Subsection 237.1(1) - Definitions
Promoter
Administrative Policy
6 November 1991 T.I. (Tax Window, No. 13, p. 18, ¶1589)
Normally, where a partnership is created with a small number of members, all of whom are involved in its organization, statements or representations as to the deductibility of amounts will be made only to the organizers, in which event any accountant or lawyer who provided advice to the organizers on the creation of such a partnership would not be a promoter.
88 C.R. - F.Q.14
A lawyer or accountant who advises the organizer of a tax shelter normally would be included in the definition of a promoter.
88 C.R. - Q.63
Where an investor resells an interest in a tax shelter that was acquired prior to the requirement for an identification number, the investor will not be subject to the new rules if the resale is not in the course of a business. However, a repackaged tax shelter could be considered to be a new tax shelter.
Tax Shelter
Cases
Canada v. O'Dwyer, 2013 DTC 5156 [at 6369], 2013 FCA 200
The Minister imposed over $2 million in penalties against the taxpayer in respect of the sale of partnership units constituting an alleged tax shelter. Webb JA upheld the motion judge's decision to strike the Minister's Reply, finding that it failed to make out the facts necessary to support the conclusion that there was a tax shelter. For property to be considered a tax shelter, there must have been statements or representations made in connection with that property, as described in para. (b) of the definition of "tax shelter." As the Reply did not point to any such statements or representations (para. 19-20), it was obvious that it had no chance of success. The taxpayer's appeal was upheld.
The Reply had also been written as if the partnership itself were the tax shelter rather than its units. This error alone would not have been fatal to the Reply, as a reasonable reading of the Reply in its entirety would lead to the inference that the units, not the partnership, were the alleged tax shelter (para. 13).
Jevremovic and Maege v. The Queen, 2008 DTC 6263, 2007 FCA 125
Business losses and investment tax credits allocated to an accountant ("Maege") and chemical engineer ("Jevremovic") by an alleged partnership were disallowed by the Minister on the grounds inter alia that their investments in the partnership were a tax shelter. Maege admittedly was a "promoter" as she had made "statements or representations" about losses and credits available to investors (such as Jevremovic) in offering memoranda.
In rejecting a submission made on behalf of both taxpayers that their decision to invest was not made on the basis of statements or representations but, instead, was based on the quality of the project, Noël J.A. stated (at para. 4) that he agreed with Rip J. (as he then was) in the Tax Court "that the existence of a tax shelter does not depend on the motivation of the investor, but rather on the equation provided for in section 237.1".
Furthermore, the submission on behalf of Maege, that although she was a promoter, no statement had been made to her, was rejected. Noël J.A. agreed with Rip J. (who had found that it was irrelevant that Maege had not made any statements to herself) and stated (at para. 5) that "what is relevant is that she knew that beneficial tax consequences would arise as a result of her investment, as had been announced [by her]".
The Queen v. Baxter, 2007 DTC 5199, 2007 FCA 172
Before going on to find that the purchase by the taxpayer (with others) of a non-exclusive, limited-use day-trading licence was the acquisition of a tax shelter in light of statements contained in a legal opinion provided to him by selling agents that the cost of the licence would be depreciable over two years, Ryer J.A. indicated (at para. 42) that the use of the word "represented" in subparagraph (a)(i) "is intended to do no more than convey the notion that the amount that is the subject matter of the statements or representations contemplated by the opening portion of the definitions has been made known to the prospective purchasers of the property in question. To that extent, words such as communicated or announced could also be used ... ." and (at para. 44) that it would be reasonable to conclude that the persons who must have made the statements or representations referred to in the definition must each be a person who is a promoter, as defined in s. 237.1(1).
Evans, J.A. added (at para. 66) that he did not wish to "preclude the possibility that there may be circumstances in which property can be found to be a 'tax shelter' even though representations have not been made, provided that the promotor proposes to make them".
See Also
Gleig v. The Queen, 2015 TCC 191
The taxpayers entered an arrangement with a corporation ("Blue Hill") in order to deduct Canadian resource expenditures from income:
- the taxpayers paid $2 for an option to acquire an interest in mineral claims owned by Blue Hill;
- in exercising the options, the taxpayers agreed to engage Blue Hill to incur CRE on their behalf in consideration for promissory notes
Lyons J found (at para. 42) that the taxpayers were not required by Blue Hill to pay the promissory notes. The taxpayers also made an out-of-pocket payment, not referred to in the agreements, for 25% of the face value of the notes.
