6 November 1991 External T.I. 911990 F - Definition of "Tax Shelter"

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.

Dear Sirs:

Re:  Section 237.1 of the Income Tax Act

This is in reply to your letter dated July 12, 1991 requesting a technical interpretation of the definition of "tax shelter" found in section 237.1 of the Income Tax Act (the "Act").

In particular you questioned whether this provision would apply in the following scenario.

Several individuals or corporations decide to start a partnership venture that will have significant start-up costs.  It is expected that the losses from the partnership will exceed the cost of the partnership interest during the initial years of the venture.

Each partner will typically consult with an income tax advisor (accountant or lawyer) as to the deductibility to start-up costs.

Specifically you asked if the lawyer advising his client gave any positive assertion as to the deductibility of a cost, will he have "represented" certain amounts of be deductible, so that the investment would technically qualify as a "tax shelter"?

Our Comments

while we are unable to provide confirmation of the tax implications in respect of the particular situation outlined in your letter, we can offer the following general comments related to the definitions of "tax shelter" and "promoter" in subsection 237.1(1) of the Act.

Tax Shelter

In order to determine whether a partnership is to be considered a tax shelter, one must have regard to "statements or representations made or proposed to be made" concerning the deductibility of certain amounts. In general, the creation of a partnership consisting of a small number of members where the individuals organizing the partnership's creation are also the only partners in the partnership, there would not normally be statements or representations made to anyone other than the organizers. Before an interest in a partnership would be considered a tax shelter, there must be, inter alia, statements, representations or advertisements made or proposed to made promoting the income tax deductions available, in order to recruit investors. Consequently, where such statements have not been made or are not proposed to be made or if there is no promoter to find  additional investors for such a partnership, then the partnership would not be a tax shelter.

Promoter

In the 1988 Conference Report of the Canadian Tax Foundation in the Revenue Canada Round Table the Department indicated that:

    "A lawyer or accountant who advised the organizer of a tax shelter in respect of the sale, issuance, or acquisition of an interest in a tax shelter normally would be included in the definition of a promoter under subsection 237.1(1). The lawyer or accountant would also be included if the advising of investors amounted to the promotion of the tax shelter.

    Where the lawyer or accountant is merely giving advice to a client who proposes to invest in a tax shelter, the lawyer or accountant will not be affected by the reporting requirements of subsection 237.1(7). If the lawyer or accountant is promoting the shelter and thereby recruiting investors, however, it is appropriate that an information return be filed unless it is known that this has already been done by the vendor or the vendor's agent."

However, where a partnership interest does not meet the definition of a tax shelter, an accountant or lawyer who provides advice on the creation of such a partnership will not be considered a promoter.

The foregoing comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may lead to different conclusions.  This opinion is not a ruling and, in accordance with the guidelines set out in Information Circular70-6R2 dated September 28, 1990, it is not binding on the Department.

Yours truly,

G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch