The Smith Manoeuvre and the Singleton Shuffle bite the Dust

The Smith Manoeuvre and the Singleton Shuffle bite the Dust.

I hate to feel smug, but what the hell, every once in a while it is OK. Especially after all the crap unloaded on me over my article in REM and then Bob Arron picking up the article in the star and then the ensuing attack on him and I. You would think we had insulted the Holy Grail.

I am proud to say that I think we successfully prevented all our clients from getting involved with this. I was so loud and determined to make sure everyone knew to say away from this tax scheme.

So last week the long awaited judgment came down from the Supreme Court. The final word is in.

The Lipson versus Canada was the final word case and the game of over. You can not convert your home mortgate to a tax deductible mortgage. Check out my previous blog article on the Smith Manoeuvre, what I wrote is now the guiding light on the matter.

The majority decision was written by two criminal lawyers, a family lawyer and a labour lawyer, and the only Justices who actually know something about tax were in the minority.

While there are complaints that the ruling in the Lipson case did not clear up the matter as to how to know when GAAR applies and when it does not. I think the matter is pretty clear.

GAAR itself is pretty clear to me…. the simple solution is if your primary purpose is to reduce tax… it is wrong… if saving taxes is secondary, and you have the documentation to prove it… then there is nothing to worry about you can deduct the interest for investment loans.  So long as the masters of muddy water try to invent phony schemes and paper for untrue diversionary reasons, then they will continue to get caught in grapples of GAAR.

That is not to disagree that the tax system is inept, unfair or unethical and that CRA previous publications on the matter were ambiguous. The end result is now that now thousands of Canadians to be hit with serious penalties and interest. CRA has known this stuff for years but do nothing because it is a good investment for them to let citizens blunder.

For every single person who played this game, they can expect to get audited. The CRA computers can easily identify every homeowner who has unreasonable interest deductions.

I sure won’t complain because my company is here to help victims who got trapped in the sexy nature of converting their taxable mortgages to tax deductible interest deductions. They now become prime prospects for a WNBC rescue mission.

We have our defense strategies worked out to mitigate damages. I will write on this later. CRA will claim gross negligence and will likely go for 100% penalties plus interest.

Following is further information on this topic. Also check out my previous blog article.

So I am going off to have a nice glass of wine. I think I will have a bottle of Chateau Gloat 2009,

Best Regards

Dan

Lipson v Canada(F.C.)(32041)(March 16, 2007)
“The taxpayer E and his wife entered into an agreement of purchase and sale for a family residence.  The wife borrowed $562,500 from a bank to finance the purchase of shares in a family corporation.  She paid the borrowed money directly to the taxpayer who transferred the shares to her.  The taxpayer and his wife obtained a mortgage from a bank for $562,500.  That same day, they used the mortgage loan funds to repay the share loan in its entirety.  On his 1994, 1995 and 1996 tax returns, the taxpayer deducted the interest on the mortgage loan and reported the taxable dividends on the shares as income when applicable.  The brother of the taxpayer, J, conducted similar transactions.  The Minister of National Revenue disallowed the deductions for those taxation years and reassessed the taxpayers accordingly.  The Tax Court of Canada dismissed the taxpayers’ appeals, holding that the series of transactions constituted a misuse of ss. 20(1)(c), 20(3), 73(1) and 74.1 of the Income Tax Act and the taxpayers’ appeals were dismissed.  The Federal Court of Appeal upheld that decision”.

Canada Court Strikes Mortgage-Interest Deduction Plan (Update1)
By Joe Schneider
Jan. 8 (Bloomberg) — Canada’s high court struck down a method some wealthy families use to gain tax deductibility for mortgage interest, ruling that a husband’s application of his wife’s deduction to his own income is abusive and illegal.
The Supreme Court of Canada, in a 4-3 decision today, upheld a federal ruling that dismissed a tax plan devised by Toronto residents Earl and Jordanna Lipson. Mortgage interest in Canada isn’t tax-deductible, though interest paid on investment loans generally is.
The Lipsons agreed to buy a house in Toronto in 1994 for C$750,000 ($633,000). Jordanna Lipson borrowed C$562,000 from the Bank of Montreal to buy shares in the family company, Lipson Family Investments Ltd., from her husband. The Lipsons then obtained a C$562,000 mortgage from the Bank of Montreal and used it to pay off the share loan. Earl Lipson deducted the interest on the mortgage loan on his 1994, 1995 and 1996 tax returns.
“The tax benefit of the interest deduction resulting from the refinancing of the shares of the family corporation by Mrs. Lipson is not abusive viewed in isolation,” Justice Louis LeBel wrote on behalf of the majority. “The ensuing tax benefit of the attribution of Mrs. Lipson’s interest deduction to Mr. Lipson is.”
The ruling won’t affect Canadians who borrow against the value of their home to buy investments, making their mortgage interest in effect tax-deductible, Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, said in a telephone interview.
‘Plain Vanilla’
“That strategy, based on this ruling, is still alive and well,” Golombek said. “The plain vanilla debt-swap strategy should be fine.”
Golombek, who moved to CIBC last year after 12 years as vice president of taxation and estate planning at AIM Trimark Investments, said the case has been closely followed by Canadian tax planners. People lined up outside the Supreme Court in April, when arguments were heard, to gain a seat inside the courtroom, Golombek wrote on his blog at the time.
LeBel said the federal tax department properly relied on a law prohibiting abusive tax avoidance — the general anti- avoidance rule, or GAAR — to deny Lipson’s deduction. Justice William Ian Binnie, in dissenting, said the anti-avoidance rule will make it difficult for people to plan their taxes properly.
“The GAAR is a weapon that, unless contained by jurisprudence, could have a widespread, serious and unpredictable effect on legitimate tax planning,” Binnie wrote.
The case is Between Earl Lipson and Her Majesty The Queen, No. 32041, Supreme Court of Canada (Ottawa).
To contact the reporters on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.
Last Updated: January 8, 2009 14:55 EST

