Two things in life you can be sure of: death and….

In a peculiar coincidence, or perhaps as a way of joining in all the April tax filing fun, the Supreme Court of Canada (“SCC”) on Wednesday heard an appeal from Lipson v Canada, [2007] 4 FCR 641, a case about the legal limits of tax avoidance within Canada’s ‘General Anti-Avoidance Rule’ (“GAAR”) under the Income Tax Act, RSC 1985, c 1 (5th Supp).

Earlier this month, Vern Krishna wrote an article [CGA Magazine (Jul-Aug 2008) online: <>] that ably canvassed what is at stake. I thought I’d take today to highlight the points that were raised.

Perhaps oversimplified, the facts giving rise to this case are as follows:

1. Mrs. Lipson borrowed money to purchase shares in her husband’s profitable family company.
2. Mr. and Mrs. Lipson (a married couple) then used this money to purchase a home
3. A mortgage interest was then provided to Mrs. Lipson’s lender as security for the loan.

As Prof. Krishna puts it, this is a case of tax-arbitrage where “a taxpayer exchanges non-deductible interest [such as for home-mortgages] for deductible interest [such as for investment in stocks] through a series of transactions that allow form to prevail over substance.” Nevertheless, though the “the form of each step of the series of transactions were legal,”

GAAR looks at whether the taxpayer misuses any of the provisions of the Income Tax Act or abuses the statute read as a whole. The economic substance of the Lipson transactions was to circumvent the underlying policy of the Income Tax Act, which clearly prohibits the deduction of personal mortgage interest for tax purposes. …The substantive economic effect of the Lipson financing was to convert non-deductible personal interest into deductible business interest.

In response, Nathan Boidman criticized Krishna’s assessment as being ‘jaundiced,’ stating that “the very essence of tax planning is carrying out a transaction in a way that takes tax rules into account and crafts the arrangement to arrive at a reduction of tax.” He fears that if the Lipsons’ activities are found to constitute abusive tax avoidance, then Canadians will no longer have certainty and predictability in their finances so as to be able to deduct interest.

Indeed, as is typical at the SCC, a clear tension exists between the competing viewpoints of predictability for taxpayers on the one hand, and the prevention of abusive tax avoidance on the other. It will be interesting to see how the SCC deals with this one as many potential real estate investors and tax lawyers wait in anticipation.

[Editor’s note: the SCC has since rendered its judgement on this case in Lipson v Canada, [2009] 1 SCR 3.]

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