CRA Income Tax Technical News No. 41 - rulings on proposed legislation, definition of tax shelters

December 21, 2009 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: News, What's New from the Charities Directorate of CRA, Canadian Charity Law

CRA Income Tax Technical News No. 41 was released December 23, 2009 and discusses rulings (opinions) on proposed legislative amendments, the definition of “Tax Shelter” – Subsection 237.1(1) and donation of flow-through shares – subparagraph 38(a.1)(i), subsection 248(35) through (41) and section 237.1

Income Tax Technical News No. 41 December 23, 2009 The bulletin is located at:  http://www.cra-arc.gc.ca/E/pub/tp/itnews-41/itnews-41-e.pdf

Here are the relevant sections:

Rulings (Opinions) on Proposed Legislative Amendments
Question
What is the CRA’s practice on re-assessing a taxpayer
contrary to an opinion given by the Rulings Directorate
based on proposed rules that have not been enacted into
law as part of the Act?
Response
The CRA will provide an opinion on proposed
legislation, and the CRA permits a taxpayer to file a
return based on proposed legislation. However, if a
particular return may go statute-barred and the
legislation is not yet passed, the CRA will request a
waiver or assess based on the actual legislation if the
waiver is refused.


Definition of “Tax Shelter” –
Subsection 237.1(1)
Briefly, in Maege v. The Queen,15[15 Sub nom. Jevremovic et al. v. The Queen, 2008 DTC 6263
(FCA).] the Federal Court of
Appeal considered whether a tax shelter existed despite
the absence of statements or representations directly
made to a taxpayer. The Court affirmed the reasoning of
the Tax Court of Canada in concluding that a tax shelter
could exist in the absence of statements or
representations made directly to the taxpayer.
Notwithstanding a plain reading of the definition of “tax
shelter” in subsection 237.1(1), the Tax Court seems to
suggest that statements or representations may not be an
essential element of a tax shelter (that is, in obiter, Rip J.
(as he then was) rejected the argument that the phrase
“statements or representations” is an essential element of
the definition, noting that it is preceded by the words
“having regard to”).16[16 Maege et all. v. The Queen, 2006 DTC 3193, at paragraphs
31-38 (TCC).] This issue has also been addressed
in Baxter v. The Queen.17 [17 2007 DTC 5199 (FCA).]

Question
In light of the Maege decision, what is the CRA’s
position regarding the significance of statements or
representations made in the context of the definition of a
tax shelter?
Response
In our view, the decisions in Maege and Baxter are
consistent with our position that statements or
representations do not have to be made to a particular
investor in order for a particular investment to be
considered a tax shelter. Paragraph (b) of the definition
of “tax shelter” in subsection 237.1(1) of the Act reads
as follows:
“(b) a gifting arrangement described by paragraph (a)
of the definition “gifting arrangement”, or a property
(including any right to income) other than a
flow-through share or a prescribed property, in
respect of which it can reasonably be considered,
having regard to statements or representations
made or proposed to be made in connection with
the gifting arrangement or the property, that, if a
person were to enter into the gifting arrangement or
Canada Revenue Agency
acquire an interest in the property, at the end of a
particular taxation year that ends within four years
after the day on which the gifting arrangement is
entered into or the interest is acquired, …” [emphasis
added]
The test in the definition of a “tax shelter” in section
237.1 is whether statements or representations have been
made or proposed to be made in connection with the
property. On this basis, once a property meets the
definition of a tax shelter it becomes a tax shelter for all
owners. Further, as Evans J clarified in Baxter, there
may be circumstances in which property can be found to
be a tax shelter on the basis of statements or
representations that a promoter proposes to make.
In Maege, the Tax Court of Canada found that the
absence of statements or explicit representations was not
determinative in deciding the issue of whether a tax
shelter exists. These comments were made in addressing
the testimony given by the promoter concerning this
point. The question was resolved by reference to the
investment sophistication of the taxpayers and,
consequently, the likelihood that they knew a tax shelter
existed. It is important to note that the Tax Court
justified this position by emphasizing that the definition
of “tax shelter” in section 237.1 did not refer to “explicit
representations” and that the term “representation” can
be interpreted broadly. Accordingly, it is our view that
the Maege decisions at the Tax Court and the Federal
Court of Appeal do not represent a departure from the
requirement that statements or representations be made
or are proposed to be made in connection with a
property when applying the tax shelter rules; rather they
adopt a broad view of this requirement, especially when
sophisticated investors are involved.
Donation of Flow-Through Shares –
subparagraph 38(a.1)(i), subsection 248(35)
through (41) and section 237.1
Because of the flow-through nature of the deductions
available to a subscriber of a flow-through share, the
deemed cost of such shares to the subscriber is nil. With
the elimination of capital gains taxes on shares of a
public corporation donated to registered charities, the
donation of flow-through shares issued by public
corporations is an effective way to avoid paying such
capital gains taxes that could be very significant on the
disposition of flow-through shares. If such flow-through
shares are acquired for the sole purpose of gifting them
to a registered charity, then the donation of flow-through
shares may be an arrangement that technically qualifies
as a tax shelter. If a tax shelter is not registered under the
Act, then the deductions with respect to that tax shelter
may be disallowed.
Question
Since both the flow-through share rules and the rules to
eliminate taxable capital gains from charitable donations
of shares of public corporations are incentives aimed at
encouraging such subscriptions and donations, what is
the CRA’s position with regard to whether such
donations will be classified as a tax shelter (and subject
to the tax shelter registration rules)?
Response
The definition of “tax shelter” in subsection 237.1(1) of
the Act includes a “gifting arrangement” which as
defined in that subsection means any arrangement under
which it may reasonably be considered, having regard to
statements or representations made in connection with
the arrangement, that if a person were to enter into the
arrangement, the person would make a gift to a qualified
donee. The exclusion of a flow-through share in
paragraph (b) of the definition of “tax shelter” is in
reference to the acquisition of a property that is a flowthrough
share that has not been acquired pursuant to a
“gifting arrangement” described in paragraph (b) of that
definition.
The purpose of the tax shelter registration rules is to
identify the arrangements that fall within the definition
of “tax shelter” for review by the CRA. The issuance of
an identification number by the CRA is not to be
construed as the CRA approving the arrangement. On
the other hand, it also does not mean that a subsequent
audit will result in adjustments.
The CRA has already issued identification numbers in
respect of several flow-through share/donation
arrangements and has in fact issued advance income tax
rulings on some arrangements. Nevertheless the
requirement to obtain a registration identification
number allows us to review all such arrangements for
compliance with the provisions of the Act.

 

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