| 921534 | |
| 24(1) | A.Y. Ho| |
| (613) 957-4796 |
Attention: 19(1)
July 29, 1992
Dear Sirs:
This is in reply to your letter of May 13, 1992 wherein you requested our technical interpretation on subsections 74.1(2), 74.4(2), 74.3(1), 56(4.1), 75(2) and 245(2) of the Income Tax Act (the "Act"). The situation you described appears to involve proposed transactions, as stated in paragraph 21 of the Information Circular 70-6R2, we do not provide technical interpretation on proposed transactions unless they are in a ruling context. However, we can provide you with the following general comments.
Our Comments
Subsection 56(2) of the Act may apply in a situation where a shareholder, who did not make adequate contributions, financially or otherwise, to the corporation, receives discretionary dividends. Even though it appears contrary to the court case, The Queen v. Jim A. McClurg, 91 DTC 5001, the Department takes the position that the decision of the Supreme Court is limited to the particular facts and situation which the court addressed in that case. Since subsection 74.3(1) of the Act is for the purposes of sections 74.1 and 74.2 of the Act, income from property loaned or transferred to a trust for the benefit of minor children of the transferor could be viewed as being subject to the provisions of subsection 74.1(2) of the Act by virtue of subsection 74.3(1) of the Act.
Subsection 74.1(2) or 74.4(2) of the Act only applies in situations where an individual has made a transfer or loan of property. It is a question of fact whether or not a transfer or loan of property takes place under the particular circumstances. However, if the existence of a corporation is to avoid the application of subsection 74.1(2) or 74.4(2) of the Act, the general anti-avoidance rules ("GAAR") as contained in section 245 of the Act may be applicable. If a trust genuinely borrows money from an arm's length lender to acquire property, the loan by itself does not generally trigger the application of subsection 56(4.1) or 75(2) of the Act. However, if a loan is part of a series of transactions to avoid the application of subsection 56(4.1) or 75(2) of the Act, GAAR may be applicable.
We are not prepared to make any comments on the possible application of GAAR beyond what is stated above and in the Information Circular 88-2. The detailed facts are so critical to such a determination that we would only provide such comments on an advance ruling basis.
We trust the above comments are of assistance.
Yours truly,
ChiefManufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch