Prescribed property and prescribed benefits in relation to a tax shelter

Prescribed property

There are two types of properties excluded from the definition of a tax shelter. They are flow-through shares and prescribed property.

Prescribed property in relation to a tax shelter is defined in the Income Tax Regulations section 3101 and includes property that is:

• a registered pension plan
• a registered retirement savings plan
• a deferred profit-sharing plan
• a registered retirement income fund
• a registered education savings plan
• shares of:
  • prescribed venture capital corporations
  • prescribed labour-sponsored venture capital corporations
  • taxable Canadian corporations held in a prescribed stock savings plan

An investment in property is considered to be a tax shelter where it is reasonable to consider, based on statements or representations made or proposed to be made, that the buyer or donor will have losses, deductions, or credits within the first four years of buying an investment in the property.

Statements or representations include those made by a promoter or person associated with the promoter or their agent.

Further, it has to be reasonable to consider that the losses, deduction, or credits would be equal to or greater than the Net cost of the original investment or of the property acquired under the gifting arrangement.

Prescribed benefits

Prescribed benefits in respect of an interest in a tax shelter are defined in the Income Tax Regulations subsections 3100(1), 3100(2) and 3100(3), and include:

• tax credits
• revenue guarantees
• contingent liabilities
• limited-recourse amounts
• rights of exchange or conversion

Representations made in connection with the property

The definition of what constitutes a tax shelter depends entirely on the reasonable inferences that the CRA can draw from representations made in connection with the property Representations include:

• written representations such as those contained in sales brochures or advertisements
• verbal representations such as those made in public or private information, or sales meetings

Gifting arrangements

Generally, a gifting arrangement is any arrangement under which it may reasonably be considered, based on statements or representations made or proposed to be made in connection with the arrangement, which a person entering into the arrangement would:

1. make a gift to a qualified donee, or make a political contribution, of property acquired by the person under the arrangement
2. incur a limited-recourse debt that can reasonably be considered to relate to a gift to a qualified donee or a political contribution

A political contribution refers to a monetary contribution to a registered party, a registered association, or a candidate as defined in the Canada Elections Act.

Learn more: Limited-recourse amounts in respect of a tax shelter

The tax shelter rules for gifting arrangements generally apply to gifts, monetary contributions, and representations made and property acquired under the gifting arrangement after February 18, 2003.

As part of the overall gifting arrangement, documents such as purchase agreements, transfer agent agreements, deeds of gift, and other documents may be used at some future date. The promoter has to provide unsigned copies of such documents with their application to get a tax shelter identification number.

Appraisals for donations of gifts in kind

Generally, appraisals are central to the success of gifting arrangements, and may be produced after the tax shelter identification number has been issued.

The Canada Revenue Agency (CRA) requires that appraisals of gifts in kind be produced as they become available after the CRA have issued the tax shelter identification number. The promoter has to include these reports when they file Form T5003SUM, Tax Shelter Information Return, in the following year. If the number of appraisal reports is substantial (more than 10), the CRA will accept a listing of the appraisers along with one completed and representative report from each appraiser. The list has to be prepared in the format provided on Form T5001, Application for Tax Shelter Identification Number and Undertaking to Keep Books and Records.

The appraiser should be at arm's length from the donor or the institution receiving the donation. A fair market value (FMV) evaluation should be obtained from a dealer or appraiser who is active in the marketplace for the object donated.