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XIV. Interrelation of Income Tax and Gift Tax

24.A105. In Chapter 7, the Committee has recorded its decision not to include gifts as such in the income tax base. In some circumstances, however, a donor may make a gift and the property given or benefit conferred will be income of the donee under existing principles. The fact that the property or benefit is taxed as income does not preclude the liability of the gift to gift duty. A number of situations may be distinguished:

  • (a) Where there is an assignment to a donee of royalties or interest, each payment to the assignee should be treated as a gift of the amount of the payment, reduced by the amount of the income tax that would be payable by the donee.
  • (b) The donor who carries on a business may make an excessive payment to the donee for goods supplied or services rendered by the latter. The gift is the amount by which the payment exceeds the consideration given, diminished by an amount equal to the income tax payable by the donee.
  • (c) The donor who does not carry on a business may make an excessive payment to the donee for services supplied by the donee. The fairest outcome will follow if the Commissioner does not treat the excess remuneration as income of the donee (assuming that it is open to him to go behind the form of the transaction), in which case the amount of the excess is the gift.
  • (d) The donor may supply goods for an inadequate price to a donee who carries on a business. In this case the amount by which the value of the goods exceeds the consideration should be treated as a gift, diminished by any income tax assessed against the donee.
  • (e) The profits distributed to a member of a partnership may exceed a fair return for the partner's contribution of capital or the use of his property. The


      ― 477 ―
    amount of the excess, after deducting the income tax payable by that partner, should be treated as a gift by the other partner.
  • (f) Differential dividends paid within a company may operate to divert income from one shareholder to another. The gift should be determined in accordance with the rule proposed in paragraphs 24.A91–24.A93, but the deemed gift should be reduced by the amount of the income tax payable by the shareholder receiving the dividend.

Some of the foregoing illustrations are likely to be part of an income splitting arrangement. The Commissioner may, in certain of these cases, have power to deny the reduction in income tax sought by the arrangement. Nevertheless, if the gift tax legislation is to be effective, gifts of the kinds described above must be subjected to gift tax, irrespective of what action the Commissioner may be empowered to take in relation to the gift under income tax legislation.

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