19(1)
This is in reply to your letters of November 16, 1990, January 28 and March 5, 1991 wherein you requested our opinion relating to the applicability of subsection 96(2.2), section 237.1 (including Regulation 231(6)), and subsections 245(2) and 245(4) of the Income Tax Act (the "Act") to the following hypothetical situation as outlined in your letters and your telephone conversations with Mr. Ho:
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Our comments
As you have stated in your letters, the above hypothetical situation involves contemplated transactions. As stated in Information Circular 70-6R2, we do not confirm income tax consequences except in the context of an advance ruling. However, we can provide the following general comments on some of the issues you have raised.
In our opinion, a non-interest bearing loan could reduce the at-risk amount under paragraph 96(2.2)(d) of the Act and could be a prescribed benefit under Regulation 231(6). If a loan is negotiated as a package of investing in a partnership then there would be a link between the loan and membership in the partnership. As a result, the requirements under the preambles of paragraph 96(2.2)(d) of the Act and Regulation 231(6) would be met. Therefore, the at-risk amount will be reduced and the non-interest bearing feature will be considered a prescribed benefit. However, if a loan is not made as a package of investing in a partnership, is made from a third party dealing at arm's length with the limited partners, has normal commercial terms, is not guaranteed by the general partner or the partnership and the lender has full recourse to the limited partners, then the benefit will not be considered to arise by virtue of being a member of the partnership. In this case, the at-risk amount will not be reduced and the non-interest feature of the loan will not be considered a prescribed benefit.
Subparagraph 96(2.2)(d)(iii) of the Act exempts any amount or benefit to the extent that an entitlement to an amount or benefit arises as a consequence of death.
In order for a partnership to be considered to be a tax shelter, one must regard "statements or representations made or proposed to be made" according to the preamble of the definition of tax shelter in subsection 237.1(1) of the Act. In general, the creation of a partnership consisting of a small number of members where the individuals organizing the partnership's creation are also the only partners in the partnership, there would not normally be statements or representations made to anyone other than the organizers. However, if there is a promoter to find additional investors for such a partnership then the partnership would be a tax shelter if it meets the other requirements.
Whether the general anti-avoidance rules ("GAAR") as contained in section 245 of the Act will apply to a specific situation can only be determined following a review of all the relevant facts related to that situation. In general, if a transaction or a series of transactions results, directly or indirectly, in a tax benefit there would be an avoidance transaction unless there was a valid business reason. Tax benefit is defined in subsection 245(1) of the Act and means "a reduction, avoidance or deferral of tax". In appropriate circumstances the fixing of a purchase price at the time of death and the non-interest feature of a loan could be seen as a tax benefit or an avoidance transaction. However, as stated in paragraph 5 of the Information Circular 88-2, a transaction that is consistent with the object and spirit of provisions of the Act is not affected by GAAR by virtue of subsection 245(4) of the Act. The application of subsection 245(4) of the Act will depend in large measure on all the relevant facts of each case.
With regard to the participating loan feature, the questions raised are findings of fact involving a determination of the proper characterization of the arrangement as a borrower/lender relationship or an equity investment. This issue has been discussed in the 1989 Corporate Management Tax Conference sponsored by the Canadian Tax Foundation and is found on pages 8:9 to 8:11 of that conference report.
Our answers would not be different in a case where partnership units were being disposed of at fair market value upon the death of a taxpayer.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular 70-6R2, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch