23 June 1998 Internal T.I. 9811896 - LSVCC

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 Issues: allocation of LSVCC tax credit to identical shares. Is it earned on the first shares acquired or pro rata?

Position: pro rata,

Reasons: cannot identify particular shares that earned tax credit. Therefore apply a portion to each share. On redemption "clawback' will be on the same basis.

June 22, 1998

	Mel Mechado	Partnerships Section
	Audit Directorate	S. Tevlin
	Tax Incentive Audit Section

Attention: André Albert
981189

Attributes of Labour-Sponsored Venture Capital Corporation Shares

We are writing in response to your memorandum dated May 7, 1998 regarding the above noted subject matter. In particular you have requested our opinion with respect to (a) the timing of the “clawback’ of an individual’s labour sponsored funds tax credit as provided in section 211.8 of the Income Tax Act (the “Act”) and, (b) with respect to the application of the 3-year cooling-off period pursuant to subsections 127.4(3) and (4) of the Act.

Our understanding of the facts is as follows:

(a) A taxpayer purchases more than $3500 of LSVCC shares in a taxation year. The taxpayer is entitled to a tax credit on the $3500 but cannot, pursuant to subsections 127.4(5) and (6) of the Act, claim a tax credit on the amount exceeding the $3500. The investor wishes to redeem the shares in excess of $3500. You have asked whether the taxpayer can redeem all or part of the excess shares that did not earn tax credits without causing a clawback of the tax credit

(b) Assuming the same facts as in (a) the taxpayer also acquires additional LSVCC shares in the year that the original shares are redeemed. The issue is whether, if the LSVCC shares acquired in previous years are redeemed, will the taxpayer still be entitled to deduct a tax credit on a current year’s share acquisition pursuant to subsection 127.4(2) of the Act or will the subsection 127.4(3) of the Act (the“3 year cooling-off period”) apply to deny such a deduction.

It is your opinion that there should be no restrictions whatsoever with respect to the withdrawal of the investor’s capital that has not received a tax incentive.

It is the taxpayer’s opinion that the clawback should not apply until the last $3500 of shares are redeemed.

Our Comments

The LSVCC shares would in our opinion be identical properties. Unlike subsections 7(1.3) and 147(10.5) of the Act, Part XII.5 does not contain an ordering with respect to the disposition or acquisition of the LSVCC shares held by an investor.

It is our position that, for purposes of subsections 127.4(5) and (6), where a number of identical shares are acquired at the same time, it can reasonably be said that no one share is acquired before another share and as such the tax credit is generated from a fractional part of each share acquired. For example, where 100 shares are acquired for $35,000 a tax credit of 15% x $35,000 or $5250 is calculated. However, the tax credit limit is $525 or 15% of $3500 which represents 1\10 of the total investment ($3500\$35000). Therefore, the tax credit in respect of each share would be $5250 x 1\100 x 1\10 or $5.25 per share. Accordingly, a redemption of any share from that pool of identical properties would result in a clawback of the $5.25 tax credit attributed to that share. Using this approach there is no need to determine whether or not the tax credit related to the first $3500 of shares redeemed. This position results in the same tax credit per share as that calculated in a situation where a 100 shares are acquired for $3,500. There each share contributes fully to the tax credit since the total tax credit as calculated (15% x $3500) does not exceed the tax credit limit. Therefore each share would be allocated a tax credit of $525 x 1\100 or $5.25. When any share is redeemed the tax credit of $5.25 is subject to clawback.

We would be most interested in the Ontario Government’s reasons for their contrary view.

(a) Subsection 127.4(4) of the Act provides exceptions to the 3 year cooling-off period rule found in subsection 127.4(3) of the Act. Subsection 127.4(4) of the Act states that subsection 127.4(3) of the Act will not apply inter alia where the individual’s labour-sponsored funds tax credit in respect of the original acquisition of the share is nil or where tax becomes payable under Part XII.5 of the Act because of a redemption, acquisition or cancellation of a share.

Based on our position in (a) above, if the taxpayer redeems all of his shares there will be a clawback of the tax credit in respect of each share pursuant to subsection 211.8(1) of the Act. As a result of the clawback the taxpayer should be exempted from the 3 year cooling-off period ruled pursuant to paragraph 127.4(4)(c) of the Act with respect to the current years acquisition.

We trust our comments will be of assistance to you.

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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