Thursday, January 22, 2009
n January 8th, 2009, the Supreme Court of Canada issued its decision in the case of Lipson v. Canada. For tax practitioners across the country, the earth swayed, thunder rumbled and some checked their insurance coverage.
Lipson is an individual resident in Canada who purchased a home, in part with borrowed money, and structured his affairs in such a manner to allow for a deduction on interest paid on the debt. Normally, debt used to acquire personal property is not deductible, but some taxpayers in the past have structured the purchase and debt to allow for an interest deduction against business income and income from property. This is what Lipson tried to do, but the government argued against it citing ITA 245--the General Anti-Avoidance Rule.
Prior to Lipson, the courts held up such structures, but that was before the GAAR was law. Not so with Lipson and all courts involved in the case ruled against the taxpayer and in favour of the government.
If you know 20(1)(c) doesn't relate to the size of an engine, you can read an excellent summary of the facts and arguments as written by UoT Tax Law Prof. Ben Alaire. Click here to read it. I assume no liability if you hurt your brain reading it.
And if you want to read the court decision, click here.
So what does it all mean? Be very careful in trying to turn personal non-deductible debt into deductible debt. Your deduction maybe denied.
Further, look for more supreme court decisions relating to the GAAR. There have been several already and there will be more. It's an area of tax law that is uncertain and open to debate, just what the SCC looks at when deciding to hear tax cases.
The good news is that interest paid on debt used to earn income from a business or property is still a valid tax deduction provided you meet the requirements under the ITA and common law. That's where a tax advisor can help with this complex area of tax law.
Posted 2009/01/22 at 20h26ET in Tax Law.