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.
19(1) 5-8920
D. Turner
(613) 957-2094
February 26, 1990
Dear Sirs:
Re: Tax Shelter Reporting
We are writing in reply to your letter of October 17, 1989, concerning the new tax shelter reporting rules contained in section 237.1 of the Income Tax Act (the “Act”). In your letter you requested our comments related to the following questions:
1) In the definition of tax shelter in subsection 237.1(l) of the Act, a reference is made to “the cost to the person of the interest in a property at the end of a particular year”.
- a) Will the cost include all levels of financing such as mortgage financing, notes to developers, and funds borrowed from third party financial institutions, provided the financing has recourse to the individual?
- b) Will the costs include any debts assumed or incurred in connection with the acquisition of a real estate property whether through a direct title or limited partnership offering?
2) In the definition of tax shelter in subsection 237.1(l) of the Act, the cost to a person of any interest in a property at the end of a particular year is reduced by “aggregate of all amounts each of which is the amount of any “prescribed benefit” that is expected to be received or enjoyed directly or indirectly”.
- a) Would cash flow guarantees constitute a “prescribed benefit”.
- b) Would mortgage guarantees provided on an overall basis by a promoter constitute “prescribed benefits” if the mortgage guarantee given by the promoter is secondary given the fact that the liability for all guarantees ultimately rests with each individual investor?
3) The Act defines a tax shelter to include any property where it may reasonably be considered that within four years after the day in which an interest is acquired (the “Calculation Period”), the aggregate of the amounts deductible in computing the income of the individual exceeds the cost of an individual's interest in a property.
- a) Where an individual is required to fund operating cash shortfalls on a yearly basis will these additional contributions during the Calculation Period be included when calculating the cost of an individual's interest in a property?
4) In subparagraph 237.l(l)(b)(ii) of the Act, the cost of a specific investment is reduced by a prescribed benefit that can be expected to be received or enjoyed directly or indirectly in respect of the interest in the property, by the individual or a person with whom the individual does not deal at arm's length.
- a) Does a “prescribed benefit” only need be considered if the benefit is expected to be received or enjoyed by the individual investor during the Calculation Period?
- b) Will net present value calculations be used in computing the value of any “prescribed benefit” that may be realized sometime in the future?
Our Comments
Our comments related to “tax shelters” which are in the form of limited partnerships and those which involve the acquisition `of a direct title in an asset are as follows:
I) a) In our opinion, the “cost” to the investor of an interest in a limited partnership at the end of a particular year as described in subparagraph b(i) of the definition of “tax shelter” in subsection 237.1(l) of the Act, is the cost according to generally accepted accounting principles (“GAAP”) and will include any loans or other financing required by the investor in order to acquire his limited partnership interest, including any notes payable to the developer. Financing such as mortgage financing would not normally occur when purchasing a partnership interest as it is the partnership which would be the mortgagor.
- The “cost” to the investor of a property at the end of a particular year, where he has acquired direct title, is the cost according to GAAP and will include financing such as mortgage financing, notes to developers, and loans from financial institutions which may have been necessary in order to acquire the property.
- In both the acquisition of a limited partnership interest and the direct title to a property, the “cost” may however be reduced by the aggregate of all amounts each of which is the amount of any “prescribed benefit” described in subparagraph b(ii) of the definition of “tax shelter” in subsection 237.1(l) of the Act and depending on the facts of a particular situation financing may be considered to be a “prescribed benefit” as defined in subsection 231(6) of the Income Tax Regulations (the “Regulations”), (see answer 2 below).
b) In our opinion, the “cost” will include any debts assumed or incurred in connection with the acquisition of a real estate property if through direct title, however, where a limited partnership interest is acquired, the “cost” will include only those debts assumed or incurred in connection with the acquisition of the partnership interest itself and not any debts incurred by the partnership to acquire partnership property. As stated in paragraph a) the “cost” may be reduced by any “prescribed benefit” as described in subparagraph b(ii) of the definition of “tax shelter” in subsection 237.1(l) of the Act.
- 2) a) It is a question of fact whether a particular cash flow guarantee is a “prescribed benefit”. However, clause 23l(6)(b)(ii) of the Regulations states that a “prescribed benefit” includes a revenue guarantee to the extent that the revenue guarantee may reasonably `be considered to ensure that the investor will receive a return of all or a portion of the investor's outlays in respect of the tax shelter. Where the liability for repaying all guarantees rests with the investor and the guarantees are structured as loan arrangements, it is still a question of fact whether the arrangements will result in the investment receiving a return of a portion of his outlays in respect of the tax shelter. In addition, any agreements which limit the repayment of the cash flow guarantees by the investor could result in a “prescribed benefit” occurring. In the sample offering attached to your letter, the cash flow guarantee does not appear to result in a “prescribed benefit” as although the requirement to repay the guarantee is restricted, it does not appear to result in a return of any of the investor's outlays in respect of the tax shelter.
b) A guarantee of a mortgage under which the investor is the primary debtor would be likely to occur only in situations where the investor has acquired direct title to a property. Where a mortgage is granted in order to finance such an acquisition, the granting of the mortgage itself will not normally result in a “prescribed benefit”. It is a question of fact whether a mortgage guarantee will be considered to be a “prescribed benefit”. Subsection 231(6) of the Regulations indicates that where a guarantee exists and it may reasonably be expected that the amount covered by the guarantee would have the effect of reducing the impact of any loss that the investor may sustain, the guarantee will be considered to be a “prescribed benefit”. Where the investor is ultimately liable to repay a guarantor for any funds outlayed, it is our opinion that the guarantee does not reduce the impact of any loss which the investor may sustain and therefore would not generally be considered to be a “prescribed benefit”.
- 3) a) Where an individual investor in a limited Partnership is required to contribute additional funds subsequent to his initial investment, the additional funds will be included when calculating the cost of his interest in a property provided they are actually paid during the Calculation Period. Where an investor has purchased a direct interest in a property, any additional funds required subsequent to his initial investment will not be included in calculating the cost of his interest in the property unless they relate to the addition of capital assets to the property.
- 4) a) In our opinion, the reference to “prescribed benefits” contained in subparagraph b(ii) of the definition of “tax shelter” in section 237.1 of the Act does not contain any provision which would limit the calculation to only those benefits expected to be received or enjoyed by the investor in the initial four year period.
- b) In our opinion, neither section 237.1 of the Act nor section 231 of the Regulations contain any provision which would allow the use of net present value calculations when computing the value of a “prescribed benefit” that may be realized sometime in the future.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
We trust these comments will be of assistance.
for Director
Business and `General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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