Seica – Quebec Court of Appeal applies the tax shelter definition on a property-by-property basis, and excludes interest from cost
Each taxpayer acquired rights to use software licences (treated as Class 12 property) for $190,000, and a franchise right for the non-exclusive right to distribute the software licences in specified territories (treated as eligible capital property), for $10,000. The consideration paid included a promissory note for $190,000 with a five-year term and bearing interest at 7.5%.
The Court confirmed two findings below relevant to the “mathematical test” in the “tax shelter” definition being satisfied:
- The taxpayers had acquired two properties (the franchise right and the software rights) rather than one composite property, so that the mathematical test could be applied to the software rights separately.
- The “cost” of the mooted tax shelter (against which the intimated deductions including CCA and interest expense were to be compared) should not be increased by the amount of interest covenanted to be paid under the promissory note (citing Coast Capital Savings and Stirling).