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: Would certain long term debt borrowed by a limited partnership be a prescribed benefit for the purposes of the tax shelter definition.
Position: Insufficient information to conclude. Depending on the facts, it is possible that it would cause an interest in the partnership to be a tax shelter.
Reasons: Our reading of the relevant legislation. Consistent with other positions previously taken.
XXXXXXXXXX
2008-030298
Allan Nelson, CMA
(613) 443-7253
January 7, 2009
Dear XXXXXXXXXX :
Subject: Tax Shelter and Prescribed Benefits
Technical Interpretation Request
This is in reply to your December 5, 2008 facsimile and your most recent email message dated December 31, 2008, requesting our views concerning the impact that certain indebtedness would have on the determination of whether an interest in a particular partnership would be a tax shelter as defined in subsection 237.1(1) of the Income Tax Act (the "Act"). We also acknowledge our numerous telephone conversations (XXXXXXXXXX /Adams/Jolie/Nelson).
In your December 31, 2008 email, you describe a proposal where a limited partnership would borrow funds from an arm's length party on a piecemeal basis over a number of years. When the debt became due, it would likely be refinanced multiple times, so that it would not be fully repaid for more than 10 years. You note that Regulation 231(6.1) provides that an amount that is a limited-recourse amount because of subsection 143.2(1), (7) or (13) of the Act would be a prescribed benefit. Subsections 143.2(1), (7) and (13) all refer to the "unpaid principal" of the relevant indebtedness. Pursuant to subsection 143.2(12) and paragraph 143.2(7)(a) of the Act, the unpaid principal of the indebtedness in your proposal would be deemed to be a limited-recourse amount. Consequently, you acknowledge that the unpaid amount of the indebtedness will also be a prescribed benefit, pursuant to subsection (6.1) of section 231 of the Regulations to the Act (referred to in this letter as "Regulation 231(6.1)").
You have asked us to confirm your view that the quantum of such indebtedness to be considered at the end of each year for purposes of the definition of "tax shelter" in subsection 237.1(1) of the Act would be limited to the unpaid balance expected to be outstanding at the end of that particular year.
Our Comments
As noted in paragraph 22 of Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than by way of an advance income tax ruling. However, we will provide you with the following general comments, which we hope will be of assistance.
Generally, an interest in a partnership would be a tax shelter, as defined in subsection 237.1(1) of the Act, if, inter alia, statements or representations have been made regarding tax losses expected to be allocated to a hypothetical purchaser, as a result of acquiring the partnership interest, where it can reasonably be considered that at the end of any taxation year that ends within four years after the day on which the purchaser acquires the property [that 4-year period being referred to in this letter as the "Calculation Period"],
(i) the total amount of the partnership losses represented to be deductible by the purchaser in the year or any preceding year, would equal or exceed
(ii) the amount, if any, by which the purchaser's cost of the partnership interest at the end of that year would exceed the total of all amounts each of which is the amount of any "prescribed benefit" that is expected to be received or enjoyed, directly or indirectly, in respect of that partnership interest by the purchaser or another person with whom the purchaser does not deal at arm's length.
In our view, the amount to be included as a prescribed benefit in the tax shelter definition in subparagraph 237.1(1)(b)(ii) of the Act is not limited to only those benefits expected to be received or enjoyed by the purchaser during the Calculation Period. When, as in the present case, it is reasonable to conclude that the partnership will have unpaid indebtedness that will be outstanding for more than 10 years (i.e., indebtedness that will be deemed to be a limited-recourse amount by virtue of the application of subsection 143.2(12) and paragraph 143.2(7)(a) of the Act, and a prescribed benefit for the purposes of Regulation 231(6.1)), such an amount would be included as a prescribed benefit in the Calculation Period when determining whether an interest in the partnership would be a tax shelter. This would be so even if that partnership debt would not be expected to be borrowed until after the Calculation Period.
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling.
We hope this clarifies our position on this matter.
Yours truly,
Gwen Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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