30 July 2004 Internal T.I. 2004-0072531I7 - Tax shelters - penalties

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.

Principal Issues: Whether the balance of a loan outstanding, or a partial repayment, constitutes "consideration" receivable/received for purposes of 237.1(7.4)

Position: No.

Reasons: These amounts are inherent elements of a loan, not amounts given in payment for some other thing.

July 30, 2004

	XXXXXXXXXX  TAX SERVICES OFFICE	HEADQUARTERS
	Tax Avoidance	B.G. Dodd
(613) 957-8954
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			2004-007253

Subsection 237.1(7.4) of the Income Tax Act (the "Act")

We are writing in reply to your email request of April 19, 2004 concerning the meaning of the word "consideration" as it applies in subsection 237.1(7.4) of the Act.

Your email refers to a film tax shelter arrangement whereby a studio, who is the tax shelter promoter, loaned funds to a production partnership, to produce a pre-November 1997 film. You advise that the partnership repaid a portion of the loan, and there remains an outstanding loan balance. You further advise that the outstanding loan balance will not be repaid to the studio given that repayment is based on receipt, by the partnership, of certain fees, which will not, in fact, be received by the partnership.

You have asked whether, in such circumstances, the outstanding loan balance or the partial payment on the loan, can be considered to be "consideration" receivable or received, as the case may be, by the studio in respect of the tax shelter under subsection 237.1(7.4) of the Act.

Our Comments

Please note that our comments are based on the brief description of the facts as outlined in your e-mail and summarized above.

Subsection 237.1(4) of the Act prohibits a person from selling, issuing or "accept[ing] consideration in respect of, a tax shelter" before the Minister has issued an identification number. To help enforce the prohibition in subsection 237.1(4), subsection 237.1(7.4) of the Act imposes a penalty upon a person who (whether as principal or agent) sells, issues or accepts consideration in respect of a tax shelter before its identification number has been issued by the Minister. The penalty is equal to the greater of $500 and 25% of the total amounts each of which is "the consideration received or receivable from a person in respect of the tax shelter".

We presume that the tax shelter in this case is not the film itself but rather, property that is an interest in the production partnership. In this regard, it is our understanding that under such arrangements, the studio is typically the owner of the film and that the investors (i.e., the partners) do not acquire an interest in the film. If this is the case here, for subsection 237.1(7.4) of the Act to apply, the consideration (if any) would have to relate to the interest(s) in the production partnership.

Consideration

Black's Law Dictionary defines consideration, in part, as follows.

"The inducement to a contract. The cause, motive, price or impelling influence which induces a contracting party to enter into a contract. Some right, interest or benefit accruing to one party or some responsibility given or undertaken by the other."

"Consideration" is defined in Jowitt's Dictionary of English Law (2nd ed.) in part as follows:

"The consideration in a contract, conveyance, or other legal transaction is an act or promise by which some right, interest, profit, or benefit accrues to one party, or by which some forbearance, detriment, loss, or responsibility is given, suffered, or undertaken by the other, and in return for which the party who receives the benefit, or for whom the detriment is suffered, promises or conveys something to the other (Currie v Misa (1875) L.R. 10 Ex. 162). Thus, in a contract of sale, the money paid or agreed to be paid by the purchaser is the consideration to the vendor, and the property sold is the consideration to the purchaser."

The Tax Court of Canada stated in Ruffolo et al v. The Queen, 99 DTC 184

[7] ... The word "consideration" in subparagraph 160(1)(e)(i) is to be given its ordinary meaning, namely, something given in payment ...

In The Queen v. Toronto Refiners and Smelters Ltd., 2002 FCA 476, the Federal Court of Appeal stated

[10] "Consideration" is a legal term that may have different meanings in different contexts. In the context of section 14 it must be understood as the thing that the recipient of a payment gives in exchange for the payment. This is explained in the leading case on section 14, The Queen v. Goodwin Johnston (1960) Ltd., [1986] 1 C.T.C. 448, 86 D.T.C. 6185 (F.C.A.). The Court was required in that case to determine what consideration was given by the recipient of a payment made to settle the recipient's claim for damages for breach of contract. According to Justice Urie, writing for the majority, the consideration was "agreeing to settle the action for damages for breach of contract ... and, as a result, forgoing the benefits under that contract had it continued in existence".

Based on the definitions and jurisprudence cited above, it may generally be said that "consideration" is something that is bargained for and agreed to in exchange for something else. Whether or not something constitutes consideration is a question of fact, to be determined on the basis of whether the item in question is given in payment for some other thing. In our view, it would be difficult to argue, on the basis of the facts as set out in your email, that either the outstanding balance of the loan or the repaid portion of the loan, is something to be given, or that has been given, as the case may be, to the studio as payment for some other thing.

Studio loan

We assume that we are, in fact, dealing with a loan and that there is a lender-borrower relationship between the studio and the partnership. Generally, one essential element of a loan is that it shall be repaid. This requirement is reflected in the definition of "loan" in Black's Law Dictionary which is cited with approval in a number of cases. For example, the 1979 edition is cited in A.C. Simmonds & Sons Limited, 89 DTC 707 (TCC) as follows:

Delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest.

The outstanding balance of a loan, at a particular time, or a repayment thereof, are, in our view, inherent features of a loan transaction. As such, it is difficult to view a loan amount which is repayable, or which has been repaid, as being an amount which is to be given, or which has been given, to the lender in payment for some other thing. It is thus our opinion that these loan elements would not constitute consideration.

We would generally think that consideration received/receivable by a lender in the context of a loan would involve something beyond the obligation to repay the loan. Interest on a loan, for example, or a fee for arranging a loan might possibly be viewed as consideration but unless there are facts which would allow it to be argued otherwise, such consideration would be in respect of the loan rather than in respect of the tax shelter and therefore subsection 237.1(7.4) of the Act would not apply.

The fact that the loan might never be repaid in full because repayment (after the initial payment) is tied to the earning of fees that are not expected to materialize might be indicative of some benefit or advantage. This could conceivably be in the nature of consideration. (This might be so particularly if it were understood from the outset by the parties involved in a tax shelter arrangement that the fees would never be earned and the loan would never have to be repaid in full.). If so, however, this would appear to be something provided by the studio (to the partnership), rather than something received by the studio and, therefore, subsection 237.1(7.4) of the Act would not apply.

Finally, we are uncertain when the relevant transactions occurred, beyond the fact that a pre-November 1997 film was involved. However, please note that prior to the legislative amendments that were effective after December 1, 1994, the language of the relevant provisions was somewhat different. Previously, subsection 237.1(4) of the Act provided that no person shall "... accept a contribution towards the acquisition of, an interest in a tax shelter before ..." and the penalty for contravening that provision was contained in subsection 162(9). Paragraph 162(9)(b) of the Act referred, in part, to a person who "accepts a contribution for the acquisition of an interest in a tax shelter". In our view, neither the loan outstanding nor the loan repayment would appear to be a contribution for the acquisition of an interest in the tax shelter and therefore, these former provisions would not have applied in your circumstances. The present wording in subsections 237.1(4) and (7.4) of the Act (applicable after December 1, 1994), while perhaps somewhat broader in scope, in that the provisions refer to consideration in respect of a tax shelter, as discussed above, we do not think the provisions can apply to the facts in this scenario as we understand them.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you from Mrs. Jackie Page at (819) 994-2898, who will send the severed copy to you for delivery to the client.

We hope this will be of assistance.

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch