Baxter, 2007 FCA 172

In Baxter v. The Queen, 2006 TCC 230, Mr. Justice Bell examined the definition of “tax shelter” in the Income Tax Act and concluded that the appellant taxpayer, a Mr. Baxter, did not buy a shelter when he purchased trading software. The Federal Court of Appeal disagreed and allowed the Crown’s appeal.

Interestingly, the FCA had no difficulty concluding that statements and representations were made about the tax consequences of an acquisition of trading software: the promoters obtained a legal opinion about those consequences and a valuation of the software. The opinion and the appraisal were the statements, they were made available to prospective purchasers, and it did not matter that the promoters did not make statements about income tax matters in a prospectus or offering memorandum (¶¶38–39). Moreover, the Court appears to have concluded that it would not have mattered if Mr. Baxter had not received a copy of the opinion or the appraisal (in fact, he did receive a copy of the opinion):

The Tax Opinion and the Appraisals, in some instances, were given to prospective purchasers, thereby communicating or announcing to prospective purchasers that if they were to purchase TIP licences, the acquisition cost of those TIP licences would be fully deductible to them over a two year period. Accordingly, in my view, all of the requirements of the definition of tax shelter were met […] [at ¶58, with emphasis added]

A taxpayer, then, can acquire a shelter arrangement even if no statements or representations are made to that particular taxpayer about the tax consequences of the arrangement.

What were the tax consequences to Mr. Baxter of this finding? Subsection 237.1(6) of the Income Tax Act provides that a taxpayer is not entitled to any deduction in respect of a tax shelter if the shelter does not have a CRA-issued identification number. Unfortunately for Mr. Baxter, the promoter of the software licence scheme had not obtained a shelter number, and so the Court’s finding affirmed the CRA’s reassessments.

The taxpayer has sought leave to appeal to the Supreme Court of Canada.