determining whether a completed transaction has received the appropriate tax treatment, that determination is first made by our Tax Services Offices following a review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
In general, the attribution rules in subsection 74.2(1) (taking subsection 74.3(1) into account, if applicable) do not apply to a particular situation where the conditions in subsection 74.5(1) are all satisfied. We are of the view that the condition in paragraph 74.5(1)(c) would be satisfied in a situation where an individual's capital property is not transferred in the circumstances described in subsection 73(1.01).
Although you asked us to assume that subsection 75(2) would not apply in this case, we would point out that the CRA generally considers the condition in subparagraph 75(2)(a)(i) to be satisfied where a person from whom property was received directly or indirectly by a trust holds a capital interest (whether or not subject to discretion) in that trust.
We hope that our comments are of assistance.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.