Subsection 74.5(11) of the Income Tax Act (the “Act”) is an anti-avoidance provision that prevents the attribution rules in sections 74.1 to 74.4 of the Act from applying where it is determined that one of the main reasons for the transfer or loan that gives rise to the income or gains being attributed is to reduce tax.  Below is CRA Document No. 2014-0519661E5 indicates that subsection 74.5(11) may apply if it is concluded that one of the main reasons for the transfer of the shares was to reduce the tax on income from the shares.

2014-0519661E5  —  Subsection 74.5(11) Attribution

 Date: March 24, 2014

 Income Tax Act: 74.5(11); 245

 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.

 PRINCIPAL ISSUES: Whether a transaction would be subject to subsection 74.5(11)

 POSITION: A question of fact, however it is possible in this situation that subsection 74.5(11) would apply.

 REASONS: Intent and wording of subsection 74.5(11).

 2014-051966

Andrea Boyle, CGA

 March 24, 2014

 Dear XXXXXXXXXX:

 Re: Subsection 74.5(11)

 We are writing in response to your letter dated January 9, 2014, in which you ask about the potential application of subsection 74.5(11) of the Income Tax Act (“the Act”).

 In the hypothetical situation described in your letter, a taxpayer is a professional who formerly operated an unincorporated professional practice. Relevant provincial legislation requires that all of the issued and outstanding shares of a professional corporation be legally and beneficially owned, directly or indirectly, by one or more members of the same profession. The taxpayer's spouse is not a member of the profession and may not, therefore, own shares of a professional corporation. The taxpayer formed a corporation with the taxpayer and the taxpayer’s spouse each subscribing to shares of the corporation. The taxpayer's spouse gifted the spouse’s shares to the taxpayer so that, after the gift was made, the taxpayer owned all the shares of the corporation. The taxpayer was then able to register the corporation as a professional corporation.

 It is your view that, in future years, the dividend income on the gifted shares now owned by the taxpayer would, pursuant to subsection 74.1(1) of the Act, be attributed back to the spouse. The taxpayer and the taxpayer's spouse would, therefore, be using the attribution rules in order to split income, while still complying with the rules related to professional corporations.

 Our Comments

 This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

 Subsection 74.5(11) of the Act provides that, notwithstanding any other provision of the Act, the attribution rules in sections 74.1 to 74.4 do not apply to a transfer or loan of property where it may reasonably be concluded that “one of the main reasons” for the transfer or loan was to reduce the amount of tax that would, but for this subsection, be payable under Part I on the income and gains derived from the property or from property substituted therefor.

 You have suggested that the sole reason for the transfer of the shares from the spouse to taxpayer was to comply with the requirements of the corporation to qualify as a professional corporation. The determination of the main reasons for a transfer or loan is a factual one. Therefore, it is possible that subsection 74.5(11) may apply in the situation described if one of the main reasons was to reduce the amount of tax that would, but for this subsection, be payable under Part I on the income and gains derived from the property or from property substituted therefor.

 We trust that our comments will be of assistance.

 Yours truly,

 G. Moore

for Director

International Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs

Branch