Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Cost of Tax Shelter Investments and Limited-recourse Debt in Respect of Gifting Arrangements

Marginal note:Definitions

• 143.2 (1) The definitions in this subsection apply in this section.

  expenditure

  expenditure means an outlay or expense or the cost or capital cost of a property. (dépense)

  limited partner

  limited partner has the meaning that would be assigned by subsection 96(2.4) if that subsection were read without reference to “if the member’s partnership interest is not an exempt interest (within the meaning assigned by subsection 96(2.5)) at that time and”. (commanditaire)

  limited-recourse amount

  limited-recourse amount means the unpaid principal amount of any indebtedness for which recourse is limited, either immediately or in the future and either absolutely or contingently. (montant à recours limité)

  taxpayer

  taxpayer includes a partnership. (contribuable)

  tax shelter investment

  tax shelter investment means

  • (a) a property that is a tax shelter for the purpose of subsection 237.1(1); or

  • (b) a taxpayer’s interest in a partnership where

    • (i) an interest in the taxpayer

      • (A) is a tax shelter investment, and

      • (B) the taxpayer’s partnership interest would be a tax shelter investment if

        • (I) this Act were read without reference to this paragraph and to the words “having regard to statements or representations made or proposed to be made in connection with the property” in the definition tax shelter in subsection 237.1(1),

        • (II) the references in that definition to represented were read as references to “that can reasonably be expected”, and

        • (III) the reference in that definition to is represented were read as a reference to “can reasonably be expected”,

    • (ii) another interest in the partnership is a tax shelter investment, or

    • (iii) the taxpayer’s interest in the partnership entitles the taxpayer, directly or indirectly, to a share of the income or loss of a particular partnership where

      • (A) another taxpayer holding a partnership interest is entitled, directly or indirectly, to a share of the income or loss of the particular partnership, and

      • (B) that other taxpayer’s partnership interest is a tax shelter investment. (abri fiscal déterminé)

• Marginal note:At-risk adjustment

  (2) For the purpose of this section, an at-risk adjustment in respect of an expenditure of a particular taxpayer, other than the cost of a partnership interest to which subsection 96(2.2) applies, means any amount or benefit that the particular taxpayer, or another taxpayer not dealing at arm’s length with the particular taxpayer, is entitled, either immediately or in the future and either absolutely or contingently, to receive or to obtain, whether by way of reimbursement, compensation, revenue guarantee, proceeds of disposition, loan or any other form of indebtedness, or in any other form or manner whatever, granted or to be granted for the purpose of reducing the impact, in whole or in part, of any loss that the particular taxpayer may sustain in respect of the expenditure or, where the expenditure is the cost or capital cost of a property, any loss from the holding or disposition of the property.

• Marginal note:Amount or benefit not included

  (3) For the purpose of subsection 143.2(2), an at-risk adjustment in respect of a taxpayer’s expenditure does not include an amount or benefit

  • (a) to the extent that it is included in determining the value of J in the definition cumulative Canadian exploration expense in subsection 66.1(6), of M in the definition cumulative Canadian development expense in subsection 66.2(5) or of I in the definition cumulative Canadian oil and gas property expense in subsection 66.4(5) in respect of the taxpayer; or

  • (b) the entitlement to which arises

    • (i) because of a contract of insurance with an insurance corporation dealing at arm’s length with the taxpayer (and, where the expenditure is the cost of an interest in a partnership, with each member of the partnership) under which the taxpayer is insured against any claim arising as a result of a liability incurred in the ordinary course of carrying on the business of the taxpayer or the partnership,

    • (ii) as a consequence of the death of the taxpayer,

    • (iii) in respect of an amount not included in the expenditure, determined without reference to subparagraph 143.2(6)(b)(ii), or

    • (iv) because of an excluded obligation (as defined in subsection 6202.1(5) of the Income Tax Regulations) in relation to a share issued to the taxpayer or, where the expenditure is the cost of an interest in a partnership, to the partnership.

