What is a “portfolio investment” as used in s. 94.1(1)(b)?
After referring to earlier positions and Gerbro as to the meaning of "portfolio investment," CRA stated:
[T]he term “portfolio investment” must be given a broad meaning and is not limited to passive investments. In paragraph 94.1(1)(b), the word “portfolio” modifies the word “investment” to specify that the investment in particular assets by the investor is one in which the investor does not have an active role in the management of the item invested in. This is so, regardless of the number, value or length of ownership of such assets by the investor.
CRA also adopted the view in Gerbro that the “Funds need only primarily derive their value from portfolio investments” so “that holding a minimal amount of controlling interests that are not portfolio investments or that are portfolio investments in non-listed assets” could still satisfy the test.
Should tax attributes, such as interest deductions, foreign tax credits, or a loss pool, be taken into account to establish whether the “one of the main reasons” test in the mid-amble is engaged?
CRA responded:
The impact of a taxpayer’s tax attributes, such as non capital or net capital losses, should not be disregarded but the existence of such tax attributes does not automatically result in making section 94.1 inapplicable. What is required is a determination of the main reasons for the taxpayer acquiring, holding or having the interest as supported by an analysis of the relevant facts and circumstances to determine what reasons in fact motivated the transactions. If, based on all the facts and circumstances of a particular case, a taxpayer had tax attributes but could not have used them to offset the income from the offshore investment fund property had those investments been held directly by the taxpayer, or that the tax attributes could be used by the taxpayer to offset other income, then section 94.1 may still be applicable.
In a further discussion of the “one of the main reasons” test, CRA noted:
The more surrounding circumstances support that that non-tax motivations drove a decision, the more it might be reasonable to conclude that tax motivations were not a “main reason” (Honeywood Ltd. v. R., [1981] C.T.C. 38 (T.R.B.) and Jordans Rugs Ltd. v. Minister of National Revenue, [1969] C.T.C. 445 (Can. Ex. Ct.)). Conversely, where non-tax reasons alone do not explain why a particular decision was made, it might be reasonable to conclude that tax motivation was a “main reason” (Continental Stores Ltd. v. R. (1978), 79 D.T.C. 5213 (Fed. T.D.) at 5217). Even if non-tax reasons may be sufficient to explain why a decision was made, that does not necessarily mean that tax motivation was not a main reason (Groupe Honco Inc v. The Queen, 2013 FCA 128, 2014 DTC 5006, at paragraph 24, aff'g 2012 TCC 305, 2013 DTC 1032).