Section 237.1

The taxpayer acquired a 50% interest in software after being provided with a valuation report (prepared by a Toronto firm and provided to it by the vendor - IAC) that indicated that the software was Class 12 property and qualified as being available for use. Visser J found that this was sufficiently tantamount to representing that the cost of the software could be written off over two years and that there thus was an unregistered tax shelter, resulting in the CCA claims being denied under s. 237.1(6). He also rejected a submission that “the tax shelter rules are intended to apply only to publicly marketed tax shelters and not to private transactions between two parties” (para. 32).

Visser J further stated (at para. 31):

By providing copies of the Valuation Report to Mr. Krumm, IAC and its agents could each be considered to be a tax shelter “promoter”, as defined in subsection 237.1(1) … .

What had been found by the Court of Quebec to be a tax shelter entailed the sale by a corporation (“Prospector”) to investors, including the appellants, of rights to use software licences (treated as Class 12 property) for $190,000, and a franchise right for the non-exclusive right to distribute the software licences in specified territories (treated as eligible capital property), for $10,000. The consideration paid included a promissory note for $190,000 with a five-year term and bearing interest at 7.5%.

The Court confirmed two findings below relevant to the “mathematical test” in the “tax shelter” definition being satisfied:

• The taxpayers had acquired two properties (the franchise right and the software rights) rather than one composite property, so that the mathematical test could be applied to the software rights separately.
• In light of the approach taken to “cost” in Coast Capital Savings and Stirling, the “cost” of the tax shelter (against which the intimated deductions including CCA and interest expense were to be compared) should not be increased by the amount of interest covenanted to be paid under the promissory note.

A tax shelter, for the initial (2003/2004) years assessed by the ARQ, entailed the sale by a corporation (“Prospector”) to over 200 investors of software licences. Following an adverse determination by the ARQ for those years, the design of the tax shelter was changed, and for the subsequent years (2005-2010) investors were sold franchises for the non-exclusive right to distribute the software licences in specified territories. After further pressure from the ARQ, the notes issued by investors for the franchises were full recourse rather than limited recourse notes. Drouin had reversed a CRA reassessment of some investors’ 2008 taxation years made on the basis that no business was carried on. Prospector obtained a tax shelter registration number for the 2005 and 2006 years, but not the other years.

After finding that the software licences acquired in 2003 and 2004 clearly were tax shelters (as defined in the Quebec equivalent of s. 237.1) given the description in the marketing materials of the (Class 12) deductibility of the licence costs and their financing with limited recourse debt representing prescribed benefits (so that the failure to obtain a tax shelter number resulted in a denial of the claimed deductions), Fournier JCQ turned to the franchises purchased in 2005 and 2006 (comprising, for each purchase, software purchased for $150,000 and a membership right for $10,000) and financed with notes bearing interest at 9.38% under which recourse was limited to revenues generated from the franchises, and found that these constituted tax shelters for essentially the same reasons, and that they also were tax shelter investments, and that the licences were computer tax shelter properties, as defined under the Quebec equivalents of ITA s. 143.2(1) and Reg. 1100(20.2). Accordingly, their CCA claims were denied on that basis notwithstanding the tax shelter registrations (the revenues generated were nil). Furthermore, two of the taxpayers had not filed the prescribed forms reporting the tax shelter numbers.

For the 2007 and subsequent taxation years, the taxpayers argued that they satisfied the numerical tests for those years because the cost of their acquisition of the property (being a single franchise property for these purposes comprised of the software licence and the membership right) included all the interest they had covenanted to pay. After referring to the definitions of “cost” in Coast Capital Savings and Stirling, and in rejecting this argument, Fournier JCQ stated (at para. 547, TaxInterpretations translation):

The term "cost" must therefore be assimilated to the price that the taxpayer agreed to pay to acquire the property, excluding other expenses incurred in respect of the property, including interest payable on money borrowed by the taxpayer to acquire the property.

In also rejecting the single property argument, Fournier JCQ stated (at paras 551-552):

[T]he assets acquired under the … franchise agreement must be considered separately for tax shelter determination purposes because they have different tax characteristics. The software suite is a Class 12 property while the membership right is an eligible capital property with different rates of depreciation.

… The definition of tax shelter contained in TA section 1079.1 … militates in favour of an individual analysis of the property in question in order to determine whether or not it qualifies as a tax shelter.

Accordingly, the Class 12 CCA claims for those years respecting the cost of the software were also denied, whereas the eligible capital amounts claimed for the membership right were deductible.

The promotional materials of Strategic Gifting Group (“SGG”) contemplated that participants would make a cash donation to a participating charity, and receive a donation of shares from a non-resident philanthropist (later discovered to be fictitious) and also donate those shares (which the evidence indicated were worthless but which were treated by SGG as having a value of up to 12 times that of the cash donation) to the charity.

In finding that the arrangement was a tax shelter (which had not been registered) so that (in addition to other grounds for denying the taxpayers’ charitable credits, they were denied under s. 237.1(6), Favreau J stated (para. 63):

The promotional materials of SGG set out that participants make donations to a charity, acquire shares from a non-resident philanthropist and give the shares to the charity. By doing so, the participants could claim deductions in their income tax returns of four to twelve times the amount of their cash donation and obtain inflated tax credits. Clearly, the gifting arrangement offered by SGG qualified as a tax shelter... .

The taxpayers entered an arrangement with a corporation ("Blue Hill") in order to deduct Canadian resource expenditures from income:

• the taxpayers paid $2 for an option to acquire an interest in mineral claims owned by Blue Hill;
• in exercising the options, the taxpayers agreed to engage Blue Hill to incur CRE on their behalf in consideration for promissory notes

Lyons J found (at para. 42) that the taxpayers were not required by Blue Hill to pay the promissory notes. The taxpayers also made an out-of-pocket payment, not referred to in the agreements, for 25% of the face value of the notes.

Although the taxpayers apparently argued that the property actually acquired by the taxpayers (the option agreement) would not give rise to any deductions, Lyons J agreed with the Minister that the interests in the mineral claims were the tax shelter. Blue Hill's principal had specifically promoted the interests on the basis that they would lead to an income deduction of four times the purchasers' outlays (which was the purchasers' only cost as the promissory notes were a prescribed benefit under Reg. 231(6) (now Reg. 31001).). As Blue Hill had been assessed penalties under s. 237.1(7.4) which were not paid, the Minister was correct to deny the taxpayers' deductions under s. 237.1(6.1).

See summary under Reg. 3100(1).

The taxpayer's purchases of tree seedlings that were being planted at a Costa Rican tree plantaition constituted a tax shelter on the basis of statements made to the taxpayer in a family setting by his brother-in-law (who also was the key individual involved in promoting investments by potenital investors in the plantation trees) that the taxpayer "would be able to deduct the money invested, as it constituted a current business expense." Hogan J. stated (at para. 15):

Following the guidance of Baxter, it suffices that Mr. Maheux discussed with the appellant the investment opportunity and that he presented to the appellant the amount of possible deductions for the definition of tax shelter to apply.

Interests in partnerships were tax shelters given that the investors expected an immediate deduction of 100% of their investment and only contributed 32% of this amount.

In finding that the taxpayer's investment in a partnership was a tax shelter notwithstanding that she did not receive any representations as to the tax consequences of her investment, Rip J. stated at p. 3200) that "a 'representation' need not be an explicit written or verbal assertion but can also include a mental or intellectual element" and that this was "further reinforced by the definition of 'proposed' or 'proposal', which seems to include one's own personal intentions".