Words and Phrases - "one of the main reasons"
24 August 2023 Internal T.I. 2019-0810391I7 - Offshore Investment Fund Property:
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).
Prairielane Holdings Ltd. v. The Queen, 2019 TCC 157
The two taxpayers (“PLH” and “SCL”), which were each controlled by two unrelated individuals, would have been associated with each other but for the implementation of a stacked partnership structure for them and others to hold their interests in the business of a corporation (“MEL”) carrying on business as a farm implement dealer. PLH (and SCL) were able to claim the small business deduction (“SBD”) in their 2011 (or 2011 and 2012) taxation years.
In allowing the taxpayers’ appeals of the denial of such SBD claims through the application of s. 256(2.1), MacPhee J stated (at para. 66):
I also am satisfied that the main reasons for the second tier of corporations which were created as part of the restructuring were to:
· obtain tax deferrals of up to 25 months;
· be more flexible in moving partners in and out of the structure … .;
· be able to deal with their concerns about Mr. Moody [a now-inactive founder] continuing to be a partner.
The above finding was reinforced, in the case of PLH, by a finding that receipt of the SBD had not been anticipated at the time of implementing the structure, given that its taxable capital exceeded $15 million, and it had not been recognized that, because the determination of taxable capital looks to a prior year, and the attribution of such taxable capital only arose to the extent that income was allocated by the partnership to a particular corporation, in the first year of the corporate partnership, none of them had any income allocated to them by the partnership. MacPhee J further stated (at para. 36):
PLH would not have as a main reason for the creation of the new corporate structure access to the SBD for one year as the cost of creating the newly created structures, as well as the ongoing costs, far exceeded the SBD obtained in 2011.
Respecting SCL, MacPhee further stated (at para. 66):
I am satisfied that Mr. Streifel, as the operating mind of SCL, was neither informed nor aware of the potential access to the SBD.