Lipson v. Minister of National Revenue, (2009) 383 N.R. 47 (SCC)

• Judge: Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.
• Court: Supreme Court (Canada)
• Case Date: January 08, 2009
• Jurisdiction: Canada (Federal)
• Citations: (2009), 383 N.R. 47 (SCC);2009 SCC 1;[2009] ACS no 1;383 NR 47;[2009] 1 SCR 3;[2009] SCJ No 1 (QL);[2009] 1 CTC 314;[2009] DTC 5015;301 DLR (4th) 34

Lipson v. MNR (2009), 383 N.R. 47 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Temp. Cite: [2009] N.R. TBEd. JA.016

Earl Lipson (appellant) v. Her Majesty The Queen (respondent)

Jordan B. Lipson (appellant) v. Her Majesty The Queen (respondent)

(32041; 2009 SCC 1; 2009 CSC 1)

Indexed As: Lipson v. Minister of National Revenue

Supreme Court of Canada

Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ.

January 8, 2009.

Summary:

A husband and wife (taxpayers) purchased a Toronto home for $750,000. The wife obtained a $562,500 demand loan from the bank, which she used to purchase shares from the husband's family corporation. The husband used the $562,500 to purchase the home. The taxpayers then obtained a $562,500 mortgage, using the proceeds to retire the demand loan. The wife then deducted the financing costs of the shares under s. 20(1)(c) of the Income Tax Act, which costs extended to the mortgage loan because of the deeming provisions of s. 20(3). The husband allowed the attribution rules to apply, therefore continuing to treat the shares as his own for tax purposes. For the 1994-96 tax years, the husband deducted the mortgage interest paid from his income. The Minister reassessed the taxpayers' income, disallowing the interest deduction. The taxpayers admitted that the series of transactions constituted avoidance transactions under s. 245(3) of the Act. The issue on the taxpayer's appeal was whether the transactions constituted an abuse or misuse of ss. 20(1)(c) and 20(3).

The Tax Court of Canada, in a judgment reported 2006 TCC 148, dismissed the taxpayers' appeals on the ground that the transactions resulting in the taxpayers' being permitted to deduct the mortgage interest paid on the purchase of their home constituted abusive tax avoidance. The taxpayers appealed.

The Federal Court of Appeal, in a judgment reported (2007), 361 N.R. 191, dismissed the appeals. Considering the series of transactions as a whole, and their overall purpose, the Tax Court did not err in determining that the series of transactions constituted abusive tax avoidance under s. 245(3). The taxpayers appealed.

The Supreme Court of Canada, Binnie, Deschamps and Rothstein, JJ., dissenting, dismissed the appeals. The court agreed that the Minister established abusive tax avoidance. The general anti-avoidance rule applied to one of the transactions within the series of transactions and denied the tax benefits sought by the taxpayers.

Income Tax - Topic 1130

Income from a business or property - Deductions - Expenses incurred in borrowing money - [See first Income Tax - Topic 9517 ].

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - Spouses purchased a $750,000 home - The wife borrowed $562,500 from the bank to purchase shares from the husband's family corporation - The husband used the $562,500 to purchase the home - The spouses obtained a $562,500 mortgage, using the proceeds to retire the loan - The wife deducted the financing costs of the shares under s. 20(1)(c) of the Income Tax Act, which costs extended to the mortgage loan because of the deeming provisions of s. 20(3) - The husband allowed the attribution rules (s. 74.1) to apply (continuing to treat the shares as his own for tax purposes) - The result was to permit the husband to deduct the mortgage interest from his income - The Minister disallowed the interest deduction under the general anti-avoidance rules - The spouses admitted that the series of transactions constituted avoidance transactions under s. 245(3) of the Act, but argued that they did not abuse or misuse the provisions of the Act - The Tax Court of Canada held that the transactions constituted abusive tax avoidance - The Federal Court of Appeal agreed - The Supreme Court of Canada dismissed the spouses' appeal - The court stated that "in assessing a series of transactions, the misuse and abuse must be related to the specific transactions forming part of the series. However, the entire series of transactions should be considered in order to determine whether the individual transactions within the series abuse one or more provisions of the Act." - Section 345(4) required the court to determine whether a transaction frustrated the object, spirit or purpose of the provisions giving rise to the tax benefit - Motivation, purpose and economic substance were relevant under s. 245(4) only to the extent that they established whether the transaction frustrated the purpose of the relevant provisions - The court held that "the tax benefit of the interest deduction resulting from the refinancing of the shares of the family corporation by [the wife] is not abusive viewed in isolation, but the ensuing tax benefit of the attribution of [the wife's] interest deduction to [the husband] is. It follows that this latter tax benefit can be denied under s. 245(2), which is triggered because the transactions in the series include the attribution of the interest deduction under s. 74.1(1) and this attribution frustrates the object, spirit and purpose of that provision." - See paragraphs 1 to 55.

