7 December 1990 Income Tax Severed Letter - 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: Definition of Tax Shelter
Section 237.1 of theIncome Tax Act(the “Act”)

We are writing in reply to your letter of July 5, 1990 wherein you requested technical interpretations of section 237.1 of the Act.

In particular, you requested the following:

• 1) A tax shelter is defined by applying a test calculation encompassing “any particular taxation year ending within 4 years after the day on which the interest is acquired”. Based on the Interpretation Act which states that “after specified day” does not include that day, you have suggested that in a situation wherein a limited partnership interest is acquired on December 31, 1990 with a partnership year end of December 31, the 4 year measurement period commences January 1, 1991, the day after the December 31, 1991 acquisition date. Consequently, the taxation years ending within the 4 year period would be those ending December 31, 1991 through 1994. You have noted that under this interpretation, the initial allocation for the year ended December 31, 1990 would be excluded from the calculation to determine tax shelter status. You have asked for our comments on this situation.
• 2) You have asked for confirmation that for purposes of subparagraph (b)(i) of the tax shelter definition, that “cost” is considered to be the full acquisition price of the interest in the property in a similar manner to the definition of “capital cost” as outlined in IT-174R. You have also asked for confirmation that the definition of “cost amount” in subsection 248(1) is not applicable for these purposes.
• 3) You have asked for confirmation that any income amounts reported for taxation years within the four year period will not reduce the “loss” amount as calculated under subparagraph (a)(i) for purposes of the tax shelter definition calculation. You have noted that the lack of consideration of any gains appears to inappropriately expand the scope of the tax shelter definition to encompass some properties which may have net income over the defined period.

Our Comments

• 1) Subsection 27(4) of the Interpretation Act states that “where a time is expressed to begin after or to be from a specified day, the time does not include that day”. Subsection 27(5) of the Interpretation Act states that “where anything is to be done within a time after, from, of or before a specified day, the time does not include that day”. Based on these provisions, it is our opinion, that in a situation where an interest is purchased on December 31, 1990, “any particular taxation year ending within 4 years after the day on which the interest is acquired” refers to years ending within the 4 years from January 1, 1991 to January 1, 1995. Where the investment is a partnership interest with a December 31 year end, the particular taxation years are those ending December 31, 1991 through December 31, 1994. However, subparagraph (a)(i) of the definition includes “a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year.” In addition, the July, 1990 Draft Amendments to theIncome Tax Actincludes an amendment to subparagraph (a)(ii) of the English version of the Act so that it will include: “any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i)”. In the particular situation outlined above, it is our view that `any preceding taxation year' in respect of the interest in the property would include the taxation year ending December 31, 1990. Consequently, any loss or any other amount represented to be deductible for that taxation year would be included in the cumulative calculations at the end of the taxation years ended December 31, 1991 through December 31, 1994.
• 2) In our opinion, the term `cost' to a person of an interest in the property referred to in subparagraph (b)(i) in the definition of tax shelter is consistent with the definition of `capital cost of property' in paragraph 1 of Interpretation Bulletin IT-174R and generally means the full cost to the person of acquiring the property including legal, accounting, engineering or other fees directly incurred to acquire the property. An exception to using this laid-out cost would be where the Act deems the cost to be an amount other than actual cost. In our opinion, the definition of `cost amount' in subsection 248(1) is not applicable and, in particular, the cost to the investor of an interest in a partnership at the end of a particular year, is the cost according to generally accepted accounting principles (“GAAP”) rather than the adjusted cost base of the partnership interest.
• 3) In our opinion, gains are not to be used to reduce the losses included under subparagraph (a)(i) of the definition of tax shelter. However, in determining whether a property is a tax shelter for the purposes of section 237.1 of the Act, the calculation of deductible losses and other deductible amounts is to be made on a prospective basis based upon statements or representations made or proposed to be made in connection with that property. If it may reasonably be considered, having regard to the statements and representations made or proposed to be made in connection with the property, that a purchaser will be entitled to deduct losses or other amounts in excess of the cost of the interest in the property to the purchaser at the end of any particular year after the deduction of prescribed benefits, then the property is a tax shelter. If statements and representations to that effect are not made by the promoter, then the property is not a tax shelter.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance.