27 May 1998 Internal T.I. 9811150 - TAX SHELTERS

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: Intent of proposed section 18.1.

Position: To match reporting of expenses and revenue in certain tax shelter arrangements.

Reasons: As per Department of Finance News Release 96-082.

SPEAKING NOTES FOR RICK BISCARO FOR GOODMAN PHILLIPS & VINEBERG & CHARTERED ACCOUNTANTS OF ONTARIO ROUND TABLE, MAY 27, 1998

Query

Statutory changes - proposed section 18.1 of the Act (intent + a couple of examples)

Notes

• Finance had policy concerns that in a broad range of businesses, investors would undertake to pay expenditures that would otherwise be expenses payable by the “vendor”

(e.g., payroll, mutual fund selling commissions, film production services) in exchange for a right to receive future income, usually from the vendor’s operation. In these scenarios the investor would create current tax losses by paying the vendor’s operating expenses (which deductions the vendor usually did not need), in return for a right to receive a future revenue stream.

• Section 18.1 was introduced to stop this mismatching of reporting of expenses and revenue. Proposed section 18.1 is part of Bill C-28, as passed by the House of Commons on April 21, 1998.
• Generally, proposed section 18.1 of the Act restricts the investor’s ability to deduct the expenditures that would have otherwise been deductible by the vendor (i.e. the “matchable expenditures”) by prorating them over the economic life of the related right to receive future income (referred to in the legislation as a right to receive production). In this way investors cannot create losses in the early years of an investment that off-set income from other sources and which would otherwise be subject to tax.
• The phrase "right to receive production" is defined in proposed section 18.1 of the Act to mean a right under which a taxpayer is entitled, either immediately or in the future and either absolutely or contingently, to receive an amount all or any portion of which is computed by reference to use of property, production, revenue, profit, cash flow, commodity price, cost or value of property or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares where the amount is in respect of another taxpayer’s activity, property or business. However, it will not include an income interest in a trust, a Canadian resource property or a foreign resource property.
• Proposed section 18.1 of the Act does not apply to an expenditure for which a deduction is provided under section 20 of the Act.
• In addition, proposed subsection 18.1(15) of the Act provides an exception to the application of proposed section 18.1 of the Act. Matchable expenditures may be sheltered from the rules provided by section 18.1 of the Act if no portion of the investor’s expenditure can reasonably be considered to have been paid to another taxpayer to acquire the right from the other taxpayer and if, in addition, one of the following conditions is met:
  • the investor’s expenditure cannot reasonably be considered to relate to a tax shelter or a tax shelter investment (as defined in proposed subsection 143.2(1)) and none of the main purposes for making the expenditure is that the investor, or a person with whom the investor does not deal at arm’s length, obtain a tax benefit, or
  • before the end of the taxation year in which the expenditure is made, the total income inclusions of the investor from the right to receive production to which the matchable expenditure relates exceeds 80% of the expenditure.
  • An example where subsection 18.1(15) would apply to deny the application of the matchable expenditure rules is where a taxpayer manages another person’s property in return for a fee that is computed in whole or part with reference to the value of the property being managed. The manager did not pay to acquire the right to the stream of management fees and the manager incurs matchable expenditures in respect of the right to earn the management fees, but no portion of the expenditures relate to a tax shelter or a tax shelter investment and none of the main purposes for making the expenditure is that the manager, or a non-arm’s length party to the manager, obtain a tax benefit.

ROUND TABLE - PROPOSED SECTION 18 OF THE ACT
- File #981115
- Allan Nelson