[Old Bumped Thread] Supreme Court rules against making mortgage interest deductible

[MoneyGuy]

Originally Posted by Bertuzzied

Isn't that the reason why the US is in such trouble? Is because you can write off your mortgage interest, so everyone took on a mortgage even though they might not have needed one.

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.

[Mike F]

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.

I'm not sure you got the heart of the SCC's decision.

The key paragraph is this one:

[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.

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.

[I-Hate-Hulse]

Mike F nailed it. It was the violation of attribution rules that moved the decision, not so much the underlying transactions. The article below clearly states this.

I don't think the Smith Maneouver is dead just yet, it's going to take a bit of consideration and thought.

Here's a more detailed take on the ruling:
Link

[fredr123]

http://www.thecourt.ca/2009/01/09/us...-after-lipson/

More analysis on the ruling from TheCourt.ca.

[pepper24]

Originally Posted by fredr123

Someday, I hope to have a manoeuvre named after me. That would be awesome. Realistically, if something is named after me it will probably be a syndrome or disorder.

fredr123 Manoeuvre?

[fredr123]

The SCC will rule on Thursday whether it will grant leave to appeal another tax case involving GAAR. The case in question, according to the National Post and some observers, seems to suggest that that merely getting tax advice from a lawyer or an accountant and implementing it could colour a transaction's tax treatment

http://network.nationalpost.com/np/b...-gaar-pot.aspx

[Bobblehead]

Originally Posted by fredr123

The SCC will rule on Thursday whether it will grant leave to appeal another tax case involving GAAR. The case in question, according to the National Post and some observers, seems to suggest that that merely getting tax advice from a lawyer or an accountant and implementing it could colour a transaction's tax treatment

http://network.nationalpost.com/np/b...-gaar-pot.aspx

I was wondering why the name of that blogger, Julius Melnitzer, sounded so familiar.

The police discovered that Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. He'd used them to secure around $67 million in loans from several banks. Melnitzer had convinced a printing company in his hometown of London, Ontario, to make the certificates, claiming he needed to use them in an upcoming trial. Police also found out that he'd bilked several close friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore.

http://www.theglobeandmail.com/servl...eRequested=all

[fredr123]

Originally Posted by fredr123

The SCC will rule on Thursday whether it will grant leave to appeal another tax case involving GAAR. The case in question, according to the National Post and some observers, seems to suggest that that merely getting tax advice from a lawyer or an accountant and implementing it could colour a transaction's tax treatment

http://network.nationalpost.com/np/b...-gaar-pot.aspx

Anit-climactic. Leave to appeal dismissed with costs.

The SCC won't hear the matter and the Federal Court of Appeals decision stands.

For Bobblehead's sake, I won't quote Melnitzer's opinion.

[Bobblehead]

Originally Posted by fredr123

Anit-climactic. Leave to appeal dismissed with costs.

The SCC won't hear the matter and the Federal Court of Appeals decision stands.

For Bobblehead's sake, I won't quote Melnitzer's opinion.

I just knew I recognized that name. It was a huge story in London (my hometown), but I didn't originally recognize it because I work for a tax firm and figured I knew it from something tax related I had read.

[Kavvy]

Good morning all,

Can anyone tell me if I can make the below work for my first mortgage, or would I need a large amount of assets to sell first?

Is the smith maneuver what the wiki article below is referring to?

An indirect method for making interest on mortgage for personal residence tax deductible in Canada is through an asset swap, whereby the homebuyer sells his existing investments, purchases a house in full or in part by the sale, gets a mortgage on the house, and finally, buys back his investments with the money from the mortgage. The Supreme Court of Canada has ruled in 2001 in the Singleton v. Canada case [1] that transactions in the asset swap are to be regarded as distinct, thus rendering the interest on home mortgage acquired as part of the asset swap tax deductible

Thank you!

[Slava]

Originally Posted by Kavy

Good morning all,

Can anyone tell me if I can make the below work for my first mortgage, or would I need a large amount of assets to sell first?

Is the smith maneuver what the wiki article below is referring to?



Thank you!

It would work. The Smith Manoeuvre is basically that but on an ongoing basis.

[Northendzone]

Originally Posted by fredr123

Someday, I hope to have a manoeuvre named after me. That would be awesome. Realistically, if something is named after me it will probably be a syndrome or disorder.

for years i had the same dream, don't give up.......

Regards,
John Donkey Punch

[troutman]

Originally Posted by Northendzone

for years i had the same dream, don't give up.......

Regards,
John Donkey Punch

Tony Danza likes this.

[Displaced Flames fan]

Originally Posted by Resolute 14

Well, the US is in trouble because people wrote off the interest, then used their giant tax returns to buy vacations, plasma TVs and other non-essentials.

If Canada was like the US in this regard, I'd use the tax break to pay down the mortgage faster. But that would probably put me in the 0.001% of people who actually would do that.

No, the US is in trouble is because our government has no concept of a ceiling on debt or spending.

Our citizenry sees debt as a tool rather than as a big ol' pool of quicksand.

I write off my mortgage interest every year and it certainly doesn't result in a big fat refund....

Of course, I actually have a responsible 3.50% mortgage too.

In any case, being able to deduct mortgage interest is NOT the cause of America's economic issues.

That doesn't mean I think it is superior to what Canadians have.....

[ken0042]

Updated the thread title to reflect the fact that most of the mosts are 2.5 years old.

[Kavvy]

Originally Posted by Displaced Flames fan

I write off my mortgage interest every year and it certainly doesn't result in a big fat refund....

Of course, I actually have a responsible 3.50% mortgage too.

...

Is this possible to do without your own business or a large amount of assets?

[Slava]

Originally Posted by Kavy

Is this possible to do without your own business or a large amount of assets?

He's in the US, so the laws there allow you to write of the interest each year and then you pay CG tax when you sell the house.

[Northendzone]

Originally Posted by troutman

Tony Danza likes this.

my old buddy (R. Trombone) also had a similar observation