Interest Costs: Remain Compliant with Tax Planning Strategies

Barbara Britto, FDFS

Writing off interest costs in the 2024 tax year?  Consider the implications of recent jurisprudence and the New General Anti Avoidance Rules in structuring plans to ensure interest expenses are deductible, especially if it involves a family home.   What’s important is that the object, spirit and intent of the law is followed.

For example, consider the 2009 case of Lipson v. Canada, which revolves around the Lipson family’s attempt to deduct interest expenses that was denied by the CRA as they considered it to be abusive.

The Lipson’s had structured a series of transactions concerning the purchase of shares and a family home.  They used the interest deductibility provisions which ultimately was denied by the Supreme Court of Canada as these transactions violated GAAR and were considered abusive tax avoidance.

The Background. The court considered several critical factors to determine the Lipson’s case. The court identified that GAAR denies a tax benefit when three criteria are met: a benefit must arise from a transaction (ss245(1)and 24(2)); the transaction is an avoidance transaction as defined in Section 245(3), and the transaction results in an abuse and misuse within the meaning of Section 245(4).

The court examined the avoidance transaction which is defined in Section 245 as a transaction that would create a tax benefit.  A two-part inquiry was followed to determine whether a transaction results in a misuse and an abuse for the purposes of Section 245(4) of the Act. Attribution rules were looked up in reference to subsection74.1(1) of the Income Tax Act where taxpayers reduce tax by taking advantage of their non-arm’s length relationship when transferring property between themselves.

The court concluded that the Lipson’s took advantage of their non-arm’s length relationship structuring a series of transactions by taking loans and deducting interest expenses, and this qualified as abusive tax avoidance.  The court was not in agreement that interest was deductible by Mr. Lipson when the loan was received by Mrs. Lipson. 

Conclusion. For families and their advisors, the Lipson case emphasizes the importance of ensuring that tax planning strategies be compliant with tax rules and adhere with the intended purpose of tax legislation.

In short, a series of transactions structured achieve a tax benefit and not for bona fide business purposes, could well be denied.