Law Times

Law Times • January 19, 2009 NEWS Lipson creates General Anti-Avoidance Rule uncertainty BY KELLY HARRIS Law Times Rule will not likely find it in the Supreme Court of Canada rul- ing in Lipson v. Canada. While the Court allowed inter- est paid on investment loans to be tax deductable, tax lawyers say the ruling creates uncertainty around the applicability of the section 245 of the Income Tax Act – the GAAR. In writing the decision for the majority, Justice Louis LeBel said that uncertainty surrounding the GAAR was acceptable. "To the extent that it may not T always be obvious whether the purpose of a provision is frus- trated by an avoidance transac- tion, the GAAR may introduce a degree of uncertainty into tax planning, but such uncertainty is inherent in all situations in which the law must be applied to unique facts. The GAAR is neither a penal provision nor a hammer to pound taxpayers into submission. It is designed, in the complex context of the ITA, to restrain abusive tax avoidance and to make sure that the fairness of the tax system is preserved. A desire to avoid uncertainty can- not justify ignoring a provision of the ITA that is clearly intended to apply to transactions that would otherwise be valid on their face." The 4-3 split decision denied Lipson's appeal of a Federal Court of Appeal ruling that upheld the anti-avoidance law. The Su- preme Court, however, allowed Jordanna Lipson to declare inter- est paid on investment income when she borrowed $562,500 to purchase shares in the fam- ily company. On the same day Earl Lipson borrowed $562,500 to purchase a Toronto home. He paid off the investment loan with the home loan and then de- clared an interest deduction from the home loan. The court cited this as an abuse and allowed the GAAR to be applied. A similar arrangement was also made by Earl Lipson's brother Jordan. "Before the decision was ren- dered it wasn't clear whether all the well-established rules for in- terest deductibility were going to remain intact," says Evy Moskow- itz of KPMG/M&M Tax Law firm. "Whether you could apply those rules and whether some- how the General Anti-Avoidance Billions of dollars invested, not a penny lost. The McKellar Structured Settlement™ McKellar introduced the concept of structured settlements in Canada in 1979. With almost 40 people at your disposal, we continue to set the standard today, providing safe, reliable, tax-free investment options for injured parties, while lowering claims costs. McKellar. Now you're sure. ax planners seeking clarity on the Income Tax Act's General Anti-Avoidance Rule could somehow apply to deny interest availability even though technically you would be entitled to it. So the good news is that the court seems to have left interest deductibility intact on investments." On the other hand because the majority opinion supports the idea that the GAAR should have some level of uncertainty. Moskowitz fears that this may open the door for the Canadian Revenue Agency to apply the rule more liberally in other cases; how- ever, she says this doesn't mean the taxman has carte blanche. "It's certainly not a blank cheque," she says. "Both sides, the majority and the minor- ity, went out of their way to say taxpayers are entitled to ar- range their affairs in the most tax-efficient manner as possible, but it's not an absolute right and you've got to balance that with over-the-top abusive planning. "They say that, but what the majority does is it makes it easi- er, I think, for the CRA to apply the GAAR." Ed Kroft, of McCarthy Té- trault LLP, acted on behalf of the appellants and agreed the ruling provided some good and some not so good for tax planners. He says that the court has seen a departure in the way it previously viewed the GAAR citing the majority ruling, saying it intends to create uncertainty around the GAAR. Further uncertainty arises through the dissenting opinion that questions the health of the Duke of Westminster. The 1936 ruling in Commissioners of Inland Revenue v. Duke of Westminster created the viability of the prin- ciple that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable. That ruling was upheld in 2005 in the Canada Trustco Mortgage Co. v. Canada case. In the most re- cent ruling Justice Ian Binnie wrote in his dissenting opinion that uncertainty around GAAR is a "cause for concern" for the pro- visions from the 1936 ruling. "The GAAR is a weapon that, unless contained by the jurispru- dence, could have a widespread, serious, and unpredictable effect on legitimate tax planning. At the same time, of course, the GAAR must be given a meaningful role. That role is circumscribed by the requirement in s. 245(4) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), that the transaction[s] not only be shown to be 'avoidance transaction[s],' ie transactions structured pri- marily to obtain a tax benefit, but in addition that the minister demonstrate that the tax benefit results from a misuse/abuse of the provisions of the act relied CORRECTION The ad below appeared incorrectly on the outside back cover of the 2009 Ontario Lawyers Phone Book, as it was reproduced without the office listings and telephone numbers. This is the correct version. CLB Media Inc. regrets the error. upon to produce it." This creates another issue for tax lawyers, says Kroft. The panel hearing in Lipson was only seven members due to the retirement of Justice Michel Bastarache. Kroft questions what the ruling would have been if a full panel had heard the case, and if the majority saying GAAR should be uncer- tain would've been upheld. "The dissenting opinion would say the opposite," Kroft says. "You're gutting the abil- ity of taxpayers to plan with certainty. So that is the tension here and now that we've got two lawyers on the bench who didn't sit on the case, what would nine (a full panel) have said? "From a lawyers perspective, the issue is whether or not the judgment has created more uncer- tainty for both the crown and tax- payers. You have very strong views on both sides of the fence." LT PAGE 5 www.mckellar.com VANCOUVER 1-800-465-7878 EDMONTON 780-420-0897 McKELLAR STRUCTURED SETTLEMENTS INC. GUELPH 1-800-265-8381 HALIFAX 1-800-565-0695 USA 1-800-265-2789 McKellar_REDO_LT_09.indd 1 www.lawtimesnews.com 1/9/09 9:48:10 AM

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