24 August 1998 External T.I. 9819645 - TAX SHELTER, PARTNERSHIP INTEREST

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: time for determining tax shelter

Position: before investing, ie, prospective basis

Reasons: wording of definition and intent of law

XXXXXXXXXX 981964
Denise Dalphy

Attention: XXXXXXXXXX

August 24, 1998

Dear Sir/Madam:

Re: Definition of Tax Shelter in Subsection 237.1(1) of the Income Tax Act (the “Act”)

This is in reply to your letter dated July 22, 1998 on the above-noted issue. In particular, you have requested the Department’s interpretation of subsection 237.1(1) of the Act as it relates to an interest in a partnership.

It appears that the interpretations you seek may relate to a specific taxpayer. To the extent that your queries relate to completed transactions, it is appropriate that a determination be made by the relevant Tax Services Office. Where interpretations are sought on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following comments.

In general terms, subsection 237.1(1) of the Act provides that a property is a “tax shelter” if it is reasonable to consider, having regard to statements or representations made, that, if a person were to acquire that property, the losses or other deductible amounts would equal or exceed the amount by which the cost of the property exceeds “prescribed benefits”. Prescribed benefits are listed in subsection 231(6.1) of the draft Income Tax Regulations (the “draft Regulations’) and they include, inter alia, subsection 143.2(7) deemed limited recourse amounts, essentially long-term debt where reasonable interest is payable but not paid within the requisite timeframe. Subsection 231(6.1) of the draft Regulations also carves out certain 143.2(7) amounts from being prescribed benefits.

A determination as to whether or not an investment is a tax shelter is to be made on a prospective basis each time an investment is acquired. That is, the relevant time to ascertain whether or not an investment is a tax shelter is before a taxpayer acquires each property, not years after the investment was made, when, for example, due to unforeseen circumstances interest could not be paid on indebtedness of the type described in subsection 143.2(7) of the Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

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