TAX: GAAR (General anti-avoidance rule)
Lipson v Canada(F.C.)(32041)(March 16, 2007)
“The taxpayer E and his wife entered into an agreement of purchase and sale for a family residence.  The wife borrowed $562,500 from a bank to finance the purchase of shares in a family corporation.  She paid the borrowed money directly to the taxpayer who transferred the shares to her.  The taxpayer and his wife obtained a mortgage from a bank for $562,500.  That same day, they used the mortgage loan funds to repay the share loan in its entirety.  On his 1994, 1995 and 1996 tax returns, the taxpayer deducted the interest on the mortgage loan and reported the taxable dividends on the shares as income when applicable.  The brother of the taxpayer, J, conducted similar transactions.  The Minister of National Revenue disallowed the deductions for those taxation years and reassessed the taxpayers accordingly.  The Tax Court of Canada dismissed the taxpayers’ appeals, holding that the series of transactions constituted a misuse of ss. 20(1)(c), 20(3), 73(1) and 74.1 of the Income Tax Act and the taxpayers’ appeals were dismissed.  The Federal Court of Appeal upheld that decision”.
S.C.C. held (4:3 – with 2 separate sets of dissenting reasons) the appeal is dismissed.
Justice LeBel (in majority) wrote as follows (pp. 9-10, 12-13, 21-22):
“It has long been a principle of tax law that taxpayers may order their affairs so as to minimize the amount of tax payable (Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)).  This remains the case.  However, the Duke of Westminster principle has never been absolute, and Parliament enacted s. 245 of the ITA, known as the GAAR, to limit the scope of allowable avoidance transactions while maintaining certainty for taxpayers (Canada Trustco , at para. 15).  In brief, the GAAR denies a tax benefit where three criteria are met: the benefit arises from a transaction (ss. 245(1) and 245(2)); the transaction is an avoidance transaction as defined in s. 245(3); and the transaction results in an abuse and misuse within the meaning of s. 245(4).  The taxpayer bears the burden of proving that the first two of these criteria are not met, while the burden is on the Minister to prove, on the balance of probabilities, that the avoidance transaction results in abuse and misuse within the meaning of s. 245(4).
…In determining the purpose of the relevant provision(s) of the Act, a court must take a unified textual, contextual and purposive approach to statutory interpretation (Canada Trustco, at para. 47).  This approach is, of course, not unique to the GAAR.  As this Court confirmed in Kaulius, the approach to statutory interpretation is the same for provisions of the ITA as for those of any other statute: it is necessary “to determine the intention of the legislator by considering the text, context and purpose of the provisions at issue” (Kaulius, at para. 42; see also Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at paras. 21-23).
…At this step, it is important to identify which provisions are associated with each tax benefit. Here, it is clear that the tax benefit of deductibility of interest relates to ss. 20(1)(c) and 20(3). On the other hand, the tax benefit arising out of Mr. Lipson’s use of the attribution rules, namely the possibility of deducting the interest to reduce his income, is linked with ss. 73(1) and 74.1(1). By virtue of these provisions, Mr. Lipson retains, for tax purposes, the stream of income from the shares sold to his wife but is able to deduct the interest payments on the mortgage from his income.
…In summary, the tax benefit of the interest deduction resulting from the refinancing of the shares of the family corporation by Mrs. Lipson is not abusive viewed in isolation, but the ensuing tax benefit of the attribution of Mrs. Lipson’s interest deduction to Mr. Lipson is. It follows that this latter tax benefit can be denied under s. 245(2), which is triggered because the transactions in the series include the attribution of the interest deduction under s. 74.1(1) and this attribution frustrates the object, spirit and purpose of that provision. I must now briefly consider the tax consequences of the denial of the tax benefit and the application of the GAAR”.

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