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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
PRINCIPAL ISSUE:
A franchisor represents that a franchisee will have a annual net income and an annual taxable income from that business. The representations made include a representation that the franchisee can expect to incur annual operating expenses exceeding the franchise fee and the franchisee's cost of establishing the franchise business. Would the amount of operating expenses be an amount described in subparagraph 237.1(1)(a)(i) or (ii) of the definition of "tax shelter" so that the franchise would be a "tax shelter"?
Position:
Yes.
Reasons:
The operating expenses are represented to be deductible and are in respect of the franchise. The amount deductible is the gross amount (without a reduction for the estimated revenue).
XXXXXXXXXX 5-970756
Attention: XXXXXXXXXX
July 4, 1997
Dear Sirs:
Re: Definition of a tax shelter
This is in reply to your letter dated March 13, 1997 wherein you requested a technical interpretation relating to the definition of "tax shelter" ("the definition") under subsection 237.1(1) of the Income Tax Act (the "Act") in the following circumstances. We apologize for the delay in responding to your request.
In the course of marketing its franchises, a franchisor provides information to prospective franchisees on the estimated cost of acquiring a franchise and establishing the franchise business. The franchisor also provides an estimate of revenue and expenses from the business. Although the franchisor estimates that a franchisee will have a annual net income and an annual taxable income from that business, the representations made include a representation that the franchisee can expect to incur annual operating expenses exceeding the franchise fee and the franchisee's cost of establishing the franchise business.
You have asked whether the amount of operating expenses would be an amount described in subparagraph 237.1(1)(a)(ii) of the definition so that the franchise would be a "tax shelter".
As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Subparagraph 237.1(1)(a)(ii) of the definition reads as follows:
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
The amount of operating expenses are represented to be deductible and is in respect of the franchise. In our view, the amount of operating expenses would be an amount described in subparagraph 237.1(1)(a)(ii) of the definition where subparagraph 237.1(1)(a)(i) of the definition is not applicable. Therefore, the franchise would be a tax shelter.
The amount of operating expenses would be an amount described in subparagraph 237.1(1)(a)(i) of the definition, as proposed in Bill C-69 in the form which received first reading by the House of Commons on December 2, 1996. The proposed amendment reads as follows:
(i) an amount, or a loss in the case of a partnership interest, represented to be deductible in computing income in respect of the interest in the property (including where the property is a right to income, an amount or loss in respect of that right that is represented to be deductible) and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse
Acting Section Chief
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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