28 September 1989 Income Tax Severed Letter AC73942 - Attribution Rules

September 28, 1989

VICTORIA DISTRICT OFFICE           HEAD OFFICE
Audit Division                     Rulings Directorate
                                   Financial Industries Division
ATTENTION:  P. Gowans              F. Francis
                                   (613) 957-3496

                                   7-3942

19(1)

This is in reply to your memorandum of March 30, 1989, to the Audit Applications Division, wherein you request our opinion in respect of the following factual situation:

                   24(1)24(1)
You request our opinion as to whether the attribution rules under
sections 74.1 through 74.5 of the Act would apply in this
situation.

It is our opinion that subsection 74.1(2) of the Act will apply to attribute any income or loss on the one ounce gold coin transferred by 19(1) to the trust in respect of the minor beneficiaries.

Provided that the loan of 24(1) satisfies the requirements of subsection 74.5(2) of the Act at the time the loan was made, it is our view that the attribution rules under section 74.1 of the Act will not apply in respect of the Class B shares acquired by the trust with the loan proceeds.

Further, it is our position that subsection 75(2) of the Act will not apply in respect of the Class B shares acquired by the trust with loan proceeds provided that the loan is a genuine loan.

It should also be noted that subsection 74.4(2) of the Act may be applicable in respect of the transfer of the 19(1) to the corporation, unless the corporation 24(1) is a small business corporation. The determination of whether the corporation is a small business corporation under subsection 248(1) of the Act can be made by your Division. In this regard we note that a personal services business as defined under paragraph 125(7)(d) of the Act will not qualify as a small business corporation.

Finally we note that subsection 56(2) of the Act may be applicable in respect of the payment of dividends with the result that the dividend income of 24(1) would be included in the income of 19(1). We refer you to the 1988 case of Jim A. McClurg and the Department's arguments contained therein. While we lost the case at the Federal Court of Appeal, the Department proposes to appeal this decision.

We trust the above comments will be of assistance to you.

for Director Financial Industries Division Rulings Directorate