Regulation 231

Subsection 231(6)

See Also

Paletta v. The Queen, 2019 TCC 205

expectation of repurchase option being exercised generated a prescribed benefit

A taxpayer used U.S.$82M that had largely been indirectly financed by Twentieth Century Fox to fund, as partner, prints and advertising expenses (“P&A expenses”) respecting a film that Fox allegedly had sold to the partnership for US$128.3M, but with Fox having an alleged option to repurchase the film. The second related taxpayer, engaged in a quite similar transaction.

In denying the claimed losses, Hogan J found (at paras. 244-245) “that the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release,” so that “the P&A expenses allegedly borne by the partnerships were not incurred for the purpose of earning income.”

Hogan went on to find, in the alternative, that even if his finding on sham was wrong (i.e., the “options” were something less than binding purchase obligations of Fox), s. 231.7(6) of the tax shelter rules precluded the deduction of the losses given inter alia that no tax shelter registration had been made, the P&A expenses had been represented to be deductible and the taxpayers’ expectation of the exercise of those options gave rise to a prescribed benefit under Reg. 231(6).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham film marketing partnership loss denied on the basis that an alleged option was a sham 415
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose expenses non-deductible because partnership expected to be repurchased before any income generated 127
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate rental revenues were incidental to secondary intention save for land with 25-year hold 310

Maya Inc. c. La Reine, 2004 DTC 2001, 2003 TCC 502

In disclosure documents the taxpayer, which was a non-resident company that was promoting a proposed plantation in Costa Rica, specified that 99% of the amount invested in the project would give rise to deductions from income during the first two years and that, after eight years, the investors would have the right to require the taxpayer to buy-back their investment for an amount approximating 70% of most costs incurred on behalf of the investors, with a deposit being provided to secure that buy-back right.

Dussault J. found that the buy-back right represented an amount that "may reasonably be expected, having regard to statements and representations made in respect of the interest, to be received or enjoyed by a person (... 'the purchaser') ... which receipt or enjoyment would have the effect of reducing the impact of any loss that the purchaser may sustain in respect of the interest" and found that the buy-back right could also be concluded to be more specifically referred to in Regulation 231(6)(c). Accordingly, the taxpayer was subject to the 25% penalty in s. 237.1(7.4) of the Act for failure to register the property.

Administrative Policy

17 May 1990 T.I. (October 1990 Access Letter, ¶1485)

The representations referred to include verbal suggestions.

If a limited partner is not required to repay the advances received by him (on the basis of gross revenue) or there is limited recourse against him, the amount owed by him will constitute a prescribed benefit.

8 May 1990 T.I. (October 1990 Access Letter, ¶1486)

Where the promoter of a hotel limited partnership would attempt to place some mortgage on the hotel after the third year of operations, with the result that the limited partnership would receive the proceeds of financing and distribute the funds to the limited partners, this "liquidity feature" would constitute a prescribed benefit. In addition, if the promoter represented that it would make a public share offering of its shares and limited partners would obtain shares in the promoter in exchange for their investment in the limited partnership based on the original cost, this also would constitute a prescribed benefit.

27 March 1990 T.I. (August 1990 Access Letter, ¶1390)

Where under a revenue guarantee the limited partner will receive a specified amount of annual gross revenues in excess of the annual gross revenues reasonably expected to be earned by the partnership and the guaranteed gross revenue net of reasonably expected expenses will be distributed to the limited partners, then the excess of the guaranteed gross revenues over the expected expenses will be a prescribed benefit.

26 February 1990 T.I. (July 1990 Access Letter, ¶1343)

Where the liability for repaying all cash guarantees rests with the investor and the guarantees are structured as loan arrangements, it is still a question of fact whether the arrangements will result in the investor receiving a return of a portion of his outlays. Where an investor is ultimately fully liable to repay a mortgage guarantor for any funds laid out, the mortgage guarantee does not reduce the impact of any loss which the investor may sustain.

18 September 89 T.I. (February 1990 Access Letter, ¶1126)

S.231(6)(a)(ii) would include the amount of non-recourse or limited recourse financing owing to any other person by the purchaser or to a person with whom the purchaser does not deal at arm's length.

Subsection 231(6.1)

Articles

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

Subsection 231(7)

Administrative Policy

12 February 1990 T.I. (July 1990 Access Letter, ¶1342)

Shares of a Canadian corporation which are held by a taxpayer in a stock savings plan prescribed in Regulation 6705 are "prescribed property" for the purposes of s. 231(7).

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