“Transfer” and “revocable transfer” defined.
98
For the purposes of sections 96 and 97, and this section,—
- (a) “transfer” includes any settlement, trust, covenant, agreement or arrangement;
- (b) a transfer shall be considered to be revocable, if–– (i) it contains any provision for the direct or indirect re-transfer of the whole or any part of the income or assets to the transferor; or (ii) it, in any way, gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets.
Explanation
Section Summary:
This section defines the terms "transfer" and "revocable transfer" for the purposes of Sections 96 and 97 of the Income Tax Act. It clarifies what constitutes a transfer and under what conditions a transfer is considered revocable. This is important because revocable transfers have specific tax implications, particularly regarding the taxation of income generated from such transfers.
Key Changes:
- Expanded Definition of Transfer: The definition of "transfer" now explicitly includes settlements, trusts, covenants, agreements, or arrangements. This broadens the scope of what is considered a transfer under the law.
- Clarification of Revocable Transfer: The section provides clear criteria for determining whether a transfer is revocable, focusing on provisions that allow the transferor to regain control or benefit from the transferred income or assets.
Practical Implications:
- Taxpayers and Businesses: If a transfer is deemed revocable, the income from the transferred assets may still be taxed in the hands of the transferor, rather than the transferee. This affects estate planning, trust arrangements, and other asset transfer strategies.
- Compliance: Taxpayers must carefully structure transfers to avoid unintended revocability, which could lead to adverse tax consequences.
Critical Concepts:
- Transfer: Any action that involves the movement of income or assets, including settlements, trusts, agreements, or arrangements.
- Revocable Transfer: A transfer is revocable if:
- There is a provision for the income or assets to be returned to the transferor (directly or indirectly).
- The transferor retains the right to regain control over the income or assets (directly or indirectly).
Compliance Steps:
- Review Transfer Agreements: Ensure that any transfer agreements, trusts, or settlements do not contain provisions that could classify the transfer as revocable.
- Documentation: Maintain clear documentation of the terms of the transfer to demonstrate that it is irrevocable, if applicable.
- Tax Reporting: Report income from transfers accurately, considering whether the transfer is revocable or irrevocable.
Examples:
- Scenario 1: A taxpayer creates a trust for their child but includes a clause allowing them to reclaim the assets in the future. This would be considered a revocable transfer, and the income from the trust would likely be taxed in the taxpayer's hands.
- Scenario 2: A business transfers ownership of a property to a subsidiary but retains the right to redirect the rental income. This transfer would be revocable, and the rental income would remain taxable to the parent company.
This section ensures clarity in determining the tax treatment of transfers, particularly in cases where the transferor retains some control or benefit.