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).
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.
For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 446.