Dear Sirs:
Re: Definition of Tax Shelter - Section 237.1 of the Income Tax Act (the "Act")
We are writing in reply to your letter of January 20, 1989 wherein you requested our interpretation of the words "cost" and "prescribed benefit" as they appear in the definition of tax shelter in subsection 237.1 (1) of the Act. You asked that we consider an example where an individual taxpayer acquires an interest in a limited partnership for a cost of $100,000, 25% of which was paid in cash and 75% of which was financed by way of a non-recourse mortgage. We regret the delay in replying to your letter.
Our Comments
While we are unable to confirm the income tax consequences of a hypothetical situation, we can provide the following general comments.
The cost to a person of the interest in the property referred to subparagraph (b)(i) in the definition of tax shelter will include the purchase price and those costs directly associated with the acquisition of the property such as legal and accounting fees. This amount will be altered where a deemed cost is otherwise determined in accordance with the Act. Therefore, the cost to a purchaser of the property will include the amount paid in cash as well as any debts, loans, or promissory notes assumed or taken out byu the purchaser in order to make the purchase.
Subparagraph (b)(ii) in the definition of tax shelter reduces the cost determined above by the amount of any prescribed benefit as defined in subsection 231(6) of the Draft Income Tax Regulations issued June 8, 1989 (the "Draft Regulations"). This subsection applies where statements or representatives in respect of the tax shelter include financing arrangements made available to a purchaser who acquires an interest in a tax shelter, or to a person with whom the purchaser does not deal at arm's length. Where the conditions in the preamble of subsection 231(6) of the Draft Regulations are met, subparagraph (a)(iii) thereof would include the amount of non-recourse or limited recourse financing owed to any other person by the purchaser or by a person with whom the purchaser does not deal at arm's length. The intent that the definition of prescribed benefit should include limited recourse debt is indicated on page 452 of the Explanatory Notes to Legislation Relating to Income Tax issued on June 30, 1988 by the Department of Finance. This position is also stated in paragraph 3 of Information Circular 89-4.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation. Furthermore, part of this opinion relates to the applicability of Draft Regulations for the definition of prescribed benefit, and is only valid provided the Draft Regulations are enacted into law in substantially the same form.
We trust these comments will be of assistance.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch