Tax Shelter

If a partnership is a tax shelter, the members who hold an interest in the partnership are investors in the tax shelter. Special rules apply to a partnership that is a tax shelter and that acts as the tax shelter's promoter.

What is a tax shelter?

Tax shelters include property (including a right to income) for which, based on statements and representations relating to this property, it is reasonable to consider that, at the end of any taxation year ending in the four years following the date on which an interest in the property is acquired, the aggregate of the following amounts will be equal to or more than the cost of the property at the end of the year:

  • the amount or, in the case of an interest in a partnership, the loss (including the amount or the loss related to the right to income) that the person who acquired an interest in the property is entitled to deduct in the taxation year or in a previous taxation year;
  • any other amount related to the interest in the property that the person is entitled to deduct when calculating the income, taxable income or income tax payable and any amount deemed to have been paid as an instalment of income tax payable of the person.

The cost of the interest in the property is reduced by the amount of prescribed benefits that may be received or enjoyed, directly or indirectly, by the recipient or by a person with whom the recipient is not dealing at arm's length.

Tax shelters can also be gifting arrangements under which, given the statements or representations made or proposed in connection with an arrangement, it is reasonable to assume that one of the following situations would be possible:

  • the person who acquired the property under the terms of the arrangement will donate the property as a gift to a qualified donee or as a contribution to an authorized Québec political party and, for the taxation years that end in the four years after the date of the arrangement, the total of the amounts deductible from the person's income, taxable income, income tax payable or any amount deemed to be an instalment of income tax payable is equal to or more than the cost of the property minus the prescribed benefits;
  • the person who entered into the arrangement incurs a limited-recourse debt relating to a gift made to a qualified donee or a contribution made to an authorized Québec political party.
Note
  • Prescribed benefits include federal tax credits, revenue guarantees, contingent liabilities, and exchange and conversion rights.
  • The following types of property are not considered tax shelters:
    • flow-through shares; 
    • registered pension plans (RPP);
    • registered retirement savings plans (RRSP); 
    • deferred profit-sharing plans (DPSP);
    • registered retirement income funds (RRIF);
    • registered education savings plans (RESP);
    • shares in venture capital corporations (Québec business investment companies [QBIC], the Fédération des travailleurs et travailleuses du Québec [FTQ] and the Confédération des syndicats nationaux [CSN]);
    • shares or securities eligible for the Stock Savings Plan II (SSP II);
    • securities eligible for the Cooperative Investment Plan (CIP);
    • Capital régional et coopératif Desjardins shares.
  • The term “limited-recourse debt” refers to a limited-recourse amount or a secured debt, bonded debt or other similar secured liability.

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