Supreme Court Shoots Down Lipson – Effect on Smith Manoeuvre?

supreme-court-mortgage-case The Supreme Court of Canada has ruled against a complex strategy to make mortgage interest tax deductible. 

The court said the defendants, Earl and Jordanna Lipson, effectively abused tax laws.

According to the Calgary Herald:  "The scheme involved paying down their mortgage immediately after obtaining it, then using the repaid principal as collateral for an investment loan, which is tax deductible under the Income Tax Act."

There's no clear indication yet on if/how this may affect the popular Smith Manoeuvre.  The Smith Manoeuvre is different in many key respects but there is at least some overlap in principal. 

The Globe's Rob Carrick, for one, suggests it might not impact the Smith Manouevre.  He quotes a tax lawyer that says the ruling has no effect on borrowing against one's home to invest and making the interest tax deductible.

We'll take some time to research and get opinions on the verdict and then report back.

Here is the Supreme Court's decision:  Lipson v. Canada

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Note: This story is for general interest only and not advice! As always, seek professional tax counsel before jumping into any tax-related strategy.

  1. How is this different? Did they rule against one who owns 100% of their home, whereas the SM is used to rapidly pay off 100% of the home (and build a portfolio in the process)?
    At the very least, would this not imply that once you own 100% of your home (if I understood this post correctly), the gov’t has ruled you cannot use the same strategy anymore?

  2. In the ROB article it says:
    “The Lipson case dates back to 1994, when Earl Lipson and his wife, Jordanna, both of Toronto, began a series of transactions related to the purchase of a home. The ultimate aim was to replace non tax-deductible mortgage interest with an investment loan where interest would be deductible.”
    Isn’t that the SM?

  3. Lipson lost because he attributed tax deductions improperly. A plain Jane Smith Manoeuvre is just borrowing to invest. Nothing wrong with that.

  4. Hi MT,
    I hope this helps your readers. In a nutshell the Libson case is a misunderstood one. The media sometimes takes a story and only tells half the facts, then some people who read this tell it again like it is the truth.
    Here is the story from Jamie Golombek, CA,
    While the Lipson plan itself may be dead, the bigger question is whether the decision will have any impact on a plain-vanilla debt-swap strategy, often known as the “Singleton Shuffle.”
    The Lipsons essentially used a variation on the classic “Singleton Shuffle,” named after Vancouver lawyer John Singleton’s 2001 Supreme Court victory, which upheld the notion that you can rearrange your financial affairs in a tax-efficient manner so as to make your interest on investment loans tax-deductible.
    This technique has been employed by many Canadians who own non-registered investments and are advised to liquidate these investments and use the proceeds to pay off their mortgage. The investor would then obtain a loan secured by the newly replenished equity in their home, and use the loan for earning investment income, thus making the interest on the loan fully tax-deductible.
    Based on the Lipson ruling, it appears that this strategy is still valid and would not invoke the GAAR. As the majority wrote, the CRA “has not established that in view of their purpose (the interest deductibility) provisions have been misused and abused. Mrs. Lipson financed the purchase of income-producing property with debt, whereas Mr. Lipson financed the purchase of the residence with equity. To this point, the transactions were unimpeachable. They became problematic when the parties took further steps in their series of transactions.”
    This was echoed by Mr. Justice Rothstein in his minority dissent, saying: “There is no reason why taxpayers may not arrange their affairs so as to finance personal assets out of equity and income earning assets out of debt.”
    Bottom line? Plain-vanilla debt-swap refinancing seems to be alive and well in Canada.
    Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.
    Filed by Jamie Golombek, Jamie.Golombek@cibc.com
    Originally published on Advisor.ca
    Also, here is some more information from the financialpost…
    “For investors, the case is both good and bad, said Evy Moskowitz, a lawyer at Moskowitz and Meredith, a law firm affiliated with accounting giant KPMG. It’s good news because “you can still borrow money against the equity in your home and use the proceeds to invest in the stock market and interest will be deductible. It’s bad in the sense that I believe it has made it easier for the [Canada Revenue Agency] to apply the anti-avoidance rule…and that will result in a lot more uncertainty in tax planning.”
    Hope this helps.
    regards,
    Brian

  5. Didn’t the Singleton case happen before the current GAAR policy was in place? Hence, Singleton may or may not still be valid in today’s circumstances.

  6. I don’t think Singleton had any questionable transactions that GAAR could be applied to.
    The smith manoeuvre is so basic (simple borrowing to invest) that it would be far too difficult to invalidate IMO.

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