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - The Supreme Court of Canada stated that "to the extent that it may not always be obvious whether the purpose of a provision is frustrated by an avoidance transaction, 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 cannot justify ignoring a provision of the ITA that is clearly intended to apply to transactions that would otherwise be valid on their face." - See paragraph 52.

Cases Noticed:

Minister of National Revenue v. Canada Trustco Mortgage Co., [2005] 2 S.C.R. 601; 340 N.R. 1; 2005 SCC 54, refd to. [para. 2].

Kaulius et al. v. Minister of National Revenue, [2005] 2 S.C.R. 643; 339 N.R. 323; 2005 SCC 55, refd to. [para. 2].

Mathew v. Canada - see Kaulius et al. v. Minister of National Revenue.

Singleton v. Minister of National Revenue, [2001] 2 S.C.R. 1046; 275 N.R. 133; 2001 SCC 61, affing. [1999] 4 F.C. 484; 243 N.R. 110 (F.C.A.), dist. [para. 10].

Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.), refd to. [para. 21].

Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715; 348 N.R. 148; 210 O.A.C. 342; 2006 SCC 20, refd to. [para. 26].

Ludco Enterprises Ltd. et al. v. Ministre du Revenu national, [2001] 2 S.C.R. 1082; 275 N.R. 90, refd to. [para. 29].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 29].

Thibaudeau v. Minister of National Revenue, [1995] 2 S.C.R. 627; 182 N.R. 1, refd to. [para. 32].

Jabs Construction Ltd. v. R., 99 D.T.C. 729, refd to. [para. 62].

Statutes Noticed:

Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, sect. 245(4) [para. 24]; sect. 245(5) [para. 50].

Authors and Works Noticed:

Ahmed, Firoz, and Priede, Cassandra, Case Comment - Lipson v. Canada (2007), 17 Can. Curr. Tax 77, generally [para. 87].

Krishna, Vern, The Fundamentals of Canadian Income Tax (9th Ed. 2006), pp. 1018 [para. 116]; 1112 [para. 31].

McDonnell, Thomas E., The Relevance of "Overall Purpose" in a GAAR Analysis (2007), 55 Can. Tax J. 720, generally [para. 87].

Thivierge, Manon, GAAR Redux: After Canada Trustco, 2006 Conference Report, Report   of   the   Proceedings  of  the Fifty-Eighth Tax  Conference, Canadian Tax Foundation (2007), p. 4:1 [para. 87].

Counsel:

Edwin G. Kroft and Rosemarie Wertscheck, Q.C., for the appellants;

Wendy Burnham and Daniel Bourgeois, for the respondent.

Solicitors of Record:

McCarthy Tétrault, Vancouver, B.C., for the appellants;

Attorney General of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on April 23, 2008, before Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein, JJ., of the Supreme Court of Canada.

On January 8, 2009, the judgment of the Court was delivered in both official languages and the following opinions were filed:

LeBel, J. (Fish, Abella and Charron, JJ., concurring) - see paragraphs 1 to 53;

Binnie, J. (Deschamps, J., concurring), dissenting - see paragraphs 54 to 99;

Rothstein, J., dissenting - see paragraphs 100 to 124.