Section 143.2

Subsection 143.2(1) - Definitions

Limited-recourse amount

Administrative Policy

S7-F1-C1 - Split-receipting and Deemed Fair Market Value

Example re insurance policy

1.39 ... [T]he term limited-recourse amount is defined in subsection 143.2(1) as the unpaid principal amount of any indebtedness for which recourse is limited either immediately or in the future and either absolutely or contingently. For example, if a taxpayer enters into a contract of insurance whereby all or part of a debt will be paid upon the occurrence of either a certain or contingent event, the debt is a limited-recourse debt in respect of a gift if it is in any way related to the gift.

Tax Shelter Investment

Articles

Bacal, Jadd, Thivierge, "Raised the Curtain for Act II: Tax Shelter Reform and the New Film Tax Credit Regime", 1997 Canadian Tax Journal, Vol. 43, No. 6, p. 1965.

Ewens, "Tax Shelter Analysis", The Taxation of Corporate Reorganizations, 1996 Canadian Tax Journal, Vol. 44, No. 4, p. 1207 and Vol. 44, No. 5, p. 1486.

Subsection 143.2(2) - At-risk adjustment

Cases

Madell v. Canada, 2009 DTC 6043, 2009 FCA 193

The taxpayer, and a limited partnership of which he was a member, agreed to pay an advance royalty of $20,000 per designated territory for rights to distribute within the territory a customer loyalty card, with a $15,000 unpaid balance of the prepaid royalty being acknowledged by the taxpayer to be a limited recourse amount.

As part of the same arrangements, the taxpayer and the partnership entered into an agreement with another corporation ("Crusader") to market and distribute the card within the territories specified in the licences for $15,000 per licence territory for the purpose of ensuring that the Appellant and the partnership achieved minimal levels of performance. The fees that Crusader was to receive for its marketing efforts under the operating agreements were to be offset against the amount of performance bonds, so that if those fees had not been fully offset by the expiration of the operating agreement, the remaining amount of those performance bonds were required to be paid to the taxpayer and the partnership as damages.

The Tax Court Judge was correct in finding that the revenue guarantee provisions of the performance bonds constituted an at-risk adjustment in the amount of $15,000 per licence.

Subsection 143.2(6) - Amount of expenditure

Articles

Donald H. Watkins, "The Tax-Shelter Rules: An Update", 1998 Conference Report, c.5.

Bacal, Jadd, Thivierge, "Raised the Curtain for Act II: Tax Shelter Reform and the New Film Tax Credit Regime", 1997 Canadian Tax Journal, Vol. 43, No. 6, p. 1965.

Subsection 143.2(7) - Repayment of indebtedness

See Also

O'Dea v. The Queen, 2009 DTC 912, 2009 TCC 295

Promissory notes owing by the taxpayers, which were consideration for their acquisition of units of a limited partnership, provided that the interest thereon was to be paid by way of set-off against distributions otherwise payable by the partnership to the taxpayers. In fact, the partnership did not generate distributable cash and, particularly for the first taxation year in question, there was no evidence that interest was paid through the making of timely journal entries. Furthermore, in the case of short-term notes that were payable on demand, there was no evidence of arrangements for their repayment, nor had any copies of the notes been submitted into evidence (so that there was not evidence that the loan was in writing as required by s. 143.2(7)(a). Accordingly, the amounts represented by the notes were limited recourse amounts.

Tolhoek v. The Queen, 2007 DTC 247, 2006 TCC 681 (Informal Procedure)

A partnership ("ICON") of which the taxpayer became a limited partner purchased software from a subsidiary ("Trafalgar Capital") of the developer of the software in consideration for cash (as to 30% of the purchase price) and a promissory note (for the balance), with the taxpayer then assuming a portion of the promissory note as part consideration for his units in ICON. ICON licensed the program to a Bermuda limited partnership ("ICAP") of which Trafalgar Capital was the general partner. An agreement between ICON and Trafalgar Capital guaranteed an average annual revenue of no less than 12% on leveraged trading funds used by ICAP over the ten-year term of the promissory note and provided that in the event the software did not generate this return, ICON could replace the board of directors of Trafalgar Capital. Campbell J. found that there were no bona fide arrangements for repayment of the promissory note given that (i) an acceleration clause under the promissory note likely would never be triggered because of the ability to ICON to replace the board of directors of Trafalgar Capital, (ii) limited partners who resided outside Canada were not required to provide any security or collateral, (iii) there was no genuine risk of loss because the limited partners as debtors under the promissory note had the benefit of the revenue guarantee of Trafalgar Capital which they could invoke in the event that they were called upon to pay the note, and (iv) the nature of the legal arrangements was quite unclear, whereas a bona fide "arrangement should readily be seen to be binding upon the parties; it should be prima facie obvious" (p. 254).

