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Originally Posted by MoneyGuy
It's one of the reasons for the problems in the States, but it's not the reason.
This is a bad decision. Being able to deduct this interest in this way is fair and the strategy is available to everyone. Most people could do this if they had arranged their financial affairs in such a way and make good financial decisions.
Say I borrow $100K and have a $100K mortgage. I could borrow the money and invest it, therefore tax deductible (if done correctly). However, if I use the $100K to pay off the mortgage and then borrow that money back to invest it's not deductible?
This will affect the Smith Maneuver and the Singleton Shuffle.
To answer edm88's question, it would presumably be because now you might be in a position to do this whereas before when the home was bought you were not in such a position.
I disagree with the Court's ruling. While in a way I sort of understand its position, I think their logic is mostly flawed.
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I'm not sure you got the heart of the SCC's decision.
The key paragraph is this one:
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[42] As I mentioned above in para. 32, the purpose of s. 74.1(1) is to prevent spouses from reducing tax by taking advantage of their non-arm’s length relationship when transferring property between themselves. In this case, the attribution to Mr. Lipson of the net income or loss derived from the shares would enable him to reduce the dividend income attributed to him by the amount of the interest on the loan that financed his wife’s purchase of those shares. However, before the transfer, when the dividend income was in Mr. Lipson’s hands, no interest expense could have been deducted from it. It seems strange that the operation of s. 74.1(1) can result in the reduction of the total amount of tax payable by Mr. Lipson on the income from the transferred property. The only way the Lipsons could have produced the result in this case was by taking advantage of their non-arm’s length relationship. Therefore, the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce the tax payable on the dividend income from the shares and other income, which he would not have been able to do were Mrs. Lipson dealing with him at arm’s length, qualifies as abusive tax avoidance. It does not matter that s. 74.1(1) was triggered automatically when Mr. Lipson did not elect to opt out of s. 73(1). His motivation or purpose is irrelevant. But to allow s. 74.1(1) to be used to reduce Mr. Lipson’s income tax from what it would have been without the transfer to his spouse would frustrate the purpose of the attribution rules. Indeed, a specific anti-avoidance rule is being used to facilitate abusive tax avoidance.
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The gist of the decision is that "the attribution rules in ss. 74.1 to 74.5 are anti-avoidance provisions whose purpose is to prevent spouses (and other related persons) from reducing tax by taking advantage of their non-arm’s length status when transferring property between themselves".
However, the series of transactions here did the opposite -- it allowed Mr. Liptonr to reducing tax by taking advantage of his and his wife's non-arm’s length status when transferring the shares of the buisness.
That was the abuse that got them nailed.