Definition of “Tax Shelter” – Subsection 237.1(1)
Briefly, in Maege v. The Queen, 15 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 This issue has also been addressed in Baxter v. The Queen. 17
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 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 explicitrepresentations 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.