| 6/1/2009 |
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| Board of Special Commissioners - Cases |
| Case No. 21/62 |
Decided: 21 November, 1962 |
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Loans by parent to children at low rate of interest; whether a genuine or artificial and fictitious transaction - article 21, now 51, Income Tax Act
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Appellant loaned a sum of money to his children at a low rate of interest. A few months later appellant loaned a further sum to his children, again at a low rate. At that point in time both the father and the children loaned money to a third party at a much higher rate.
The Commissioner assessed the father on the full interest that the third party was paying to the children for both sums of money loaned from their father. Taxpayer submitted a plea to the effect that the transaction was in no way an artificial and fictitious one since a father had every right to lend money to his children even without charging them any interest. Moreover, he had not donated any money to his children and, therefore, the question of their being unmarried (sub-article 21(2)) did not arise.
The Board ruled, in the first instance, that the provisions of sub-article 21(2) did not apply because - as previously decided in an analogous case which decision was confirmed by the Court - such provisions affected only gratuitous loans. The question at issue, therefore, was reduced to whether the transactions were artificial and fictitious.
In the case of the first loan the Board observed that nothing impeded a father from lending his children money under favourable conditions. The primary intention of the father was to enhance the ego of his children who worked in the family business. He wished to ensure they would have enough capital to invest on their own and not consider themselves fully dependent upon their salary and mere employees of their father. The motive was a genuine one and the terms "artificial" and "fictitious" could not be attributed to the transaction.
In the case of the second loan, however, the Board held that circumstances in which it was made proved to be suspicious and the anti-avoidance provisions of the Act were applicable. The Commissioner had been correct in taxing the father on the full amount of the interest payable by the third party.
An appeal was entered before the Court from this decision (see case no. 51).
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