― 161 ―

Reservation to Chapter 11: Income Splitting

While I am in full agreement with the need to strengthen the income tax law to reduce the loss of revenue from income splitting, I have a number of reservations on the proposals set out in Chapter 11.

I concur with the view of Professor Parsons that the proposals in this chapter are not adequately integrated with the proposals in appendix A to Chapter 24 as to the operation of gift duty in relation to gifts of income. As paragraph 11.1 states, income splitting devices invariably involve the distribution of income to a person who has not provided an adequate consideration for the amount received. The appendix to Chapter 24 contains detailed procedures for identifying and quantifying gifts of this type together with proposals that such gifts should be brought within the ambit of the proposed integrated estate and gift duty. The principal objective of Chapter 11 should be to suggest clear and certain provisions for the method to be followed in taxing income which has been identified as a gift by the operation of provisions which match those proposed in relation to the estate and gift duty.

I support the proposal in paragraph 11.9 that the unearned income of a minor child should be taxed at a rate determined by reference to his parents’ income. However I concur with the reservation of Professor Parsons that it is not appropriate to tax such income of a minor child at a rate which takes to account not only the income of his parents but also the incomes of other minor children of the same parents.

I do not support the proposal made in various paragraphs of the chapter, that income identified as having been unreasonably diverted to others should be taxed at ‘a deterrent rate’. I concur with the view expressed by Professor Parsons that it is only income diverted to a spouse which need be subject to special taxing measures. In these cases, the tax payable should be such as would have been paid had the income in fact been received by the spouse who has made or is deemed to have made the gift. In cases of other than minor children and a spouse the diverted income should be taxed in the normal way and the sole deterrent to income splitting procedures should be the imposition of gift duty as proposed in Chapter 24.

I reject as impracticable the proposal in paragraph 11.32 that the allocation of income between the beneficiaries of a trust, other than a trust established by will, should fall to be reviewed by the Commissioner in the same way as is proposed in the chapter in respect of allocations of income by a family partnership. The tests proposed in paragraph 11.32 that the Commissioner should apply, such as beneficial interest in capital and property of the trust, business and professional contributions to the production of trust income and the arm's length concept have no place in a review of the distribution of trust income made by a trustee in accordance with the provisions of the trust document, particularly in the case of a discretionary trust. There may well be grounds for empowering the Commissioner to identify partnership income or income of a company flowing through a trust to a spouse to determine tax payable on this income but such a provision should be limited to these instances only. The Committee's proposals in relation to taxing of income of minor children, the imposition of tax at maximum marginal rates on income accumulated by a trustee and the widening of the base of estate and gift duty should adequately protect the Revenue in cases where trusts are used to spread or divert income.

  ― 162 ―

Finally, I do not support the proposed amendment to section 260 of the Act as proposed in paragraph 11.44. I believe it will increase the present uncertainty of the application of this section and is contrary to the Committee's view expressed in paragraph 11.5 of the chapter. I make no suggestion as to the action which should be taken to heed criticisms of this section of the Act as no acceptable proposal, in my view, has emerged from the Committee's researches and discussions in this area.

K. Wood