• Marginal note:Amount or benefit

  (4) For the purposes of subsections 143.2(2) and (3), where the amount or benefit to which a taxpayer is entitled at any time is provided by way of an agreement or other arrangement under which the taxpayer has a right, either immediately or in the future and either absolutely or contingently (otherwise than as a consequence of the death of the taxpayer), to acquire property, for greater certainty the amount or benefit to which the taxpayer is entitled under the agreement or arrangement is considered to be not less than the fair market value of the property at that time.

• Marginal note:Amount or benefit

  (5) For the purposes of subsections 143.2(2) and (3), where the amount or benefit to which a taxpayer is entitled at any time is provided by way of a guarantee, security or similar indemnity or covenant in respect of any loan or other obligation of the taxpayer, for greater certainty the amount or benefit to which the taxpayer is entitled under the guarantee or indemnity at any particular time is considered to be not less than the total of the unpaid amount of the loan or obligation at that time and all other amounts outstanding in respect of the loan or obligation at that time.

• Marginal note:Amount of expenditure

  (6) Notwithstanding any other provision of this Act, the amount of any expenditure that is, or is the cost or capital cost of, a taxpayer’s tax shelter investment, and the amount of any expenditure of a taxpayer an interest in which is a tax shelter investment, shall be reduced to the amount, if any, by which

  • (a) the amount of the taxpayer’s expenditure otherwise determined

  exceeds

  • (b) the total of

    • (i) the limited-recourse amounts of

      • (A) the taxpayer, and

      • (B) all other taxpayers not dealing at arm’s length with the taxpayer

      that can reasonably be considered to relate to the expenditure,

    • (ii) the taxpayer’s at-risk adjustment in respect of the expenditure, and

    • (iii) each limited-recourse amount and at-risk adjustment, determined under this section when this section is applied to each other taxpayer who deals at arm’s length with and holds, directly or indirectly, an interest in the taxpayer, that can reasonably be considered to relate to the expenditure.

• Marginal note:Limited-re­course debt in respect of a gift or monetary contribution

  (6.1) The limited-recourse debt in respect of a gift or monetary contribution of a taxpayer, at the time the gift or monetary contribution is made, is the total of

  • (a) each limited-recourse amount at that time, of the taxpayer and of all other taxpayers not dealing at arm’s length with the taxpayer, that can reasonably be considered to relate to the gift or monetary contribution,

  • (b) each limited-recourse amount at that time, determined under this section when this section is applied to each other taxpayer who deals at arm’s length with and holds, directly or indirectly, an interest in the taxpayer, that can reasonably be considered to relate to the gift or monetary contribution, and

  • (c) each amount that is the unpaid amount at that time of any other indebtedness, of any taxpayer referred to in paragraph (a) or (b), that can reasonably be considered to relate to the gift or monetary contribution if there is a guarantee, security or similar indemnity or covenant in respect of that or any other indebtedness.

• Marginal note:Repayment of indebtedness

  (7) For the purpose of this section, the unpaid principal of an indebtedness is deemed to be a limited-recourse amount unless

  • (a) bona fide arrangements, evidenced in writing, were made, at the time the indebtedness arose, for repayment by the debtor of the indebtedness and all interest on the indebtedness within a reasonable period not exceeding 10 years; and

  • (b) interest is payable at least annually, at a rate equal to or greater than the lesser of

    • (i) the prescribed rate of interest in effect at the time the indebtedness arose, and

    • (ii) the prescribed rate of interest applicable from time to time during the term of the indebtedness,

    and is paid in respect of the indebtedness by the debtor no later than 60 days after the end of each taxation year of the debtor that ends in the period.

• Marginal note:Limited-recourse amount

  (8) For the purpose of this section, the unpaid principal of an indebtedness is deemed to be a limited-recourse amount of a taxpayer where the taxpayer is a partnership and recourse against any member of the partnership in respect of the indebtedness is limited, either immediately or in the future and either absolutely or contingently.

• Marginal note:Timing

  (9) Where at any time a taxpayer has paid an amount (in this subsection referred to as the “repaid amount”) on account of the principal amount of an indebtedness that was, before that time, the unpaid principal amount of a loan or any other form of indebtedness to which subsection 143.2(2) applies (in this subsection referred to as the “former amount or benefit”) relating to an expenditure of the taxpayer,

  • (a) the former amount or benefit is considered to have been an amount or benefit under subsection 143.2(2) in respect of the taxpayer at all times before that time; and

  • (b) the expenditure is, subject to subsection 143.2(6), deemed to have been made or incurred at that time to the extent of, and by the payment of, the repaid amount.

• Marginal note:Timing

  (10) Where at any time a taxpayer has paid an amount (in this subsection referred to as the “repaid amount”) on account of the principal amount of an indebtedness which was, before that time, an unpaid principal amount that was a limited-recourse amount (in this subsection referred to as the “former limited-recourse indebtedness”) relating to an expenditure of the taxpayer,

  • (a) the former limited-recourse indebtedness is considered to have been a limited-recourse amount at all times before that time; and

  • (b) the expenditure is, subject to subsection 143.2(6), deemed to have been made or incurred at that time to the extent of, and by the amount of, the repaid amount.

• Marginal note:Short-term debt

  (11) Where a taxpayer pays all of the principal of an indebtedness no later than 60 days after that indebtedness arose and the indebtedness would otherwise be considered to be a limited-recourse amount solely because of the application of subsection 143.2(7) or (8), that subsection does not apply to the indebtedness unless

  • (a) any portion of the repayment is made with a limited-recourse amount; or

  • (b) the repayment can reasonably be considered to be part of a series of loans or other indebtedness and repayments that ends more than 60 days after the indebtedness arose.

• Marginal note:Series of loans or repayments

  (12) For the purpose of paragraph 143.2(7)(a), a debtor is considered not to have made arrangements to repay an indebtedness within 10 years where the debtor’s arrangement to repay can reasonably be considered to be part of a series of loans or other indebtedness and repayments that ends more than 10 years after it begins.

• Marginal note:Information located outside Canada

  (13) For the purpose of this section, if it can reasonably be considered that information relating to indebtedness that relates to a taxpayer’s expenditure, gift or monetary contribution is available outside Canada and the Minister is not satisfied that the unpaid principal of the indebtedness is not a limited-recourse amount, the unpaid principal of the indebtedness relating to the taxpayer’s expenditure, gift or monetary contribution is deemed to be a limited-recourse amount relating to the expenditure, gift or monetary contribution unless

  • (a) the information is provided to the Minister; or

  • (b) the information is located in a country with which the Government of Canada has entered into a tax convention or agreement that has the force of law in Canada and includes a provision under which the Minister can obtain the information.

• Marginal note:Information located outside Canada

  (14) For the purpose of this section, where it can reasonably be considered that information relating to whether a taxpayer is not dealing at arm’s length with another taxpayer is available outside Canada and the Minister is not satisfied that the taxpayer is dealing at arm’s length with the other taxpayer, the taxpayer and the other taxpayer are deemed not to be dealing with each other at arm’s length unless

  • (a) the information is provided to the Minister; or

  • (b) the information is located in a country with which the Government of Canada has entered into a tax convention or agreement that has the force of law in Canada and includes a provision under which the Minister can obtain the information.

• Marginal note:Assessments

  (15) Notwithstanding subsections 152(4) to (5), such assessments, determinations and redeterminations may be made as are necessary to give effect to this section.

