A recent decision by the Federal Court of Appeal on a tax manoeuvre called the
Singleton Shuffle, has dealt a severe blow to investors' ability to write off
interest expenses when money is borrowed for the purpose of earning investment
income.
The Singleton move was named after Vancouver lawyer John Singleton's 2001
Supreme Court of Canada victory, which upheld the notion that if you have equity
in either your business or home, you can borrow against that equity for the
purpose of earning income and write-off interest charges.
Since that 1991 decision, Canadians who have non-registered investments have
been encouraged by financial advisors and tax planners to liquidate these
investments and use the proceeds to pay off their mortgage. The investor could
then obtain a loan secured by the newly replenished equity in their home, and
use the loan for the purpose of earning investment income, thus making the
interest on the loan fully tax-deductible.
The most recent case involved Earl and Jordanna Lipson, a couple who wanted
to buy a home.
Jordanna borrowed $562,500 from the bank and used the money to purchase
$562,500- worth of shares in the family's corporation from her husband. Earl
then used the $562,500 to buy the home.
The question before the court was whether the interest expense on the money
Jordanna borrowed to purchase shares from her husband was tax-deductible.
The Canada Revenue Agency attacked the Lipson case using the general
anti-avoidance rule (GAAR), an overarching rule in the Tax Act that can attack a
legitimate tax plan for being a misuse or abuse of the rules.
The CRA won its battle against the Lipsons last year in court, and won the
appeal this month.
What's interesting about this case is that the Federal Court of Appeal
actually agreed with each step of the Lipsons' transactions, including finding
that the interest was indeed tax-deductible since the proceeds were used for
earning income. However, when viewed as a whole, the court found the entire
"series" of transactions was abusive.
This is clearly troubling as it may preclude an individual from rearranging
his or her affairs in the most tax-effective manner.
And where does this leave the Singleton Shuffle?
Al Meghji, a senior tax litigator with Oslers, who has successfully argued a
GAAR case before the Supreme Court, cautions investors to tread carefully.
"Although it is difficult to say that it is 'the end,' it certainly makes it
much easier for CRA to attack," he says.
David Spiro, a tax partner at Blakes, advises investors not to throw in the
towel.
"This particular plan clearly wasn't able to withstand attack by Revenue
Canada. Are there plans out there that could withstand attack? Sure."
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the vice-president, taxation and estate
planning, at AIM Trimark Investments in Toronto.
Jamie.Golombek@aimtrimark.com