Krumm v. R. – FCA: Tax Court did not err in finding that computer software was a “tax shelter” and disallowing the deductions claimed.

Krumm v. R. – FCA:  Tax Court did not err in finding that computer software was a “tax shelter” and disallowing the deductions claimed.

Krumm v. Canada (April 19, 2021 – 2021 FCA 78, Boivin, Rennie, Woods (author) JJ.A.).

Précis:   The taxpayer acquired computer software for a face price of $2.8 million with $700,000 payable up front and the balance my means of a promissory note.  He sought to deduct the $2.8 million over a period of two years (1997 and 1998) and CRA denied his claim on the basis that the software was an unregistered “tax shelter”.  The Tax Court dismissed his appeal.  The case turned on whether a valuation report provided to the taxpayer by the vendors of the software prior to his purchase made the software a tax shelter  Both the Tax Court and the Federal Court of Appeal concluded that the valuation was sufficient to make the software a tax shelter.

Decision:    ON appeal the taxpayer argued that the valuation was insufficient to make the software a tax shelter:

[19] Mr. Krumm submits that the tax shelter provisions do not apply because the valuation report does not explicitly state an amount that will be deductible for tax purposes. Two arguments are raised. First, Mr. Krumm submits that the statements in the report are not sufficient because they do not refer to an explicit amount that is deductible. Mr. Krumm also refers to a qualification in the report and suggests that the report does not state unequivocally that deductions will be available.


[20] The Tax Court rejected these submissions and concluded that the statements and representations in the report satisfied the requirements of the legislation. The Court stated (at para. 30 of the reasons):


[30] … It is my view that the tax opinions and representations set out in the Valuation Report were intended to advise a prospective purchaser as to the tax treatment they could expect if a purchase of Software was made. It is also my view that the representations were of sufficient detail such that it could reasonably be considered that a prospective purchaser could deduct the full purchase price of the Software over a two year period.


The Court of Appeal rejected the taxpayer’s arguments:

[25] The palpable and overriding error standard of review is a very high standard which is not met in this case. To be palpable, the error must be plainly seen. The Tax Court did not err when it concluded that prospective purchasers would reasonably consider that the report indicated that they could deduct the purchase price over the period allowed for Class 12 property that is available for use.


[26] Mr. Krumm further submits that the tax opinion in the report is qualified and therefore is not a sufficient representation for purposes of the relevant legislation. This submission relates to a qualification in the tax opinion at paragraph 51 of the report: “… Future investment in the Computer Program using provisions of this section of the Act may be compromised somewhat by the terms and conditions of this sale/acquisition.”


[27] The argument is that paragraph 51 warns prospective purchasers that the tax consequences could be negatively impacted by the terms of the agreement. I note that this qualification applies only to a “future investment,” which is contrasted with “this sale/acquisition.” There is no error in concluding that this qualification has no application to prospective purchasers in “this sale/acquisition.”


Thus the appeal was dismissed with costs.