Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Two recent cases seem directly opposed. Can you give us any indication how the CRA plans to reconcile Lipson and Singleton?
Position: The CRA will be considering the impact of the Lipson decision on the position set out in paragraph 13 of IT-533.
Reasons: It appears that the outcome in Lipson cast doubt on the position set out in paragraph 13 of IT-533 to the effect that a taxpayer may restructure borrowings and ownership of assets to meet the direct use test.
2007 STEP Round Table
Q. 17 Interest Deductibility: Lipson and Singleton
Two recent cases seem directly opposed. Can you give us any indication how the CRA plans to reconcile Lipson and Singleton?
Response
Paragraph 13 of IT-533 states that it is the direct use of the borrowed funds that generally determines the whether interest will be deductible. That paragraph quotes the Singleton case, among others, as support for that conclusion. In Singleton, the application of GAAR was not considered.
In Lipson, the Federal Court of Appeal found that the Tax Court was entitled to consider the transactions as a whole and their overall purpose in the GAAR misuse and abuse analysis. The Tax Court found as a fact that the transactions formed part of a series, the purpose of which was to make mortgage interest deductible. The Federal Court of Appeal saw no reason to interfere with that decision. Lipson has been appealed to the Supreme Court though there has not been an announcement as to whether the Supreme Court will hear the appeal.
Many practitioners believe that the outcome in Lipson cast doubt on the position set out in paragraph 13 of IT-533 to the effect that a taxpayer may restructure borrowings and ownership of assets to meet the direct use test.
The CRA will be considering the impact of the Lipson decision on the position set out in paragraph 13 of IT-533 and our conclusions will be published in an upcoming Income Tax Technical News. In the interim, if you have specific proposed transactions we recommend that you request an advance income tax ruling.
June 8, 2007
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