5(a)
When a rental property has been transferred to a trust, is rental income attributed to the transferor under s. 75(2) transformed into trust property income under s. 108(5), so that the "earned income" of the transferor will not be increased for "RRSP deduction limit" purposes?
5(b)
X, who is the sole beneficiary of a protective trust, holds voting shares of a corporation giving him control thereof, with the trust holding retractable shares (previously gifted to it by X) having a nominal paid-up capital and an adjusted cost base equal to their redemption amount. On its retraction of its shares, a deemed dividend is attributed to X under s. 75(2) and its capital loss is deemed to be nil under s. 40(3.6)(a). Is the capital loss as computed before the application of s. 40(3.6) attributed to X or to the protective trust, and is it added to the ACB of the trust's or X's shares – and would the answers change if all the shares were held by the trust?
CRA responded (TaxInterpretations translation):
…5(a)… Subsection 108(5) does not have the effect of modifying the application of subsection 75(2). In our view, the net rental income from the lease of the real property transferred to the trust...preserves its nature and the transferee must include this net rental income in his or her return of income. … For purposes of calculating the "RRSP deduction limit" of the person subject to subsection 75(2) …the income from the rental property…is included in his or her "earned income"… .
…5(b)…A loss deemed to be nil under paragraph 40(3.6)(a)(i) cannot be attributed to anyone. The amount of such loss is subject to the rules set out in paragraphs 40(3.6)(b) and 53(1)(f.2). ... Assuming that, after the redemption...the trust still holds at least one share...the amount of the loss should be added in computing the adjusted cost base of a share of a class of the capital stock of the corporation held by the asset-protection trust immediately after the disposition, in accordance with...paragraph 40(3.6)(b). In effect, the taxpayer subject to subsection 40(3.6) is the asset-protection trust.
A loss which is deemed to be nil by virtue of paragraph 40(3.6)(a) is not attributable to anyone. … On the assumption that after the retraction of the shares…held by the protective trust, it continuously holds at least one share…, the amount of the loss must be added in the calculation of the adjusted cost base of a share…held by the protective trust immediately after the disposition… . In effect, the taxpayer subject to subsection 40(3.6) is the protective trust.