Transitional Relief Proposed for Computer Software Tax Shelters

Related document:

• Draft Amendments to Income Tax Regulations and Explanatory Notes.

Finance Minister Paul Martin today announced further transitional relief from the rules announced on August 6, 1997 (Finance Canada News Release 97-069), which restrict the deduction of capital cost allowance in respect of computer software tax shelters.

Minister Martin indicated that the extended relief will apply to certain public offerings of computer software tax shelters, namely those that would have been eligible for transitional relief under the rules released August 6, 1997, but for the fact that

• the computer software was not identified in the public document; or
• the 10% minimum sales threshold had not been met.

The new restrictions will not apply to these tax shelters where

• the computer software upon which the tax shelter is based is acquired by the tax shelter before November 29, 1997 from a person resident in Canada who developed the software; and

• the total amount raised pursuant to the particular prospectus or offering memorandum does not exceed $100 million and is raised before 1998.

In this way, most of those offerings that were under serious contemplation as of the date the new rules were announced will be allowed to proceed, subject to all existing legislative requirements. In this context, the Minister emphasized that this transitional relief should not be taken to indicate government approval of these tax shelters. All computer software tax shelters will be closely audited by Revenue Canada. The Minister noted that the public should be aware that many of the investors in computer software tax shelters that Revenue Canada has audited to date have been reassessed to deny all or a portion of the deductions claimed.

As well, the Minister indicated that in the attached revised transitional rules, the references in the August 6, 1997, press release to "November 1997" have been changed to refer to 1998.

___________________ 
For further information:

Ed Short
Tax Legislation Division
(613) 996-0599

Draft Amendments to Income Tax Regulations and Explanatory Notes

3. (1) Sections 1 and 2 apply to taxation years and fiscal periods that end after August 5, 1997, except that those sections do not apply in respect of computer software for taxation years and fiscal periods of a taxpayer or partnership that end in 1997 or 1998 where the taxpayer's or partnership's interest in the computer software

(a) is acquired before August 6, 1997,

(b) is acquired before 1998 pursuant to an agreement in writing made by the taxpayer or partnership before August 6, 1997, or

(c) is, or is associated with, a tax shelter investment (as defined by subsection 143.2(1) of the Income Tax Act) that is acquired by a taxpayer or partnership before 1998 pursuant to

(i) the terms of a document that is a prospectus, preliminary prospectus or registration statement where

(A) the document was filed before August 6, 1997 with a public authority in Canada pursuant to and in accordance with the securities legislation of Canada or of any province and, where required by law, accepted for filing by the public authority before August 6, 1997,

(B) the particular computer software is

(I) identified in the document, or

(II) acquired before November 29, 1997 from a person that is resident in Canada and that developed the software, and

(C) all the funds raised pursuant to the document are raised before 1998 and all or substantially all of the tax shelter investments that can reasonably be considered to be associated with the computer software are acquired before 1998 by a person who is not

(I) a promoter, or an agent of a promoter, of the securities,

(II) a vendor of the property,

(III) a broker or dealer in securities, or

(IV) a person who does not deal at arm's length with a person referred to in subclause (I) or (II), or

(ii) the terms of an offering memorandum distributed as part of an offering of securities where

(A) the memorandum contained a complete or substantially complete description of the securities contemplated in the offering as well as the terms and conditions of the offering,

(B) the memorandum was distributed before August 6, 1997,

(C) solicitations in respect of the sale of the securities contemplated by the memorandum were made before August 6, 1997,

(D) the sale of the securities was substantially in accordance with the memorandum,

(E) the particular computer software is

(I) identified in the memorandum, or

(II) acquired before November 29, 1997 from a person that is resident in Canada and that developed the software, and

(F) all the funds raised pursuant to the memorandum were raised before 1998 and all or substantially all of the tax shelter investments that can reasonably be considered to be associated with the computer software are acquired before 1998 by a person who is not

(I) a promoter, or an agent of a promoter, of the securities,

(II) a vendor of the property,

(III) a broker or dealer in securities, or

(IV) a person who does not deal at arm's length with a person referred to in subclause (I) or (II),

except that paragraphs (a) to (c) apply to the computer software of a taxpayer or partnership only if:

(d) there is no agreement or other arrangement under which the obligations of

(i) the taxpayer or the partnership, with respect to the computer software, or

(ii) another taxpayer or partnership that acquires a tax shelter investment (as defined by subsection 143.2(1) of the Income Tax Act) that is associated with computer software, with respect to the tax shelter investment,

can be changed, reduced or waived if there is a change to the Act or if there is an adverse assessment under that Act,

(e) where the computer software is, or is associated with, one or more tax shelters sold or offered for sale at a time and in circumstances in which section 237.1 of the Income Tax Act requires an identification number to have been obtained, the identification number was obtained before that time, and

(f) where the computer software (including computer software to which paragraph (a) or (b) applies) is, or is associated with, a tax shelter investment (as defined by subsection 143.2(1) of the Income Tax Act) sold or offered for sale pursuant to a document described in paragraph (c),

1. the total amount of securities sold in 1997 pursuant to the document does not exceed $100,000,000; or
2. at least 10% of the securities authorized to be sold in 1997 pursuant to the document were in 1997 and before August 6, 1997 sold to, or subscribed for by, a person who is not

1. a promoter, or an agent of a promoter, of the securities,
2. a vendor of the property,
3. a broker or dealer in securities, or
4. a person who does not deal at arm's length with a person referred to in clause (A) or (B).

(2) For the purpose of subsection (1), computer software is deemed to be acquired by a taxpayer or partnership no earlier than the time and only to the extent that its cost is considered to be an expenditure made or incurred by the taxpayer or partnership for the purposes of the Income Tax Act, determined without reference to subsection 1100(20.1) of the Regulations, as enacted by subsection 1(2).