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Ottawa, September 18, 2001
2001-079

Technical Legislative Proposals for Matchable Expenditure Rules

Related Documents:

• Backgrounder.
• Notice of Ways and Means Motion to Amend the Income Tax Act.

Finance Minister Paul Martin today tabled in the House of Commons a detailed Notice of Ways and Means Motion to amend the Income Tax Act in respect of matchable expenditures. These proposed changes would limit the ability of a taxpayer to obtain tax shelter benefits by financing the business expenses of another person in exchange for a right to receive future income relating to that business.

Measures announced in 1996, known as the matchable expenditure rules, require that the cost of these expenditures be allocated over the economic life of the related right to receive future income. These rules are not intended to affect ordinary business transactions, and generally apply only where the expenditures relate to a tax shelter or may reasonably be considered to have been made to obtain a tax benefit.

An exception to the matchable expenditure rules applies if, in the same year as the expenditure is made, the total revenues realized by the taxpayer in respect of the expenditure exceed 80 per cent of its cost. However, certain tax shelter arrangements have been designed to exploit this exception.

Therefore, the technical amendments tabled today propose to amend the matchable expenditure rules to ensure that unintended tax shelter benefits cannot be achieved. Specifically, under the proposed rules, the 80-per-cent threshold will be modified to match the deductible expenditure against the revenue received from the related right to future income.

Minister Martin indicated that this proposed exception to the matchable expenditure rules would generally apply to expenditures made on or after September 18, 2001. However, transitional relief will apply as indicated in the attached legislative proposals.

The Minister emphasized that this transitional relief should not be taken to indicate government approval of these tax shelters. All tax shelters utilizing the exception to the matchable expenditure rules are being closely monitored by the Canada Customs and Revenue Agency.

Minister Martin confirmed that the Government intends to introduce legislation to implement these tax changes in Parliament at the earliest opportunity.

Further information on the proposed changes to the Income Tax Act is provided in the attached backgrounder. Reference in the attached proposed amendments to the Income Tax Act to ANNOUNCEMENT DATE should be read as referring to today’s date.

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Backgrounder

Tax-assisted arrangements for the financing of business expenditures are attractive to businesses because the financing is partially subsidized by government through the benefit of tax deferral. The matchable expenditure rules in the Income Tax Act constrain the tax assistance in such structures by matching the cost of an investor’s investment to the periods during which the investment earns income. In the transactions that are subject to these rules, investors undertake to pay expenditures that would otherwise be expenses payable by the "vendor" (e.g., payroll, selling commissions) in exchange for a right to receive future income (a "right to receive production"), usually from the vendor’s operation.

The matchable expenditure rules are designed to restrict the deductibility of a taxpayer’s cost of a right to receive production, by prorating the deductibility of the amount of the investment over the economic life of the right. This amortization of the expenditure effectively eliminates the tax deferral advantage of this type of financing.

An exception to the matchable expenditure rules applies in certain circumstances. This exception applies where, in the same year as the expenditure is made, the total revenues of the taxpayer from the right to receive production exceed 80 per cent of the expenditure. Under the rules announced in 1996, if this 80-per-cent revenue threshold is met, the portion of the expenditure that is deductible is limited only by general rules that apply to all business expenditures.

The proposed amendment to the matchable expenditure rules provides that, where the 80-per-cent revenue threshold is met, expenditures are deductible only to the extent of revenues received from the right to receive production. This restriction will apply where the matchable expenditure relates to a tax shelter or a tax shelter investment, or one of the main purposes of incurring the matchable expenditure is to obtain the reduction, avoidance or deferral of tax. Any portion of an otherwise deductible expenditure not yet deducted at the time of expiry of the right to receive production will be deductible at that time.

An existing exception to the matchable expenditure rules which applies where the expenditure is not related to a tax shelter, and cannot reasonably be considered to have been made to achieve a tax benefit, will remain unchanged.

Transitional relief for certain public offerings of tax shelter investments, as described in this release and in the attached proposed amendments to the Income Tax Act, should not be taken to indicate government approval of these tax shelters. Further, the existence of a tax shelter registration number in respect of a promotion should not be taken as government confirmation of the tax effects of the investment.

Tax shelter promotional documents are required to display a tax shelter identification number, and to prominently indicate that the identification number is for administrative proposes only and does not in any way confirm the entitlement of an investor to claim any tax benefits associated with the tax shelter. The Canada Customs and Revenue Agency (CCRA), under the direction of the Honourable Martin Cauchon, Minister of National Revenue, uses tax shelter identification numbers to identify those investors participating in a tax shelter arrangement.

For more information regarding the activities of the CCRA regarding tax shelters, refer to the August 14, 2001, CCRA "Tax Tip" entitled "Tax shelters: Advance income tax rulings do not guarantee deductions," available on the CCRA Web site at www.ccra-adrc.gc.ca.