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Why CRA Always Wins

Not sure if you have had such an experience. For example, if you subscribed to Rogers’ home internet service, on the service contract it says “unlimited usage”, but after a few months, Rogers comes back to you and says that you use too much P2P upload and download, as the result the amount in your monthly bill will drastically increase.

At this time, you say: wait a second, the service contract did say it’s “unlimited usage”.

Rogers replies: yeah right, but we just feel that you “abused” the terms on the contract.

In the same way, when you confront the CRA for a tax matter and when the CRA is about to lose the dispute, CRA will throw the statement “you abused the tax law”.

An example is a 2009 case. The full story is a bit convoluted so I put a summary at the bottom of this article. In short, the Lipson Couple sold some stock shares and made money, they declared a $10k interest expense as a deduction for the share proceeding income, and entire operations followed CRA’s Attribution Rule.

CRA did not agree with the $10k expense.  The two parties end up going to court.

In court, the lawyers of the Lipsons had two statements:

  1. CRA created the Attribution Rule, and CRA should stick to it.
  2. CRA’s behaviour is eliminating the freedom of all Canadians to restructure their affairs to leverage income-earning assets

The reply from CRA’s attorney is:

  1. Yes, the Attribution Rule is in our tax law, but we feel that the taxpayer has abused the tax law.
  2. No comments to the second statement.

The judges were confounded. In the end, after long discussions, the Supreme Court sided with the CRA (it’s actually MNR in Quebec). In the 36-page judgment document, a large number of detailed reasonings have been listed, but in short, it is as simple as: if aggressive tax planning is too aggressive, it is contrary to the taxation spirit of serving the whole country, thus the government rules. Lipson v Canada [2009]

In the contest between Equity and Order, most judges have to come to the direction that the Order prevails.

 

The couple, Mr Earl Lipson and Mrs Jordanna Lipson

  • On 1994-08-31, they borrowed $562,500 from the Bank of Montreal to buy shares of Mr Lipson’s company
  • On 1994-09-01, they closed a $750,000 real estate property as their principal residence
  • On 1994-09-02, they refinanced the house and obtained another $562,500 from the mortgage. They used this money to pay off the BMO loan
  • They sold the company’s stock and made a very profit
  • In 1994, 1995 and 1996, the husband deducted from his taxable income a total of more than $104,000 in interest expenses on the mortgage loan.
  • The Minister of National Revenue disallowed the deductions and reassessed Lipson accordingly. The government’s position was that the complicated series of transactions amounted to “abusive tax avoidance.”