Tax Tips

Anti - Anti Avoidance



The government through CRA has suffered a few groundings as it has attempted to navigate its way to the treasure islands known as the taxpayer pocket. Where there used to be a clear channel for the taxpayer to, as the House of Lords said in 1936 "arrange his affairs in such a manner as to attract the least amount of tax", this had been blocked. Yes, CRA had the ability in the past to stop you from sailing  down the channel of tax avoidance by chanting GARR which translated means the “General Anti Avoidance Rule”.

In the old days if you mortgaged a business asset to pay off a personal indebtedness, CRA would disallow the interest expense on the new higher business indebtedness as they said it violated the section 245 of the Act, known as GAAR.

One day a Vancouver lawyer named Singleton sold his interest in his legal practice to his partners for $300,000. He then applied the proceeds to cover his mortgage (for which the interest was non-deductible for tax purposes). That same day he went to the bank and took out a loan of $300,000  and used the proceeds to buy back an interest from his ex-partners in their legal practice.

The interest on this $300,000 bank loan, according to Singleton, was a tax deductible expense because it was money borrowed to buy an income producing asset. Not so said CRA, section 245 of the Income Tax Act clearly states that when a commercial undertaking is executed for the purpose of reducing taxes the Agency has the right to overturn that or reject it.

Singleton fought it all the way to the Supreme Court of Canada and won. His argument was that Section 245 of the Act applies only to corporations as Merton in 1936 gave“a man” the right to tax avoidance, not necessarily a corporation. So now any Canadian with a business asset can dispose of it, apply the proceeds to his personal indebtedness  and borrow to finance the business asset.

Thank you Mr. Singleton.

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