20 November 1989 Ruling 58623 F - Tax Shelter - Meaning of Prescribed Benefit

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.

November 20, 1989

Dear Sirs:

Re:  Prescribed Benefit for the Purposes of Subsection 237.1(1) of the Income Tax Act (the "Act")

This is in reply to your letter of August 31, 1989, concerning the interpretation of a prescribed benefit as set out in subparagraph 231(6)(a)(iii) of the Draft Income Tax Regulations issued June 8, 1989 (the "Draft Regulations").  You have asked us to consider the hypothetical example given.

In your hypothetical example an individual taxpayer enters into an agreement to purchase a condominium apartment form a developer with whom he deals at arm's length.  The condominium is part of a syndicate of interests to a group of investors and, as part of the acquisition, the investor agrees to purchase certain services from the developer, including leasing services, a rental revenue guarantee, and a cash flow loan.  In addition, the developer arranges a financing facility for the investor with an arm's length institutional lender, under which the lender agrees to finance a portion of the acquisition price for the unit.  The lender is a chartered bank or trust company.  The facility provided is a first mortgage loan against the condominium, collaterally secured by an assignment of rental income.  The loan has normal commercial terms (a three year term, repayments based on a twenty-five year amortization, for example) and is not guaranteed by the developer, or any other party.  The loan is fully recourse against the purchaser, so that the purchaser is liable to the mortgagee for the amount of any loss the mortgagee might suffer on a foreclosure and sale.

You wish us to confirm that such a loan will not constitute a prescribed benefit under subparagraph 231(6)(a)(iii) of the Draft Regulations.

Our Comments

We are unable to confirm the income tax consequences of a hypothetical situation, however, we can provide the following general comments.

A prescribed benefit would occur where any amount that may reasonably be expected, having regard to statements or representations made in respect of the tax shelter, to be received or enjoyed by a purchaser, has the effect of reducing the impact of any loss that the purchaser may sustain by virtue of acquiring, holding or disposing of his interest in the tax shelter.  This would be the case where the rights of some other person against the purchaser in respect of the collection of all or part of the purchase price are limited to a maximum amount which is less than the amount owed to that person, including related charges and accrued interest.

In our opinion, where a loan from an arm's length financial institution has normal commercial terms and is not guaranteed by the developer or by any other party, and the lender has full recourse against the purchaser, the loan will not constitute a prescribed benefit under subparagraph 231(6)(a)(iii) of the Draft Regulations.

The foregoing is an expression of opinion only and,as such is not binding on the Department.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings Directorate Legislative and IntergovernmentalAffairs Branch