All About Estates

Transfers to a corporation can be costly. Beware of corporate attribution.

Part III – Corporate Attribution

This blog post has been written by Pritika Deepak, Associate at Fasken LLP.

This is the last part of a three-part blog series which provides a high level overview of the attribution rules contained in the Income Tax Act (Canada)[1] (the “Act”). Part I, which addresses personal attribution and Part II, which speaks to trust attribution, can be found respectively at and

Part III of this blog addresses the attribution of income and/or capital gains that may apply in certain situations involving transfer or loans, directly or indirectly, by a individual to a corporation.

*As a reminder, the attribution rules are quite technical and complex. Readers should speak to tax and estate advisors to obtain advice for their particular situations.

Introduction of Corporate Attribution

The corporate attribution rules are contained in section 74.4 of the Act. These rules are generally intended to deter individuals from splitting income with “designated persons” (as defined in Part II of this blog series), through a corporation. Particularly, subsection 74.4(2) of the Act provides that where an individual has transferred or loaned property (directly or indirectly, including by means of a trust) to a corporation in which a “designated person” holds shares, there will be a deemed income inclusion to the transferor or lender.

For subsection 74.4(2) of the Act to apply, one of the main purposes of the transfer/loan must reasonably be considered to be the reduction of income of the individual transferor and the conferral of a benefit on a designated person. The reduction of income of an individual includes the reduction of ongoing income but also potential future capital gains. As is evident, the main purpose test is quite wide in scope and will be satisfied as long as one of the main purposes of the transaction is to benefit a designated person in any way and to reduce the income of the transferor/lender.

Application of Corporate Attribution

If subsection 74.4(2) applies, then it will deem the transferor/lender to have received interest income during the period throughout which:

(a)        the designated person is a “specified shareholder” (as hereinafter defined) of the corporation,

(b)        the transferor is resident in Canada, and

(c)        the transferee corporation is not a “small business corporation” (as hereinafter defined).

A “specified shareholder” is generally a person who holds at least 10% of the shares of any class of shares of the corporation. For the purposes of this test, if the person is a beneficiary of a discretionary trust (i.e. where the beneficiary’s interest of income and capital is based on the discretionary powers of the trustees), the beneficiary is deemed to own each share of the corporation which is owned by the trust.

A “small business corporation” is defined as a Canadian-controlled private corporation (referred to as a “CCPC”), all or substantially all of the FMV of whose assets are used principally in an active business carried on primarily in Canada. It is generally understood that ‘all or substantially all’ means at least 90% and ‘used principally’ means more than 50% of the time.

Computation of Amounts Attributed

Where subsection 74.4(2) is met and attribution applies, the amount that is included in the transferor/lender’s income as interest is calculated by applying the prescribed rate of interest to the ‘outstanding amount’. If property is transferred, the ‘outstanding amount’ is the FMV of the property transferred less the FMV of the consideration received by the transferor from the corporation (other than debt, shares or a right to receive debt/shares). If a loan is made, the ‘outstanding amount’ is the principal amount of the loan or the FMV of the loaned property. However, it is worth noting that the deemed interest income inclusion for the transferor/lender is reduced by: (1) all amounts of interest that are actually received in a taxation year with respect to the loan/transfer, and (2) all taxable dividends (other than deemed dividends on share redemptions) that were paid on shares received by the transferor/lender, as consideration for the transfer/loan.

Estate Planning Techniques to Avoid the Corporate Attribution Rule

In an estate planning context, an estate freeze is common tax-planning that is used to transition the growth in value of a business to the next generation and to reduce an individual’s tax burden resulting from the deemed disposition of private company shares on death. Often, an owner/manager of a private corporation will ‘freeze’ their shares in such corporation, by exchanging their common shares for fixed value preferred shares on a tax-deferred basis. A discretionary family trust then subscribes for new common shares of the corporation for a nominal amount. The beneficiaries of such family trusts typically include the ‘freezor’ (the owner/manger), their spouse and their children, who may be minors. The corporate attribution rules become very important whenever an estate freeze or (refreeze) is contemplated, as there is a transfer of property to a corporation.

One common planning technique to avoid corporate attribution is through the use of a trust, which meets certain conditions. Specifically, subsection 74.4(4) of the Act provides a ‘safe-harbour’ exception which states that the main purpose test under 74.4(2) is not met if: (i) the only interest that a designated person has in the corporation is through a trust; and (ii) the terms of the trust prevent a designated person from receiving income or capital of the trust while they are a designated person.

Another way to avoid the application of the corporate attribution rules is to ensure the corporation is a “small business corporation”. However, in practice this can become onerous as an assessment will be regularly required after the transfer/loan. It is worth noting that the requirements for the corporate attribution rules must be assessed on an annual basis. As such, if at any time after the original transfer/loan, the corporation ceases to be a small business corporation, the exception will no longer apply and may therefore trigger corporate attribution.

An additional planning option to avoid corporate attribution involves the payment of dividends or interest (at or above the prescribed rate) to the transferor/lender, as the deemed interest inclusion under corporate attribution is reduced by the amount of dividends or interest actually paid to the transferor/lender.


The attribution rules contained in the Act are complex and require a comprehensive understanding of estate planning and tax rules. This blog post has discussion some (but not all) ways of dealing with the corporate attributions rules. The inadvertent application of the attribution rules can be  punitive and can have adverse tax and non-tax consequences for clients. As such, it is crucial that individuals connect with the right advisors and obtain fulsome guidance before engaging in certain estate and succession planning.

[1]      Income Tax Act (RSC, 1985, c.1 (5th Supp.))

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