Where an individual taxpayer transfers or loans property to a corporation, directly or indirectly, the transferor may be deemed to receive annual income (Subsection 74.4(2)) at the prescribed rate going forward (Regulation 4301(c)). The deemed income will fluctuate with the prescribed rate – the rate is not locked in at the time of transfer.

This applies if one of the main purposes of the transfer or loan was to reduce the person’s income and to benefit a designated person (which includes an individual’s spouse or common-law partner, a non-arm’s length person who is under 18 (such as a minor child), and a niece or nephew under age 18). A number of exceptions apply to these rules. See VTN 416(10) for a further discussion on the basics of this provision, commonly referred to as “corporate attribution”.

estate freeze may trigger corporate attribution

One situation where this may apply is in an estate freeze where an individual converts the value of the company into fixed value preferred shares and allows a designated person to acquire common shares. The exchange of common shares for preferred shares is a transfer of property and can, therefore, result in the deemed income described above applying to the preferred shares. Note that the designated person may hold shares directly or indirectly, so shares held by a trust in which one or more beneficiaries are designated persons can result in the application of corporate attribution.

An October 22, 2017 Technical Interpretation (2017-0709071C6, Lafreniere, John) considered whether this provision might apply to a complex series of hypothetical transactions. In evaluating the situation, CRA opined that an unborn child is not a person for the purposes of these rules and, therefore, may not be a designated person. However, as new beneficiaries are born, they may be a designated person in respect of an existing shareholder, potentially resulting in corporate attribution.

Editors’ Comment
It is common for family trusts’ beneficiaries to include “all children or grandchildren”, or similarly broad terms.

a clause preventing minor beneficiaries being allocated income or capital from the trust

The risk of this deemed income can be avoided where the terms of the trust provide that no designated person may receive or otherwise obtain the use of any of the trust’s income or capital while they are a designated person (Subsection 74.4(4)). This would mean no income or capital of the trust can be paid, or made payable, to the designated person. A blanket restriction preventing trust income being paid, or made payable, to any person under the age of eighteen is sometimes used for this purpose. Of course, this restriction must also be honoured in administration of the trust.