| 19(1) | File No. 5-8005 |
| A.B. Adler | |
| (613) 957-8962 |
July 19, 1989
Dear Sirs:
This is in reply to your letter of May 4, 1989 in which you requested our view whether subsections 74.5(2) of the Income Tax Act (the "Act") would apply in the following situation.
We are to assume that a father settles a trust, of which the beneficiaries include his minor children, with $1.00. Further the father who, along with the mother, is a trustee of the trust, lends, at a commercial rate of interest, $100.00 to the trust to buy common shares of a small business corporation (Co. A). During the first year after the loan the trust receives dividend income from Co. A and that dividend income is used by the trust to repay the $100.00 loan from the father plus the accrued interest charged at a commercial rate. In future years Co. A will continue to pay dividends to the trust.
It is our view generally that where a loan satisfies the requirements of subsection 74.5(2) of the Act at the time the loan was made no income attribution applies. This would also be our view where the loan is fully repaid.
There may be cases where the attribution rules cannot be effectively applied, and the tax avoidance rules in section 245 of the Act may be applicable. In such cases the determination of whether to apply the tax avoidance rules would only be made upon the conclusion of the review of the facts in an actual situation.
We trust that our comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate