Section 75

S. 75(2), which otherwise would apply to attribute income and loss of a trust to the settlor, did not so apply to any losses on income account realized by the trust on trading in marketable securities (citing inter alia Robins v. The Queen, 63 DTC 1012).

In the course of a 10-page consideration of complex transactions involving a Quebec estate freeze, CRA stated (TaxInterpretations translation):

As a corporation is not the owner of its own shares before their issuance, it follows that such issuance by the corporation to a trust for consideration equal to their FMV does not generally constitute a transfer of property to which subsection 75(2) can apply. Following the case of The Queen v. Kieboom, 92 DTC 6382 (FCA), subsection 75(2) nonetheless could apply when the subscription for the shares is not for consideration equal to their FMV.

The trustees of a Quebec trust exercise their discretionary power in order to allocate an amount of income or taxable capital gain to a minor child beneficiary. The amount is paid by issuing a non-interest bearing promissory note while the funds representing the income or taxable capital gain are left in the trust and reinvested. CRA was asked:

If the funds are left in the trust but are reinvested and notionally belong to the child, does...CRA..consider that subsection 75(2) of the Act applies to such funds because the minor child may be considered to be a contributor?

CRA indicated that if the funds in fact had been made payable to the benficiary by means of the proisssory note, it was not appropriate to treat such funds as only "notionally" belonging to the child.

The question described a situation where most of the income generated by a discretionary family trust was generated from a loan made to the trust by Mr. X at the prescribed rate of interest and pursuant to a written loan agreement, and then asked whether s. 75(2) would apply if Mr. X was a beneficiary or the sole trustee of the trust. CRA responded (TaxInterpretations translation):

Provided that the loan made by Mr. X to the trust is, in accordance with the true legal relationship between the parties, legally a loan rather than a contribution of capital to the trust, the fact that Mr. X was a beneficiary or a trustee of the trust, as the case may be, would not be itself result in the application of subsection 75(2).

The summary (which is more specific than the actual question) describes an estate freeze in which a taxpayer exchanges his common shares of of a corporation for preferred shares of the same corporation, with the purchase price and the value of the preferred shares being subject to a price adjustment clause. (New) common shares of the corporation then are issued to a discretionary family trust.

CRA was asked whether the price adjustment clause will prevail if CRA seeks to apply s. 75(2), and whether this depends on whether the preferred shares are still held by the taxpayer at the time of such assessment. CRA stated (TaxInterpretations translation):

In the context of an estate freeze, if the price adjustment clause is valid and the taxpayer makes the necessary adjustments to the price for the common shares and to the redemption value of the freeze preferred shares received as consideration, and to the amount that is due for the preferred shares on their redemption (so that the corporation receives a reimbursement or makes a payment for the difference, as the case may be), the CRA considers that the tax consequences of the estate freeze take such clause into account. ... It thus is not necessary that the price adjustment clause specify that it applies as well for purposes of subsection 75(2). ...

If the CRA recognizes a price adjustment clause as being valid in a given situation in accordance with the wording of the clause, it can engage a retroactive adjustment to the redemption amount of the freeze preferred shares. In the situation you described, the freeze preferred shares have not been redeemed. Consequently, where the estate freeze occurred in a particular year, the price adjustment clause causes an adjustment to the redemption amount of the freeze preferred shares which has an effect respecting subsequent years in which these shares are redeemed.

The correspondent asked how to report income attributed to a non-beneficiary settlor under s. 75(2). CRA stated:

Where income is allocated pursuant to subsection 75(2), a T3 information slip must be prepared in respect of the income attributed and issued to the person or persons to which the income is attributed.

All T3 income amounts are entered on the appropriate rows and columns of part A of schedule 9 of the T3 return. A statement showing the amount of income attributed to the person or persons must be submitted with schedule 9. The total of all allocations and designations, including those made to beneficiaries, on line 928 is transferred to part A of line 47 of the T3 Trust Income Tax and Information Return. All allocations and designations are therefore deducted from the trust's income by way of line 47 of the return.

CRA also stated that allocated taxable capital gains are not included in the trust's adjustable taxable income for the purpose of calculating Alternative Minimum Tax.

Although CRA does not apply s. 75(2) to a genuine loan of cash to the trust, this position does not extend to a loan of income-producing property to the trust or to the situation where a capital beneficiary of a trust transfers property to that trust, regardless of whether or not the capital beneficiary receives fair market value consideration.

Ruling re attribution of income to a First Nation (which was exempt under s. 149(1)(c)) from investments transferred by it and exclusion of such attributed income from income of the trust with the remainder of the income of the trust (particularly income on reinvested income) being deductible under s. 104(6)(b).

A trust of which the settlor and family members are beneficiaries uses the settlement proceeds to buy a net profits interest in a particular oil and gas property. The trust does not have involvement in the operations or management of the property and the property's acquisition is not incidental to and does not pertain to an active business carried on by it.

Income generated by the net profits interest would be subject to the application of s. 75(2).

A Nova Scotia company limited by guarantee would not constitute a trust for purposes of s. 75(2). Corporations incorporated under the Nova Scotia Companies Act are corporations for purposes of the Act.

Where the settlor of a trust changes his common shares of a corporation into preferred shares and the trust then subscribes for common shares, s. 75(2) generally would apply if the subscription price was less than the shares' fair market value.

Discussion of when a loan of money by a parent to a trust will qualify as a "genuine loan" so that s. 75(2) does not apply.

RC noted that, notwithstanding a previous memorandum, it was now its position that "in circumstances where the conditions for the application of both subsection 94(1) and subsection 75(2) of the Act are fulfilled ... the provisions of subsection 75(2) of the Act will apply first".

Unlike s. 94(1), there is no mechanism for the utilization of foreign tax credits by a person to whom income is attributed under s. 75(2).

S.75(2) would apply where under the trust agreement, decisions are made by majority vote and the affirmative vote of the settlor must be included in the vote.

Where contributions made by members of a union to a benefit plan (that was established by the union in accordance with a collective agreement), are paid into a trust created to receive the contributions, the income earned by the trust on the contributions received will not be attributed to the union under s. 75(2)(a)(i) where (based on a reading of the trust indenture) the contributions represent property received from the members of the union and not from the union itself.

S.75(2) would not apply where a trust acquires a property from an arm's length vendor (who is not a trustee or beneficiary of the trust) in consideration for a vendor take-back mortgage which restricts the ability of the trust to sell the property during the one-year term of the mortgage without the consent of the vendor.

"Where subsection 75(2) of the Act applies to attribute income to a person, that income is never income of the trust for tax purposes and consequently it cannot be taxable through the trust nor can it be paid or payable to any beneficiary of the trust pursuant to subsection 104(13) of the Act. The attributed income therefore becomes capital of the trust."

Where the terms of the sale of the property to the trust require the trust to pay to the vendor the amount of income tax payable on any income attributed to her pursuant to s. 75(2), there will be no income inclusion to the vendor pursuant to either s. 105(1) or 12(1)(x).

S.75(2) will apply where the terms of the trust provide that the transferor of property to the trust (including a transfer for fair market value consideration) may have the property revert to her under the terms of the trust where the last of the other beneficiaries under the trust dies. However, where the trust may revert only by operation of law, eg., a total failure of the trust for lack of beneficiaries, and not pursuant to any condition under the trust indenture, s. 75(2) will not apply.

Where a trust indenture allows the settlor to reacquire the contributed property, s. 75(2) will apply even where the relevant provision can apply only in remote circumstances.

A loan to a trust which is a genuine loan as discussed in IT-258R2, paragraph 8 and IT-260R, paragraph 3 would not be considered to result in property being held in trust on any of the conditions listed in ss.75(2)(a) and (b).

S.75(2) would apply if the transferor retains the power to veto distributions of property to beneficiaries or could select beneficiaries from a predetermined class. Ss.75(2)(a)(ii) and 75(2)(b) might not apply if the transferor could not determine the identity of the beneficiaries but could only determine the amount of the trust property to be distributed to the beneficiaries identified by the trust documents.

Where unanimity was required in respect of any decision by the two trustees of a trust and the settlor was a trustee, s. 75(2)(b) would apply.

S.75(2)(b) also will apply where loan proceeds were used to acquire property from a parent, and the parents controlled the trust property as trustees or under the terms of the loan.

S.75(2) can apply by virtue of a right of the contributor of property to reacquire that property at fair market value.

S.75(2) will apply where the settlor is able to select additional beneficiaries or delete beneficiaries after the creation of the trust.

S.75(2) will apply where the settlor, in his capacity of sole trustee, has the discretion as to whom the trust property will be distributed on a distribution date out of a class of beneficiaries specified in the trust deed.

Father settles an irrevocable trust of which he is the sole trustee and whose terms are totally discretionary as to income and capital payments, and his beneficiaries are his adult children. The trust indenture provides that the trust will continue until the earlier of father's death or the day upon which father terminates the trust, at which date the trust capital is divided equally among the beneficiaries then alive. Because father can exercise control over the disposition of the trust property, s. 75(2)(b) could apply.