24 October 2001 Internal T.I. 2001-0098757 - MATCHABLE EXPENDITURES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether expenditures under a deferred sales charge plan are "matchable expenditures".

Position: possibly yes but excluded from section 18.1 application by 18.1(15)(a)

Reasons: 18.1(1) "matchable expenditure" definition and 18.1(15)(a)

								October 24, 2001

	XXXXXXXXXX  Tax Services Office		HEADQUARTERS
	Large Case File Audit				Shaun Harkin, CMA
	Section XXXXXXXXXX 

	Attention: XXXXXXXXXX
								2001-009875

Technical Interpretation Request: XXXXXXXXXX

This is in reply to your memorandum of August 22, 2001 and our telephone conversations (XXXXXXXXXX/Harkin) wherein you requested our opinion on whether XXXXXXXXXX expenditures for sales commission and other distribution costs (hereinafter collectively referred to as "Expenditures") under the deferred sales charge ("DSC") plan are "matchable expenditures" as defined in subsection 18.1(1) of the Income Tax Act (the "Act").

You have advised us that under the DSC plan, the customer does not pay any commission when units are originally purchased. XXXXXXXXXX pays the commission. If the units are redeemed within XXXXXXXXXX years after they were purchased, the customer must pay to XXXXXXXXXX a DSC of up to XXXXXXXXXX%. The DSC declines the longer the units are held, and disappears altogether after XXXXXXXXXX years.

You are of the opinion that XXXXXXXXXX DSC plan is a "right to receive production" under that definition in subsection 18.1(1) of the Act. You are also of the opinion that XXXXXXXXXX Expenditures under the DSC plan are matchable expenditures by reason of paragraph 18.1(1)(b) of the "matchable expenditure" definition of the Act.

Our Comments

We agree that the DSC plan would generally be included in the definition of "right to receive production" in subsection 18.1(1) of the Act since XXXXXXXXXX has a right under the DSC plan in which it is entitled, contingently, to an amount all of which is computed by reference to the cost of property, and the amount is in respect of another taxpayer's (the customer's) activity.

The definition of "matchable expenditure" in paragraph 118.1(1)(b) of the Act states:

""matchable expenditure" of a taxpayer means the amount of an expenditure that is made by the taxpayer to

(b) fulfil a covenant or obligation arising in circumstances in which it is reasonable to conclude that a relationship exists between the covenant or obligation and a right to receive production, ..."

Whether or not Expenditures, that XXXXXXXXXX is obligated to make, under the DSC plan are matchable expenditures by reason of paragraph 18.1(1)(b) of the "matchable expenditure" definition of the Act is a question of fact. XXXXXXXXXX derives its income from the management of the mutual fund assets and by providing administrative and customer services. XXXXXXXXXX does not earn its income by simply arranging for the issuance of mutual fund units or shares but rather they earn their income by providing investment, administrative and customer services. This indicates that it may be reasonable to conclude that a relationship exists between Expenditures under the DSC plan and income earned by providing investment, administrative and customer services as opposed to a relationship between Expenditures under the DSC plan and a "right to receive production" (i.e. the potential DSC revenue).

However, if Expenditures under the DSC plan are matchable expenditures by reason of paragraph 18.1(1)(b) or (c) of the "matchable expenditure" definition then, pursuant to subparagraph 18.1(15)(a)(i) of the Act, section 18.1 of the Act will not apply if the Expenditure cannot reasonably be considered to relate to a tax shelter (as defined in subsection 18.1(1) of the Act) or tax shelter investment (as defined in subsection 143.2(1) of the Act) and none of the main purposes for making the Expenditures is for XXXXXXXXXX to obtain a "tax benefit". Where Expenditures under the DSC plan are matchable expenditures by reason of paragraph 18.1(1)(a) of the "matchable expenditure" definition, the provisions of section 18.1 of the Act will apply.

Conclusion

It is our view that Expenditures under the DSC plan are not matchable expenditures by reason of paragraph 18.1(1)(a) of the "matchable expenditure" definition of the Act since in our opinion Expenditures under the DSC plan cannot reasonably be considered incurred to acquire a "right to receive production". Although Expenditures under the DSC plan may be matchable expenditures by reason of paragraph 18.1(1)(b) of the "matchable expenditure" definition of the Act, it would appear that Expenditures under the DSC plan cannot reasonably be considered to relate to a tax shelter and it would appear that none of the main purposes for XXXXXXXXXX making the Expenditures is to obtain a "tax benefit"; therefore, pursuant to subparagraph 18.1(15)(a)(i) of the Act, section 18.1 of the Act would not apply.

We trust the above comments are of assistance.

Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch