Lipson case tackles tax rule

Lipson case tackles tax rule

The Supreme Court of Canada has struck down a tax-reduction scheme, employing the general anti-avoidance rule (GAAR) in a case that has some positive reassurances for Canadian homeowners and mortgage professionals.  
 
“This is a landmark decision and a huge win for Canadian homeowners with tax efficient mortgages,” said Sandy Aitken, president of Tax Deductible Mortgage Plan. “The judges ruled that taxpayers have the right to restructure their debt without any threat of such transactions being caught under GAAR.”
 
The case involved Jordanna Lipson borrowing money to buy shares in the family company, Lipson Family Investments, and then using a $562,000 mortgage she and her husband, Earl, were approved for to pay off the share loan. Earl then used Jordanna’s interest deduction on his own tax return, a move that was struck down by the Supreme Court in a 4-3 count.
While the Lipsons lost the case due to Earl's use of income attribution rules to reduce taxes, the decision also states the couple were within their rights in borrowing against the value of their home to buy investments, said Aitken.  
This was one of the few times GAAR—which was introduced in 1987—has been used at the Supreme Court level, making the ruling a new reference for financial professionals.
4 Comments
  • Robert Bizzoni 2009-01-22 2:30:07 AM
    Perhaps I'm understanding the article incorrectly. If the supreme court has struck down the tax reduction scheme, how can this be a positive thing for those promoting the tax deductability of mortgage interest? The courts disallowed Earls use of income attribution rules to reduce taxes.
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  • editor 2009-01-22 2:50:25 AM
    Thanks for the note Robert, but the court only struck down Lipson's use of his wife's interest deduction on HIS tax return, not the actual practice itself. Had it been his own interest deduction, and not his wife's, it would have been fine, at least according to the language of this case.
    So far the actual Smith Manoeuver, as it's known, is legal, hence the positive reassurance.
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  • Kerry 2009-01-22 3:36:01 AM
    if it was just the husband claiming the wife's interest, why would CRA use GAAR? There is sufficient legislation without GAAR to not allow interest - section 18 limitations.
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