Expenditure — Limitations

Marginal note:Definitions

• 143.3 (1) The following definitions apply in this section.

  expenditure

  expenditure of a taxpayer means an expense, expenditure or outlay made or incurred by the taxpayer, or a cost or capital cost of property acquired by the taxpayer. (dépense)

  option

  option means

  • (a) a security that is issued or sold by a taxpayer under an agreement referred to in subsection 7(1); or

  • (b) an option, warrant or similar right, issued or granted by a taxpayer, giving the holder the right to acquire an interest in the taxpayer or in another taxpayer with whom the taxpayer does not, at the time the option, warrant or similar right is issued or granted, deal at arm’s length. (option)

  taxpayer

  taxpayer includes a partnership. (contribuable)

• Marginal note:Options — limitation

  (2) In computing a taxpayer’s income, taxable income or tax payable or an amount considered to have been paid on account of the taxpayer’s tax payable, an expenditure of the taxpayer is deemed not to include any portion of the expenditure that would — if this Act were read without reference to this subsection — be included in determining the expenditure because of the taxpayer having granted or issued an option on or after November 17, 2005.

• Marginal note:Corporate shares — limitation

  (3) In computing a corporation’s income, taxable income or tax payable or an amount considered to have been paid on account of the corporation’s tax payable, an expenditure of the corporation that would — if this Act were read without reference to this subsection — include an amount because of the corporation having issued a share of its capital stock at any particular time on or after November 17, 2005 is reduced by

  • (a) if the issuance of the share is not a consequence of the exercise of an option, the amount, if any, by which the fair market value of the share at the particular time exceeds

    • (i) if the transaction under which the share is issued is a transaction to which section 85, 85.1 or 138 applies, the amount determined under that section to be the cost to the issuing corporation of the property acquired in consideration for issuing the share, or

    • (ii) in any other case, the amount of the consideration that is the fair market value of the property transferred or issued to, or the services provided to, the issuing corporation for issuing the share; and

  • (b) if the issuance of the share is a consequence of the exercise of an option, the amount, if any, by which the fair market value of the share at the particular time exceeds the amount paid, pursuant to the terms of the option, by the holder to the issuing taxpayer for issuing the share.

• Marginal note:Non-corporate interests — limitation

  (4) In computing a taxpayer’s (other than a corporation’s) income, taxable income or tax payable or an amount considered to have been paid on account of the taxpayer’s tax payable, an expenditure of the taxpayer that would — if this Act were read without reference to this subsection — include an amount because of the taxpayer having issued an interest, or because of an interest being created, in itself at any particular time on or after November 17, 2005 is reduced by

  • (a) if the issuance or creation of the interest is not a consequence of the exercise of an option, the amount, if any, by which the fair market value of the interest at the particular time exceeds

    • (i) if the transaction under which the interest is issued is a transaction to which paragraph 70(6)(b) or 73(1.01)(c), subsection 97(2) or section 107.4 or 132.2 applies, the amount determined under that provision to be the cost to the taxpayer of the property acquired for the interest, or

    • (ii) in any other case, the amount of the consideration that is the fair market value of the property transferred or issued to, or the services provided to, the taxpayer for the interest; and

  • (b) if the issuance or creation of the interest is a consequence of the exercise of an option, the amount, if any, by which the fair market value of the interest at the particular time exceeds the amount paid, pursuant to the terms of the option, by the holder to the taxpayer for the interest.

• Marginal note:Clarification

  (5) For greater certainty,

  • (a) subsection (2) does not apply to reduce an expenditure that is a commission, fee or other amount for services rendered by a person as a salesperson, agent or dealer in securities in the course of the issuance of an option;

  • (b) subsections (3) and (4) do not apply to reduce an expenditure of a taxpayer to the extent that the expenditure does not include an amount determined to be an excess under those subsections;

  • (c) this section does not apply to determine the cost or capital cost of property determined under subsection 70(6), section 73, 85 or 85.1, subsection 97(2) or section 107.4, 132.2 or 138;

  • (d) this section does not apply to determine the amount of a taxpayer’s expenditure if the amount of the expenditure as determined under section 69 is less than the amount that would, if this subsection were read without reference to this paragraph, be the amount of the expenditure as determined under this section; and

  • (e) this section does not apply to prohibit the deduction of an amount under paragraph 110(1)(e).