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.
Principal Issues: If the anti-avoidance rule in subsection 125(5.2) would apply in a situation where a corporation transfers active assets to a related corporation?
Position: Question of fact.
Author: Couvrette, Amanda
2020 STEP CRA Roundtable – November 26, 2020
Question 14 – Adjusted Aggregate Investment Income
Subsection 125(5.2) is an anti-avoidance rule which may apply if a particular corporation transfers “property” at any time, either directly or indirectly to another corporation which is related to but not associated with the particular corporation, in circumstances where one of the reasons the loan or transfer was made was to reduce the “adjusted aggregate investment income” (“AAII”) of the particular corporation.
Would subsection 125(5.2) apply to deem a transferee corporation to be associated with a related transferor corporation when the transferor corporation transferred property which were “active assets”, the income from which did not reduce Variable E of the definition of “adjusted aggregate investment income” in subsection 125(5.1) for the transferee corporation?
Subsection 125(5.2) is an anti-avoidance rule intended to prevent the avoidance of the application of the “passive income reduction” rule in paragraph 125(5.1)(b) through the transfer of property to a related company.
Subsection 125(5.2) operates to deem two corporations associated with each other when they are otherwise not associated. It applies where the corporations are related to each other, one corporation (directly or indirectly) transfers assets to the other corporation and one of the reasons for the transfer can reasonably be considered to be to reduce the amount of the adjusted aggregate investment income of the associated group for the purposes of the passive income reduction rule in paragraph 125(5.1)(b).
Whether subsection 125(5.2) would apply in any given situation remains a question of fact that can only be made once all the relevant facts of a particular situation are known and have been fully considered. Should all the relevant facts and documentation be submitted, the Income Tax Rulings Directorate may be able to provide additional comments applicable to the fact scenario in the context of a technical interpretation or in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
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