2 November 1989 Internal T.I. 58197 F - Warehousing of Resource 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.

Subject: Warehousing of Resource Expenditures

Issue

Whether GAAR would apply to deny a resource company's renunciation of resource expenditures to Its flow-through share Investors In a scenario where the sole purpose of using a particular partnership arrangement was to facilitate the resource company's warehousing of the resource expenditures until it decided if flow-through share agreements would be entered into.

Background

Subparagraph 66.1(6)(a)(iv) of the Act includes in the definition of Canadian exploration expense ("CEE") the taxpayer's share of those expenses incurred by a partnership, if at the end of the fiscal period of the partnership, the taxpayer was a member thereof.

It has been our position that any amounts determined under the aforesaid subparagraph will be considered to have been incurred by the partner on the last day of the partnership's fiscal period. 

Based on the above analysis, and prior to the general anti-avoidance rule ("GAAR"), we have issued favourable rulings and opinions to the effect that "warehousing" arrangements as described hereunder would be acceptable for tax purposes.

These warehousing arrangements could take various forms, for example:

(i)       A limited partnership enters into flow-through share arrangements with resource companies.  Subsequently, investors purchase limited partnership units near the fiscal year-end of the partnership.  These members Invariably acquire their investments in the partnership after the resource expenses have been incurred and renounced by the resource companies, but in time to have their share of those expenses allocated to them from the partnership; or

(ii)      A principal-business corporation ("PBC") as that term is defined in paragraph 66(15)(h) of the Act, is a member of a partnership.  The partnership will allocate CEE to the PBC pursuant.to subparagraph 66.1(6)(a)(iv) at the end of partnership's fiscal period.

     The PBC enters into a flow-through share agreement with arm' s length investors after the partnership has incurred resource expenditures but prior to the partnership's fiscal year-end.  Partnership expenses allocated to the PBC at the partnership's year-end are subsequently renounced by the PBC to its flow-through share investors pursuant to subsection 66(12. 6) of the Act.  This would be so, notwithstanding that in order to have a valid renunciation under subsection 66(12.6) the resource expenditures must be incurred the flow-through share agreement has been entered into.

We have received a request for a technical opinion on the application of GAAR to the matter of warehousing as described in 24(1)

FACTS

(i)     

(ii)     24(1)

(iii)     

(iv)     

(v)     24(1)

(vi)      

Taxpayer's Representations

Included in the technical opinion request were the following representations.

24(1)

Audit's Comments

During informal discussions with M. Beaulieu, Chief of Tax Incentive Audit Section we were advised that the above issue has not yet come to their attention.

Finance's Comments

21(1)(b)

Recommendation

reasoning and conclusion that the application of GAAR would be appropriate in a scenario where the sole purpose, or for that matter the primary purpose, of the partnership in a series of transactions is

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