Although the taxpayers apparently argued that the property actually acquired by the taxpayers (the option agreement) would not give rise to any deductions, Lyons J agreed with the Minister that the interests in the mineral claims were the tax shelter. Blue Hill's principal had specifically promoted the interests on the basis that they would lead to an income deduction of four times the purchasers' outlays (which was the purchasers' only cost as the promissory notes were a prescribed benefit under Reg. 231(6) (now Reg. 31001).). As Blue Hill had been assessed penalties under s. 237.1(7.4) which were not paid, the Minister was correct to deny the taxpayers' deductions under s. 237.1(6.1).
See summary under Reg. 3100(1).
Malo v. The Queen, 2012 DTC 1214 [at 3588], 2012 TCC 75
The taxpayer's purchases of tree seedlings that were being planted at a Costa Rican tree plantaition constituted a tax shelter on the basis of statements made to the taxpayer in a family setting by his brother-in-law (who also was the key individual involved in promoting investments by potenital investors in the plantation trees) that the taxpayer "would be able to deduct the money invested, as it constituted a current business expense." Hogan J. stated (at para. 15):
Following the guidance of Baxter, it suffices that Mr. Maheux discussed with the appellant the investment opportunity and that he presented to the appellant the amount of possible deductions for the definition of tax shelter to apply.
Dagenais v. The Queen, 2008 DTC 2830, 2006 TCC 209
Interests in partnerships were tax shelters given that the investors expected an immediate deduction of 100% of their investment and only contributed 32% of this amount.
Maege v. The Queen, 2006 DTC 3193, 2006 TCC 117, aff'd supra
In finding that the taxpayer's investment in a partnership was a tax shelter notwithstanding that she did not receive any representations as to the tax consequences of her investment, Rip J. stated at p. 3200) that "a 'representation' need not be an explicit written or verbal assertion but can also include a mental or intellectual element" and that this was "further reinforced by the definition of 'proposed' or 'proposal', which seems to include one's own personal intentions".
Administrative Policy
10 January 2014 CRA News Release "
//news.gc.ca/web/article-en.do?mthd=index&crtr.page=1&nid=808689&utm_source=mediaroom&utm_medium=eml">Canada Revenue Agency continues its administrative procedures for gifting tax shelter schemes"
For the 2013 tax year...CRA...will not assess taxes owed or provide a refund to taxpayers who claim a tax credit under a gifting tax shelter scheme until the CRA has audited the tax shelter. However, if a taxpayer makes a claim under a gifting tax shelter scheme, the taxpayer can have his or her tax return assessed before the related tax shelter has been audited if they agree to remove the claim from their return. This procedure remains unchanged from the 2012 tax year.
The CRA continues to alert taxpayers that if they receive a charitable donation receipt for an amount higher than the value of property donated, the receipt is not valid... .The CRA is auditing all such gifting tax shelter schemes, and to date, none has been found to comply with Canadian tax law.
"The Canada Revenue Agency: protecting Canadians from gifting tax shelter schemes" CRA News Release, 30 October 2012
CRA announced that it will put on hold the assessments of any 2012 returns for individuals claiming credits in respect of a gifting tax shelter. An assessment will be processed once the shelter's audit is completed, or the taxpayer removes the claim for the receipt in question. CRA also noted that "all gifting tax shelter schemes are audited and CRA has not found any that comply with Canadian tax laws."
Income Tax Technical News, No. 41, 23 December 2009 Under "Definition of 'Tax Shelter' - Subsection 237.1(1)
"The Maege Decisions ... do not represent a departure from the requirement that statements or representations be made in connection with the property when applying the tax shelter rule; rather they adopt a broad view of this requirement, especially when sophisticated investors are involved."
Income Tax Technical News, No. 41, 23 December 2009 Under "Donation of Flow Through Share - Subparagraph 38(8.1)(i), Subsection 248(35) through (41) and Section 237.1".
4 July 1997 T.I. 5-970756 -
Where a franchisor represents that a franchisee will have annual net income from the business but also makes a representation that the franchisee can expect to incur annual operating expenses exceeding the franchise fee and the franchisee's cost of establishing the franchised business, the amount of operating expenses would be an amount described in s. 237.1(1)(a)(ii) where s. 237.1(1)(a)(i) is not applicable. Accordingly, the franchise would be a tax shelter.
3 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 21, ¶1057)
Discussion of measurement of 4-year period and of "cost".
90 C.P.T.J. - Q.23
The amount of loss represented to be deductible for purposes of s.a(i) includes capital losses, non-capital losses and allowable business investment losses. S.a(ii) would include such amounts as a joint venture investor's share of CCA and in the case of partnership, interest expenses, carrying charges and certain resource deductions not claimable at the partnership level.
90 C.R. - Q.53
Interest expense incurred on money borrowed to buy a partnership unit would be an amount deductible "in respect of" the partnership interest. Where the financing arrangements were made available as part of the tax shelter "package" it is likely that the interest will be regarded as being represented to be deductible.
23 April 1990 T.I. (September 1990 Access Letter, ¶1434)
Where the partnership is among a small number of partners where the individuals organizing it are also the only partners, there would not normally be written or verbal statements or representations made to any one other than the organizers. Accordingly, the partnership interest in the partnership would not normally meet the definition of a tax shelter.
26 February 1990 T.I. (July 1990 Access Letter, ¶1343)
The cost to an investor is determined in accordance with GAAP including, in the case of a limited partnership interest, any loans or other financing required by the investor in order to acquire his limited partnership interest.
The reference to prescribed benefits contained in subparagraph (b)(ii) does not limit the calculation to those benefits expected to be received or enjoyed in the initial four-year period. Additional funds which the investor is required to invest in a limited partnership will be included in the cost of his interest provided that the funds are paid within four years after the day the interest was originally acquired.
25 January 1990 T.I. (June 1990 Access Letter, ¶1282)
Interest paid on the loan contracted by the purchaser to finance the acquisition of his share of the shelter, or to make a capital contribution were included in the amount of the expected deductions in light of representations that were made outside the prospectus.
6 December 1989 T.I. (May 1990 Access Letter, ¶1235)
Interest on money borrowed to acquire a limited partnership interest or to provide capital to that partnership will be considered to be a deduction under s.(a)(ii) of the definition where the prospectus alleges that such interest will be deductible.
18 September 89 T.I. (February 1990 Access Letter, ¶1126)
The "cost" of the property will include the purchase price, acquisition costs and deemed adjustments.
89 C.R. - Q28
Interest and other expenses incurred by the investor personally but which are represented to be deductible in computing income or taxable income in respect of an interest in a property will be included under the term "any other amount" in subparagraph (a)(ii). The only exception would arise in cases where it is reasonable to expect that investors would not incur such expenses.
88 C.R. - Q.65
Since s.a(i) refers to a calculation projected by the tax shelter promoter and not the investor, financial counselling fees incurred by the investor typically would not form part of the loss.
Articles
Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.
Sale of interest in LNG project potentially a tax shelter (p. 10:25)
[A] proponent of a major construction project seeks to sell all or a portion of its interest in the project to a new investor. If the expected cash flow and tax profile of the investment is communicated to the investor by a promoter, and if the other requisite tests are met, the major construction project or partnership interest divested to the investor could be considered a tax shelter….
Ewens, "Tax Shelter Analysis", The Taxation of Corporate Reorganizations, 1996 Canadian Tax Journal, Vol. 44, No. 4, p. 1207 and Vol. 44, No. 5, p. 1486.
Subsection 237.1(2) - Application
Administrative Policy
88 C.R. -"Tax Reform and Tax Administration" - "Shelter Reporting"
An application by one promoter for a tax shelter discharges any other promoter for the same shelter from the obligation to make an application.
Articles
Donald H. Watkins, "The Tax-Shelter Rules: An Update", 1998 Conference Report, c.5.
Subsection 237.1(4) - Sales prohibited
Administrative Policy
23 February 1990 Memorandum (July 1990 Access Letter, ¶1344)
Discussion of proposed revisions to IC 89-4, para. 6, 7.
88 C.R. -"Tax Reform and Tax Administration" - "Shelter Reporting"
Preliminary promotions would not offend this provision provided that no actual sales are concluded before the identification number is issued.
88 C.R. - Q.64
Where a taxpayer acquires a tax shelter before the Minister has issued an identification number for the tax shelter, RC will not deny that the acquisition of the tax shelter has occurred if it subsequently issues an identification number.
Subsection 237.1(6) - Deductions and claims disallowed
See Also
Bandi v. The Queen, 2013 DTC 1192 [at 1032], 2013 TCC 230
The taxpayer participated in a donation scheme whose particulars reflected numerous differences with the program described in the promoters' s. 237.1 application for a tax shelter identification number, including:
- the identity of parties (e.g. trust settlors and vendors) and their locations (e.g. Belize v. Barbados);
- the nature of the donated property (e.g. copies of software v. software licences; different versions numbers); and
- monetary values (e.g. different bulk rates, different alleged fair market values of the software).
The Minister argued that these differences meant that the program in which the taxpayer participated should not be regarded as the program for which the promoter obtained the identification number. Before finding against the taxpayer on the ground that no "gift" had been made, Hogan J found that the changes, although material, did not prevent the taxpayer from claiming charitable receipts. Tax shelter participants do not have the opportunity to compare a program's details to the details disclosed in the s. 237.1 application. Hogan J stated (at para. 9):
A literal interpretation of the provisions relied on by the respondent would impose on promoters of tax shelters an obligation to abandon an existing registration and reapply for a new number each time a change was made to the arrangement. ... In my opinion, if Parliament had favoured a dynamic reporting regime, it would have introduced a registration system that affords taxpayers the possibility of determining whether changes have been properly disclosed to the CRA by promoters.
See also the summary under s. 118.1 - "total charitable gifts."
Administrative Policy
23 April 1990 T.I. (September 1990 Access Letter, ¶1434)
The provisions of ss.237.1(4) and (6) only apply to tax shelters in respect of which a promoter has not been required by s. 237.1(2) to apply for a number.
88 C.R. - Q.64
If an identification number subsequently is obtained, RC will take the necessary corrective action within limits.
Subsection 237.1(7) - Information return
Administrative Policy
IC 89-4 "Tax Shelter Reporting"
Subsection 237.1(7.4) - Penalty
Cases
Canada v. O'Dwyer, 2013 DTC 5156 [at 6369], 2013 FCA 200
The Minister's Reply was found to be inadequate to support that the taxpayer had sold partnership units constituting an alleged tax shelter (see summary under s. 237.1(1)). The Minister also assessed the taxpayer for penalties under s. 237.1(7.4). The Minister's reply stated that:
The Appellant is liable for a penalty because he acted as principal or agent to sell, issue or accept consideration in respect of the SRLP tax shelter before the Minister issued a tax shelter identification number, pursuant to subsection 237.1(7.4) of the Act.
Webb JA found that it was unnecessary to consider this issue in light of the tax shelter findings, but nevertheless stated (at paras. 27, 31):
Every possible combination enumerated in subsection 237.1(7.4) of the Act is included. There is no clear indication of why the penalty was imposed. The above paragraph 18 would include the allegation that Thomas O'Dwyer, as principal, issued units in the limited partnership. However, only the limited partnership could, as principal, issue units in itself.
...
In setting out the basis upon which the penalty was assessed, the Minister should clearly identify the role that Thomas O'Dwyer is alleged to have played and not simply reiterate every possible permutation or combination that could satisfy the statutory conditions to impose the penalty. Any taxpayer who has been assessed a penalty should know why the penalty was assessed. Simply reiterating the multiple combinations of possibilities that could result in the imposition of the penalty does not tell a taxpayer what specific act (that would result in the imposition of the penalty) he or she is alleged to have committed.
See Also
Blier & Bernier v. The Queen, 2003 TCC 505, briefly aff'd 2004 DTC 6726, 2004 FCA 236
Before finding that the appellants, who clearly had promoted what was a tax shelter given that investor paid 32% of the amount invested and deducted the full amount invested as a business loss, had not exercised due diligence for the purposes of avoiding the penalty under s. 162(9) (which since had been repealed and replaced by s. 237.1(7.4)), Lamarre Proulx J. noted that "financial planners have an important role in economic life ... . They must personally ensure that the investments they propose are legal and must exercise the required diligence with respect to the substantial investments that they propose to their clients".