Supreme Court of Canada rules in favour of tax deductible mortgages! January, 2009
Breaking News: Court Ruling Good for
Mortgage Brokers Supreme
Court of Canada rules in favour of tax deductible mortgages! Mortgage
Brokers and Financial Advisors that are engaged in restructuring debt for tax
efficiency can finally sleep easy. For almost a year, tax efficient mortgage
strategies have been under critical review by the Supreme Court of Canada in
the much acclaimed court case Lipson et. Al. v. the Queen. On January 8th 2009, the Supreme Court of
Canada published their decision on this closely monitored General
Anti-Avoidance Rule (“GAAR”) court case that involved taxpayers making their
mortgage interest tax deductible among other transactions. “After a nail
biting 8 months, we finally have a definitive answer on GAAR and tax efficient
mortgages – and it is very good news for homeowners as well as the mortgage
brokers that advise them.” said Sandy Aitken, President of TDMP.COM. “We’ve
advised thousands of homeowners mortgage brokers in how to structure these
deals properly under the tax rules. We are delighted to see that the TDMP tax
strategy was unanimously supported by these seven judges in the highest court
of the land.” While the Supreme Court Justices were split (4-3) on their
decision regarding the Lipson’s Appeal, the most interesting revelation in the
written decision is that the judges unanimously agreed that the Lipsons were
very well within their rights to restructure their mortgage for tax benefits
under paragraph 20(1)(c) and subsection 20(3) of the Income Tax Act (“ITA”)i.
In fact, the dissenting views among the judges were
restricted to the application of GAAR with respect to the income attribution
rules related to subsections 73 and 74.1 of the ITA (also known as the
“spousal twist”) as well as the government’s failure to assess the taxpayer
under 74.5(11) instead of GAAR with respect to these same income attribution
rules. Differing opinions among Supreme Court Justices on these specific “spousal
twist” issues were no doubt responsible for the court taking so long to
render a judgement in the case. However, for ordinary homeowners with
conventional mortgages structured for maximum tax benefits, it was worth the
wait. It is now clear that there is nothing to prevent taxpayers taking full
advantage of their entitlement to tax benefits that can result from
restructuring their mortgage to more tax efficiently match up with their
assets. “This is a landmark decision and a huge win for Canadian homeowners
with tax efficient mortgages” said Aitken. “Not only did the judges
specifically reaffirm the precedents set in prior court decisions- upon which
we all rely: Duke of Westminsterii [1936] and Singletoniii [2001], they went one step further to rule that
taxpayers have the right to restructure their debt without any threat of such
transactions being caught under GAAR. More specifically, the Justices agree
that taxpayers are allowed to make their mortgage interest tax deductible by
restructuring their mortgage debt to align with eligible purposes.” TDMP.COM
is Canada’s largest provider of tax efficient mortgage solutions and provides
Public Seminars and TDMP Mortgage Broker Certification Training in all major
urban centres across Canada.
i Supreme Court of Canada Citation:
Lipson v. Canada 2009: Per LeBel, Fish, Abella and Charron JJ.: The Minister
has failed to establish that the purpose of ss. 20(1)(c) and 20(3) have been
misused and abused. The series of transactions did not become problematic until
the taxpayer and his wife turned to ss. 73(1) and 74.1(1), in order to obtain
the result contemplated in the design of the series of transactions which
resulted in the taxpayer applying his wife’s interest deduction to his own
income. ii Supreme Court of Canada Citation:
Lipson v. Canada 2009: Paragraph 19: 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). iii Supreme Court of Canada Citation: Lipson v. Canada
2009: Per Binnie and Deschamps JJ. (dissenting): “Singleton” illustrates the proposition that
there is nothing abusive in principle for a taxpayer to rearrange his or her
capital (borrowed or non-borrowed) in a tax efficient manner. The Minister is
not asking the Court to revisit Singleton. He does not claim that GAAR would
have applied in that case. The Minister acknowledges here that “it is common
ground that the interest was deductible”.