Furthermore, an alleged implicit set-off arrangement did not establish that interest was paid on the promissory notes within the 60-day period stipulated by subsection 143.2(7) given that Trafalgar Capital (in its own capacity rather than as general partner) did not owe money to either ICON or to each partner, and there was a failure to produce documentation as required under s. 143.2(13).

Words and Phrases
bona fide necessary

Administrative Policy

3 February 2000 TI 990688

For purposes of determining whether indebtedness denominated in a foreign currency is deemed to have a limited recourse amount by s. 143.2(7), fluctuations in the Canadian-dollar equivalent of that indebtedness will be disregarded. However, once a foreign currency borrowing is determinant to have a limited recourse amount, s. 143.2(6) will be applied to the Canadian-dollar equivalent of the borrowing.

Paragraph 143.2(7)(a)

See Also

Cassan v. The Queen, 2017 TCC 174

loans were not bona fide in that not handled with commerciality

In December 2009, individual taxpayers participated in a tax shelter that involved making both a leveraged investment (the "LP Program") and leveraged donation. In the lP Program, they used money borrowed from a lender trust (FT) (the "Unit Loans") to purchase units in an Ontario LP, which used most of the proceeds to purchase notes of a BVI company (Leeward). The return on the notes was linked to whichever of a stock market index and a notional balanced portfolio performed the better, with Leeward then lending the funds back to FT via a second trust.

Respecting the leveraged donation, they borrowed money from FT (under the TGTFC Loans") at 7.85% p.a. – of which 3.75% of p.a. was required to be paid annually in cash (“cash-pay interest”) and with the balance was capitalized each year (“capitalized interest”). This borrowed cash was then contributed by them to a registered charity ("TGTFC") on condition that TGTFC invest most of such proceeds in a note of Leeward, that matured in 2028, and bore interest of 4.75%, of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing under the note to accrete by over 1/3 by 2028). These funds also were mostly circled back to FT. The ability of Leeward to be able to repay this note owing to the charity depended on the small portion of the funds received by it from the individuals (via the LP) under the investment component, that it invested in a fully-indexed note rather than on-lending back to FT via the second trust, appreciating at a rate of 10% p.a. over the close to 20 years until 2028.

After finding that their donation did not qualify as a “gift” under common law principles given that the interest rate of 7.85% that was charged to them by FT was less than a reasonable rate of interest, Owen J went on to find that bona fide arrangements had not been made for repayment of the loan from FT (which had a term of 9.3 years) as required by ss. 248(32)(b) and 143.2(7)(a). He stated (at para. 345):

[T]he phrase bona fide speaks to the fundamental character of the arrangements and requires that the arrangements reflect what one would reasonably expect arm’s length commercial relations to look like in the circumstances. …

After noting that the taxpayers had not disclosed their debts incurred from their previous participation in tax shelters, he stated (at paras. 352-4):

In my view, a borrower’s unilateral determination that a significant liability need not be disclosed on a loan application coupled with the failure of FT to insist on full disclosure is strong evidence of an absence of the sort of good faith and genuineness contemplated by paragraph 143.2(7).

I have already commented on the shortcomings of the ULAA Forms, the generalized information provided to FT by those forms, the failure of FT to require documentation to support the information provided on the forms and the failure of FT to perform thorough credit checks on all the Participants prior to closing and at the time of each additional advance. All of these factors point away from the arrangements regarding the Program Loans being bona fide arrangements… .

I also draw a negative inference … from ... no one from FT testif[ying] regarding the borrowing arrangements with the Participants.

In finding that the Unit Loans were not also limited-recourse debt reasonably "relating to" the gifts by the taxpayers to TGTFC, Own J stated (at para. 359):

It is true that the existence of the LP Program may indirectly support the TGTFC Program by ostensibly placing more assets in Leeward than would be the case if only the TGTFC Program existed and by allowing the LP Units to be given as security for the TGTFC Loans. However, in my view, that remote a connection is not sufficient for one to conclude that the Unit Loans can reasonably be considered to relate to the gifts made by the Appellants to TGTFC.

