| 922322 | |
| 19(1) | A. Payette |
| (613) 957-2139 |
October 8, 1992
Dear 19(1),
Re: Transfers and Loans to Relatives
This is in reply to your letter of July 28, 1992 wherein you requested our opinion as to the income tax implications in the following three situations.
Situation 1
A non-interest bearing loan is made to a spouse for the purpose of purchasing farm land. Your question is whether the attribution rules apply to the income generated from the farm land (farming income). As a second question, would the attribution rules apply if the land was gifted to the spouse?
Situation 2
A parent puts up land as collateral for his child's loan. The loan was used by the child to purchase farm land to be used in a farming business and the child is making the loan repayments from the income derived from the farm business. The child in question is over 18 years of age. You ask whether any attribution rules apply on the farming income earned by the child so that the income would be attributed back to the parent.
Situation 3
A land is transferred from individual ownership to joint tenancy. Your question concerns whether this transfer to joint tenancy triggers a change in the beneficial ownership or just a change in the legal ownership and whether there is a capital disposition.
General comments
The particular circumstances outlined in your letter on which you have asked for our interpretation appears to be a factual situation involving specific taxpayers. As indicated in paragraph 21 of Information Circular 70-6R2, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. However, we are prepared to offer the following general comments which may be of some assistance to you.
Our comments
Firstly, the Department's position regarding the attribution of income between spouses is stated in Interpretation Bulletin IT-511 (copy of which is enclosed). As mentioned in paragraph 1 of It-511, transferred or loaned property means all transfers or loans of property whether accomplished directly or indirectly, by means of a trust or by any other means whatever. A transfer includes a sale whether or not at fair market value, as well as gifts.
Subsection 74.1(1) of the Income Tax Act (the "Act") provides that where an individual has transferred or loaned (including money) to the individual's spouse or to a trust in which that spouse is beneficially interested at any time any income or loss from the property or property substituted therefor is deemed to be income or loss of the individual for a taxation year. It is however necessary to distinguish between income or loss from property and income or loss from a business. Subsection 74.1(1) of the Act does not apply to attribute business income or losses even if the business operates with some or all of the property obtained from the transferor. Provided the farm land is actively used in the farming business, the attribution rules should not apply in your first situation.
With respect to your second situation, subsection 56(4.1) of the Act was enacted to prevent individuals from avoiding tax through the use of loans to non-arm's length individuals. Under this subsection, where an individual loans property to another individual with whom he does not deal at arm's length and one of the main reasons for the loan is to reduce or avoid tax on income from the property or substituted property, such income is considered to be income of the individual who made the loan and not of the other individual. In your specific situation, since the parent has not loaned any money to his adult child but simply provided the collateral, no income would be attributed back to the parent.
Finally in your third situation, it is the Department's position that if an individual transfers property which he owns into a joint tenancy, such a transfer results in a disposition of property pursuant to paragraph 54(c) of the Act. Furthermore, when such a disposition occurs with another individual not dealing at arm's length with the transferor individual, paragraph 69(1)(b) of the Act deems the disposition to have been made for proceeds equal to the fair market value of the interest in the property disposed of. The taxable capital gain on the disposition, which represents 75 per cent of the capital gain, would be included in the individual's income in the year of disposition.
Such a disposition would result in the other individual acquiring an interest in a property in which the other individual had no interest prior to the transaction taking place. Consequently, the other individual would be deemed to have acquired his/her interest in the property at its fair market value at the time it was so acquired pursuant to paragraph 69(1)(c) of the Act.
It should be noted however that even though there would be a change in legal ownership in the land, it would be a question of fact whether there is also a change in the beneficial ownership in the land. In the case where there is no change in the beneficial ownership of the property, paragraph 54(c) of the Act specifically states that although there has been a change in the legal ownership of the property this would not be considered a disposition of property.
These comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may result in a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2, it is not binding on the Department.
We trust the foregoing is of assistance.
Yours truly,
J.A. Szeszyckifor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch