1 March 2001 External T.I. 2001-0067725 - 74.4 and estate freezes

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Does subsection 74.4(2) of the Act apply in a typical estate freeze?

Position:

1. Yes.

Reasons:

1. The issue of whether it is reasonable to consider that one of the main purposes of the transfer of property is to reduce the income of the individual and to benefit a designated person is based on a question of fact

		2001-006772
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
March 5, 2001

Dear XXXXXXXXXX:

Re: Application of Section 74.4

We are writing in reply to your letter of January 24, 2001 wherein you requested our opinion regarding the application of subsection 74.4(2) of the Income Tax Act (the "Act") in the context of a straightforward estate freeze carried out under either subsection 85(1) or section 86 of the Act.

The situation in your letter may be briefly restated as follows:

1. Mr. X is an individual resident in Canada who owns all of the issued and outstanding shares of Holdco, a corporation which is not a small business corporation.

2. Mr. X proposes to freeze his Holdco shares by exchanging them for fixed value preferred shares of Holdco and thereafter a trust of which the beneficiary is Mr. X's minor child will subscribe for common shares of Holdco.

Specifically, you have requested our interpretation on whether subsection 74.4(2) of the Act would apply assuming that the requirements of subsection 74.4(4) are not met.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R4 dated January 29, 2001. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. We can, however, provide you with the following general comments which we hope will be of assistance.

Subsection 74.4(2) of the Act generally applies to a loan or transfer of a property by an individual to a corporation, other than a small business corporation, when one of the main purposes of the loan or the transfer can reasonably be considered to reduce the individual's income and to benefit, either directly or indirectly, a designated person. Subsection 74.5(5) defines "designated person" and includes, with respect to the individual making the transfer of the property, a child who is under 18 years of age.

The exchange of shares as described in paragraph 2 above, whether carried out under either subsection 85(1) or section 86 of the Act would result in a disposition of the Holdco shares to Holdco, and in our view, these transactions would be considered to be a "transfer of property" to Holdco for purposes of section 74.4 of the Act.

The issue of whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person is a question of fact that must be resolved by taking into account all the circumstances and details peculiar to the case. However, we are of the opinion that the provisions of subsection 74.4(2) of the Act will generally apply, subject to subsection 74.4(4), to the situation described above.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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