dentist example - mortgage interest as a deduction in - Singleton, Overs, Lipson, and Evans -

david ingram replies:

Fraser Smith's book, The Smith Maneuver  is obviously a good thing to do if you can.

You should read my Nov 2001 newsletter in the top left hand box at www.centa.com.  This was the first written description of how to make your mortgage deductible and was originally written and published in the North Shore News in 1976 and three editions of my Investment Guide in 1979, 1980 and 1981.  The Smith book came out in 1985 after Fred Snyder had shown him how it worked at a seminar. Fred took it out of my book. Therefore, as you can see, I am 100% behind what I believe I invented and published originally.  At one time I called it the 'CEN-TA Clause'.

Read on

This deals with making your personal mortgage interest in Canada deductible and the Overs, Evans, Lipson and Singleton tax cases and GAAR

David Ingram's US/Canada Services

Mortgage Interest as a Deduction in 2008 – dealing with GAAR

I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident.  It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement. 

My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.   

When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.

My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of.  At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976. 

I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the Internet and can be found in the March 1997 and November 2001 newsletters in the top left hand box at www.centa.com.

I was pretty heavily involved in the Federal  Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return. 

Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.

In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups.  In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods.  In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.

Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account.  He got permission to take the $300,000 out (it was his but was being used as security in his law practice).  He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day.  Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down.  He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals.  The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.

This case has now been quoted and cited in many other cases.  In OVERS 2006 TCC 26, Mr Overs paid back a shareholder-loan, which would have been included in his income.  By doing what he did, co-incidentally, the interest expense was made deductible. 

Mrs Overs borrowed funds to purchase shares of his holding company at their fair market value.  However, Mr Overs did NOT use a 73(1) rollover as Lipson did.  Therefore, no capital gain was realized but the attribution rules in section 74(1) worked to transfer the interest expense on the wife’s borrowed funds -- back to him.

Judge Little turned down the CRA’s claim that tax benefits arose from this series of transactions.  The taxpayer followed the Income Tax Act in repaying his loan and transferring the shares to his wife. Justice Little ruled that the transactions were NOT avoidance transactions and therefore GAAR did not apply. Judge Little ruled that none of the transactions could be considered “abusive tax avoidance”.

And Judge Bowman ruled in favour of Evans (2005 TCC 684).  Judge Bowman found there were no avoidance transactions in what could only be described as a super complicated and very sophisticated series of business restructurings that ended up with a former shareholder receiving cash by using  specific rules in the Act, including sections 85

(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends).

Judge Bowman assumed that there ‘were’ avoidance transactions.  He then dealt with them on an individual basis to decide whether the avoidance transactions were ‘abusive’.  His final decision was that provisions of the Income Tax Act operated as intended and there could not be any abuse.

However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148 

Mr Lipson owned a profitable business and:

1. The Lipsons contracted to buy a home in Forest Hills in Toronto
2. Mrs Lipson took out a demand loan to buy share in the family business from her husband.
3. The shares were transferred to Mrs Lipson as a section 73(1)  rollover
4. Mr Lipson used the funds to buy the house
5. They “both” took out a mortgage on the house to repay the demand loan

 Judge Bowman used the Section 245 GAAR provisions to rule that the Lipson family was guilty of Gross Abuse of the Tax system.  Perhaps, if they had a business reason for the loan or had not used the Section 73(1) tax free rollover, he would have found in their favour as he did with the EVANS 2005 DTC 1762 case.  In the LIPSON case the wife’s borrowing did not put income in her hands and it was unclear who had paid the interest.