25 March 2009 External T.I. 2008-0300401E5 F - Fiducie en faveur de soi-même - prêt sans intérêt
Principal Issues: [TaxInterpretations translation] 1. Is subsection 75(2) likely to apply in respect of a beneficiary of an alter ego trust by virtue of the beneficiary making an interest-free loan to the trust?
2. If subsection 75(2) were to apply in respect of an alter ego trust, would it be possible to make an election under subsection 104(13.1) to tax the income within the trust?
3. If subsection 75(2) were inapplicable in respect of an alter ego trust, would it be possible to make an election under subsection 104(13.1) to tax the income within the trust?
4. Is subsection 56(4.1) likely to apply in respect of a beneficiary of an alter ego trust by virtue of the beneficiary making an interest-free loan to the trust?
Position: 1. Generally no.
2. No.
3. Generally yes, subject to the terms of the Trust Indenture.
4. No.
Reasons: 1. Howson decision.
2., 3., 4. Text of the Act.
XXXXXXXXXX 2008-030040 Yannick Roulier March 25, 2009
Dear Sir:
Subject: Alter ego trust - interest-free loan
This is in response to your letter of November 13, 2008, in which you requested our opinion with respect to the application of subsections 56(4.1), 75(2) and 104(13.1) of the Income Tax Act in the following hypothetical situation.
Note that the legislative references below are to the provisions of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)) as amended, in force as of the date hereof (the "Act").
Hypothetical Situation
- A trust qualifying as an "alter ego trust" as defined in subsection 248(1) ("Trust") is established in favour of Mr. X.
- Pursuant to the Trust Indenture, Mr. X is not a beneficiary of the capital of the Trust and any property transferred by Mr. X to the Trust may not revert to him.
- The Trust Trustee is a family member of Mr. X.
- Mr. X may not be appointed as a trustee of the Trust. Mr. X has no authority with respect to the appointment of the Trust Trustee, the designation of beneficiaries of the Trust Trustee or the disposition of the Trust Trustee's property.
- Mr. X lends money to the Trust without interest or any terms of repayment or security.
- The terms of the loan are established independently of the terms of the Trust Indenture.
Questions
1. Is subsection 75(2) likely to apply in respect of Mr. X in the hypothetical situation where he proceeds with the loan in the manner discussed above?
2. If subsection 75(2) were to apply regarding Mr. X respecting certain property held by the Trust, would it be possible to make an election under subsection 104(13.1) to tax the income generated by such property within the Trust?
3. If subsection 75(2) were inapplicable in respect of the Trust property, would it be possible to make an election under subsection 104(13.1) to tax the income within the Trust?
4. Is subsection 56(4.1) likely to apply in respect of Mr. X in the hypothetical situation where he proceeds with the loan in the manner discussed above?
Comments
As stated in paragraph 22 of Information Circular 70-6R5 issued on May 17, 2002, it is the practice of the Income Tax Rulings Directorate of the Canada Revenue Agency (the "CRA") not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their 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. These comments are technical interpretations that are not binding on the CRA and may, in certain circumstances, not apply to your particular situation.
Question 1 - Application of 75(2)
Subsection 75(2) is generally not likely to apply to Mr. X in the hypothetical situation where he proceeds with the loan in the manner discussed above. The inapplicability of this provision arises from the fact that the terms of the loan are determined independently of the terms of the trust indenture, as confirmed by the Tax Court of Canada in Howson v. The Queen, 2007 DTC 141. In this context, it remains a priori appropriate to determine whether it is legally a loan, rather than a contribution to the capital of the trust, and whether the loan is independent of the terms of the trust.
Question 2 - Application of 75(2) and election under 104(13.1)
An election under subsection 104(13.1) cannot be made to tax income earned on certain Trust property within the Trust if subsection 75(2) would apply in respect of such income. Subsection 75(2) deems, inter alia, any income or loss from the property or from property substituted for the property held by a trust to be income or loss, as the case may be, not of the trust but of the person subject to that subsection. In that context, the conditions for the application of subsection 104(13.1) cannot be satisfied. This is so since, for the purposes of the Act, income reallocated under subsection 75(2) does not constitute income realized by the trust, paid or payable to Mr. X. In this regard, we refer to paragraph 10 of Interpretation Bulletin IT-369R.
Question 3 - Non-application of 75(2) and election under 104(13.1)
In the event that subsection 75(2) is inapplicable in respect of Trust property, it would generally be possible to make an election under subsection 104(13.1) to tax income earned in a taxation year in the Trust. This would be subject to compliance with the terms of the Trust Indenture. We distinguish two circumstances in which this election could be made in the hypothetical situation presented.
First, an election under subsection 104(13.1) could be made where the income for the year would be distributed to Mr. X. In the event that the Trust tax attributable to such income would be paid by Mr. X, the payment of such tax would generally not constitute a contribution to the Trust. The payment of the Trust tax by Mr. X could be made in one of the following ways:
- reimbursement of the trustee by Mr. X,
- payment by cheques by Mr. X to the tax authorities in payment of Trust tax, or
- payment by the trustee to Mr. X of an amount representing the Trust's income for the year net of taxes payable.
Furthermore, all income earned by the Trust during the year may be distributed to Mr. X. In such a case, the payment of the tax attributable to such income by the Trust would result in an encroachment on its capital which may not be in compliance with the terms of the Trust Indenture.
Second, an election under subsection 104(13.1) could be made where Mr. X renounces the income payable to him by the Trust for the taxation year. In that situation, Mr. X would be considered to have made a capital contribution to the Trust. This contribution could subsequently lead to the application of subsection 75(2) in respect of Mr. X.
It should be remembered that the absence of a right to return in respect of a property, or substituted property as defined in subsection 248(5), means that the property cannot revert to the taxpayer, either as a return of capital or as payment of allocated income. An analysis of all the relevant facts and documents is required to determine whether subsection 75(2) is likely to apply in a particular situation.
Question 4 - Application of 56(4.1)
We are of the view that subsection 56(4.1) is not likely to apply to Mr. X in the hypothetical situation presented as a result of Mr. X proceeding with the loan in the manner discussed above, as the conditions for the application of subsection 56(4.1) are not satisfied. In particular, the intention test in paragraph 56(4.1)(b) requires that it can reasonably be considered that one of the main reasons for making the loan was to reduce or avoid tax by causing income from the loaned property, or property substituted therefor, whose acquisition the loan enabled or assisted, to be included in the income of another individual (other than a trust). That condition of application cannot be satisfied in the hypothetical situation submitted considering that Mr. X must be entitled to receive all the income from the trust during his lifetime.
We hope that the above comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.