Reimagining Section 94.1: The Offshore Investment Fund Property Rule

Abstract

In this article, the author contemplates how section 94.1 of the Income Tax Act (Canada), the offshore investment fund property (OIFP) rule, might be reimagined considering its inefficacy in the face of unique non-resident investment funds. By tracing the anti-avoidance origins of the rule, the author shows that the source of this inadequacy is an expectation overload rather than legislative failure. While the OIFP rule was introduced as a stop-gap designed only to tackle a certain kind of basic intermediation strategy, it is now tasked with the much grander objective of creating a level playing field with respect to the tax treatment of domestic and offshore investment funds. The author shows how this mismatch of aspiration and reality has created the opportunity for savvy investors to manipulate the "motive" test within the rule, and avoid its application, simply by proving themselves to have a sufficiently credible and pervasive alternative reason for investing in an offshore fund (for example, the unique expertise of its manager). The author postulates that this flaw is likely to become more frequently tested as funds specializing in novel asset classes (such as cryptocurrency funds) proliferate and grow. The article closes with the proposition that if the test at the centre of the rule is recast as a purely objective analysis, and certain other changes are made, section 94.1 can be transformed to apply a transaction-cost model that will deter undesirable intermediation attempts and ensure that Canada's revenue authorities get a cut of any profits from superreturn investment opportunities. The author draws on key elements of the ultimately abandoned foreign investment entity rules and certain anti-avoidance provisions from elsewhere in the Act to provide a conceptual foundation for the proposed amendments. He also seeks to demonstrate how revising the OIFP rule in this way will achieve a greater degree of capital export neutrality—a policy thread that runs through the Canadian approach to international taxation—by creating a more (though not wholly) level tax playing field, but without the crippling administrative burden and incomplete tax coverage that may accompany a more capital export neutrality-driven approach.

Keywords: Offshore investment fund property, tax reform, investments, capital export neutrality, anti-avoidance, tax havens