Tax Updates

Krumm versus The Queen decision clarifies tax shelter definition

November 17, 2020

Authored by RSM Canada LLP

Cleo L. Melanson, CPA, CA, CMA, shared this article


Depending on your age, you may remember the Pyramid Game Show: without stating certain key words, one person tried to communicate a concept sufficiently to allow another person to understand and identify the concept.

What does the Pyramid Game Show have to do with the tax shelter definition?

A key component of the tax shelter definition in subsection 237.1(1) of the Income Tax Act (ITA) is whether certain information is communicated (or proposed to be communicated) about property offered for sale. Specifically, the definition requires that the communication explain the tax benefits a taxpayer would receive if the taxpayer were to purchase the property. The property is a tax shelter if the communication explains that, within four years after the purchase of the property, the tax benefits will equal or exceed the purchaser’s cost to acquire the property. When a property is a tax shelter, the ITA restricts the purchaser from enjoying the tax benefits (for example, capital cost allowance (CCA) or losses) unless the seller of the property has applied for, and the Canada Revenue Agency (CRA) has issued, a tax shelter registration number. However, will property be a tax shelter if the communications merely provide sufficient detail to allow a potential purchaser to understand the tax benefits without expressly setting out or quantifying what the tax benefits are?

This is the question that the Tax Court of Canada (TCC) faced in Krumm v. The Queen (2020 TCC 7). In Krumm, a vendor communicated certain information about a property to a purchaser but did not specifically quantify the tax benefits the purchaser would receive. As a result, the TCC had to determine whether the information the vendor communicated to the purchaser was sufficient to cause the property to be a tax shelter notwithstanding that the vendor avoided key words about the tax benefits. This was the first time the TCC considered this issue and the TCC’s decision confirming that the property in Krumm was a tax shelter clarifies that the Courts will give a broad interpretation to the phrase “amount represented to be deductible” in the tax shelter definition.

Relevant facts

In August 1997, James Krumm (Krumm) purchased a 50% interest in a computer application software from Intersports Acceleration Corp. (Intersports) for $2.8 million. The transaction was a private transaction, as Intersports did not publicly market its potential sale of interests in the software.

Prior to Krumm’s purchase of the software, Intersports secured a valuation of the software. In addition to valuing the software, the valuation report identified that the software:

  1. qualified as a Class 12 asset under the ITA and the Income Tax Regulations (Regulations), and
  2. was commercially available for use for the purposes of the ITA and the Regulations.

A taxpayer can claim CCA at a rate of 100% on a Class 12 asset (the rate is restricted to 50% in the year the taxpayer acquires the Class 12 asset). However, if the asset is not ‘available for use’ as defined in the ITA, the taxpayer is restricted from claiming CCA. As a result, the valuation report provided two key pieces of information that would allow Krumm to understand that he would be able to claim CCA of $2.8 million within two years.

In each of the 1997 and 1998 tax years, Krumm claimed CCA of $1.4 million related to the software, effectively deducting the full purchase price of the software from his taxable income over the two year period.

The CRA disallowed Krumm’s CCA claims on the basis that his purchase of the interest in the software was an unregistered tax shelter. The failure to register the tax shelter meant that Krumm was not entitled to claim the CCA.

The Tax Court of Canada

Krumm argued that the software was not a tax shelter for two reasons:

  1. The tax shelter rules were intended to apply to publicly marketed tax shelters and not private transactions between two parties (Krumm cited the CRA’s publications as support).
  2. Krumm did not understand the valuation report and was unaware of the tax deductions that could be received upon purchase of the asset and, therefore, did not rely on the information communicated in the valuation report when evaluating whether to purchase the software.

The TCC easily dismissed these two arguments. First, the TCC identified that the tax shelter definition does not state that it only applies to publicly-marketed transactions. Without such an express restriction in the legislation, there was no reason to limit the scope of the tax shelter definition to publicly marketed transactions, regardless of the CRA’s published position.

Second, the prior jurisprudence has firmly established that the purchaser’s knowledge of the tax deductions is not relevant in determining whether the property is a tax shelter. Property either is or is not a tax shelter before a taxpayer purchases the property and even if no taxpayer purchases the property. As a result, the subjective knowledge of any actual purchaser is irrelevant.

The more interesting issue that the TCC addressed was whether the communication in the valuation report was sufficient to satisfy the communication element of the tax shelter definition. Again, the tax shelter definition provides that property is a tax shelter when the communications represent that the tax benefits a purchaser will enjoy will equal or exceed the purchaser’s cost of the property within four years. Importantly, the ITA requires that this analysis be an objective analysis. As set out above, in Krumm the valuation report described the tax attributes of the software (that it qualified as a Class 12 asset and was commercially available for use), but did not expressly communicate the quantum of tax deductions that would be available for a Class 12 asset that was commercially available for use. In all previous tax shelter cases, the communications expressly set out the amount that a purchaser would be able to deduct or the tax benefit the purchaser would receive.

As a result, in Krumm, the TCC had to determine whether, for the purpose of the tax shelter definition, generally describing the tax attributes was akin to quantifying the tax benefits. In this case, the TCC held that it was. Specifically, the TCC held that, when objectively considering the description of the software’s tax attributes, there was sufficient detail for a potential purchaser to understand that the purchaser could deduct the full purchase price within two years. Avoiding specific communications about the amount of available deductions did not prevent the software from being a tax shelter.

Krumm has appealed the TCC decision to the Federal Court of Appeal.

Understanding the type of representations that cause property to be a tax shelter

Based on the TCC’s decision in Krumm, property may be a tax shelter even if the communications do not expressly quantify the tax benefits that a potential purchaser will receive. This broad interpretation of tax shelter may increase CRA’s use of the tax shelter rules as a reassessment tool to disallow tax benefits. The CRA has already publicly stated that it is actively reviewing certain mass-marketed plans that the CRA considers to be aggressive, such as leveraged insured annuity plans and foreign exchange loss straddling plans. Potential purchasers in any transaction should evaluate pre-transaction communications carefully to protect themselves against a possible reassessment for purchasing an unregistered tax shelter.

Let's Talk!

Call us at 1 855 363 3526 or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Clara Pham and originally appeared on 2020-11-17 RSM Canada, and is available online at

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

FCR a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how FCR can assist you, please call us at 1 855 363 3526

Important Notice:

FCR will now redirect you to CCH Portal where your FCR Client Portal login is located.

Share This