Words and Phrases
bona fide relate to
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts common law gift was vitiated by loan to donor at unreasonably low rate 746
Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(12) although borrowing by taxpayers had a term of 9.3 years, they had a reasonable expectation of refinancing with the promoter’s assistance 466
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d) no requirement to accrue interest on index-linked note in a year when the return thereon was not determinable 577
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest on loan to acquire LP units was deductible as there was a prospect of gross income being allocated by LP in 19 years’ time 583
Tax Topics - Statutory Interpretation - Realization Principle amount should not be recognized until ascertainable 67
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) gratuitous transfer is gift irresepctive of absence of benevolent intent 50

Subsection 143.2(615)

See Also

Tolhoek v. The Queen, 2007 DTC 247, 2006 TCC 681 (Informal Procedure)

The taxpayer unsuccessfully submitted that it was not "necessary" for the Minister to have reassessed beyond the normal limitation period on the basis that the necessary facts underlying the assessment were known to the Minister prior to the expiration of the normal reassessment period. This submitted interpretation of "necessary" was not consistent with a unified textual, contextual and purposive interpretation.

Subsection 143.2(12)

See Also

Cassan v. The Queen, 2017 TCC 174

although borrowing by taxpayers had a term of 9.3 years, they had a reasonable expectation of refinancing with the promoter’s assistance

In December 2009, individual taxpayers participated in a tax shelter that involved making both a leveraged investment and leveraged donation. In the investment component, they used money borrowed from a lender trust (FT) to purchase units in an Ontario LP, which used most of the proceeds to purchase notes of a BVI company (Leeward). The return on the notes was linked to whichever of a stock market index and a notional balanced portfolio performed the better, with Leeward then lending the funds back to FT via a second trust.

Respecting the leveraged donation, they borrowed money from FT at 7.85% p.a. – of which 3.75% of p.a. was required to be paid annually in cash (“cash-pay interest”) and with the balance was capitalized each year (“capitalized interest”). This borrowed cash was then contributed by them to a registered charity on condition that it invest most of such proceeds in a note of Leeward, that matured in 2028, and bore interest of 4.75%, of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing under the note to accrete by over 1/3 by 2028). These funds also were mostly circled back to FT. The ability of Leeward to be able to repay this note owing to the charity depended on the small portion of the funds received by it from the individuals (via the LP) under the investment component, that it invested in a fully-indexed note rather than on-lending back to FT via the second trust, appreciating at a rate of 10% p.a. over the close to 20 years until 2028.

After finding that their donation did not qualify as a “gift” under common law principles given that the interest rate of 7.85% that was charged to them by FT was less than a reasonable rate of interest, and that bona fide arrangements had not been made for repayment of the loan from FT (which had a term of 9.3 years) as required by ss. 248(32)(b) and 143.2(7)(a), Owen J went on to find that s. 143.2(12) resulted in the full amount of the loan from FT reducing the amount of their gift to nil under s. 248(32)(b) and s. 248(30)(a), stating (at para. 368):

[A] reasonable person would contemplate that when the Program Loans matured they would be replaced or refinanced with other similar loans and that EquiGenesis [the promoter] would take the lead in ensuring that this occurred. In fact, I cannot imagine an individual participating in the Program unless that individual fully expected the Program Loans to be replaced or refinanced in that manner. The refinancing of the loans associated with earlier similar programs offered by EquiGenesis certainly suggests that such an expectation would be reasonable and may even go so far as to suggest that this eventuality is “baked-in” to the fact that the Program has a 19-year term.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts common law gift was vitiated by loan to donor at unreasonably low rate 746
Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(7) - Paragraph 143.2(7)(a) loans were not bona fide in that not handled with commerciality 655
Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d) no requirement to accrue interest on index-linked note in a year when the return thereon was not determinable 577
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest on loan to acquire LP units was deductible as there was a prospect of gross income being allocated by LP in 19 years’ time 583
Tax Topics - Statutory Interpretation - Realization Principle amount should not be recognized until ascertainable 67
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) gratuitous transfer is gift irresepctive of absence of benevolent intent 50