On January 8, 2009, the Supreme Court of Canada released the
highly anticipated decision of Lipson v. Canada
("Lipson"). Lipson is essentially the second Supreme
Court of Canada decision to address the application of the General
Anti- Avoidance Rule ("GAAR") contained in the Income Tax
Act (Canada) (the "Act"). Lipson dealt with the deduction
of interest in the context of borrowings used directly to acquire
income producing property where the proceeds are effectively used
to purchase non income producing property. Although an earlier
decision of the Supreme Court in Singleton v. Canada 1 held that
somewhat similar transactions were permissible under the Act, the
application of GAAR was not considered in that case. While the
Supreme Court of Canada in Lipson ultimately found in favour of the
Minister of National Revenue (the "Minister") (in a 4:3
split decision) the reasons delivered by LeBel, J. on behalf of the
majority can be regarded as being favourable to taxpayers in
several respects. The general facts of the case are below.
Mr. Lipson and his wife entered into an agreement of purchase
and sale for a new house. Mrs. Lipson borrowed $562,500 from a bank
and used the funds to purchase shares of a family holding company
from Mr. Lipson. The funds were then used to purchase the house.
Mr. and Mrs. Lipson obtained a mortgage of $562,500 from the bank,
the proceeds of which were used to fully repay the first loan
advanced to Mrs. Lipson. By virtue of the application of the
spousal attribution rules contained in the Act, the dividend income
from the shares of the holding company that would have been
included in Mrs. Lipson's income and the interest deductions
that would otherwise have been available to Mrs. Lipson were
attributed to Mr. Lipson. The Minister challenged the deduction of
interest by Mr. Lipson on the basis that the series of transactions
constituted a tax avoidance series that misused or abused
provisions of the Act and was subject to GAAR. The Minister was
successful at both the Tax Court of Canada and the Federal Court of
The majority of the Supreme Court held that the series of
transactions was abusive and that GAAR applied. As a result, the
Court disallowed the interest deductions claimed by Mr. Lipson but
attributed those deductions back to Mrs. Lipson.
The reasoning of the Court centred on the exploitation of the
Act's spousal attribution rules. In short, the Court held that
the attribution of Mrs. Lipson's interest deductions to Mr.
Lipson resulted from the misuse of specific attribution rules. The
Court held that Mr. Lipson's reliance on certain spousal
attribution rules to achieve the intended result frustrated the
purpose of the attribution rules and was subject to GAAR.
It is important to note that all seven judges in Lipson
stated that interest on borrowed funds used to acquire income
producing property, the proceeds of which are then used to purchase
personal use property, is deductible for Canadian tax purposes. The
Court therefore confirmed that the "tracing rules" of
interest deductibility are still valid and that GAAR does not apply
to re-characterize such transactions. However, it appears that
relying on non-arm's length attribution rules in connection
with interest tracing may result in abusive tax planning.
In addition, the Court confirmed that although taxpayers are
generally still entitled to order their affairs so as to minimize
the amount of tax payable, the scope of permitted tax planning is
to be restricted by GAAR. Additionally, the Court commented that
although the application of GAAR may introduce a degree of
uncertainty into tax planning, a desire to avoid uncertainty cannot
justify ignoring a provision of the Act that is clearly intended to
apply to transactions that would otherwise be valid on their
In summary, while the taxpayer's appeal in Lipson
was dismissed, the reasons provided by the Court should keep
taxpayers and tax planners relatively content. The reasons of the
Court appear to be restricted to the specific facts of the case,
and consequently, may not affect tax planning that does not utilize
the same transactions. In fact, the comments made by the Court in
respect of interest deductibility appear to bolster the validity of
interest tracing and may afford taxpayers with additional tax
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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