A family trust allocates and distributes to Child Y (the 15 years old child of Mr. Y and Ms. Y) $400,000 of the capital gain realized by it on the sale of shares of Yco (a related business in which Ms. Y was actively involved). Child Y lends the $400,000 at 5% interest to Ms. Y, who invests that sum in the stock market. CRA stated:
Assuming that the $400,000 was validly allocated and distributed to Child Y by the family trust and that a true loan, within the meaning of the applicable private law, existed between Ms. Y and Child Y, Child Y's interest income from the $400,000 loan to Ms. Y would not constitute "split income" … [as it] is not an amount described in paragraphs 120.4(1)(a) to 120.4(1)(e) of the definition of "split income".
There may, however, be abusive situations where the CRA would consider the use of the general anti-avoidance rule …. [f]or example … if it were found that the transactions were put in place to circumvent the application of the TOSI provisions.
… Furthermore, it should be noted that the $400,000 allocated and distributed to Child Y by the family trust could, depending on the facts of the situation, constitute "split income" to Child Y … .