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How A Partner In A Law Firm Deducted the Down Payment For Buying A House For Tax Purposes? Very Ingenious And Why To Challenge Canada Revenue Agency:
In 1988 Mr. Singleton used $300,000 from the capital account of his law firm towards purchasing a house in his wife’s name. On the same day he wrote the cheque for the house, he borrowed money to replace the partnership capital and later claimed a tax deduction for his interest costs.
Of course the CRA decided that this action was incorrect and so disallowed the interest deduction claimed. The Tax Court agreed but thirteen years after the fact, in 2001, the Supreme Court did not, holding that Mr. Singleton’s attempt to minimize his taxes was irrelevant.
He had legitimately borrowed funds to replace business capital and so he was entitled to the deduction.
The implications of this decision are clear and far-reaching. If you have business assets or investments they can be sold to make personal purchases then you can borrow to buy the same or new assets while deducting the interest costs from your taxable income.
Here is where I have personally used this for my self:
I had $20,000 in an investment account
I wished to purchase a new car and receive a loan
Most bankers will give you the non deductible loan (if you are not using it for business) and then sell you more investments.
However simply cash in your investments and pay for the car, then borrow funds to replace the investments (be careful of the superficial loss rules if claiming.) Most bankers will not tell you this. (Applicable to Non RRSP holdings.)
Mr. Singleton was not the only one brave enough, or smart enough, to challenge the tax collector. Irving Ludmer in Ludco Enterprises Ltd., et al. v. Her Majesty the Queen (FC) (Supreme Court of Canada, September 2001) had his interest costs disallowed simply because the tax man decided his investments did not produce enough income to justify the writing off of interest costs.
He had claimed a deduction for six million in interest costs while earning only $600,000 in dividend income over an eight-year period.
However he did produce $9.2 million in capital gains but as you know while dividends are considered income from property, capital gains are not.
So Revenue Canada denied the interest expense deduction.
But the Supreme Court, for that is where it finally ended, thought differently.
They decided that Ludco did have a reasonable expectation of some property income which satisfied the test required under the Income Tax Act and then ruled that property income does not have to be the “exclusive, primary or dominant purpose of the investment to qualify for interest deductibility”.
The lesson here?
Do not be afraid to appeal and challenge the department’s decisions, these people did it and won. And the court’s rulings benefit not only them but also all Canadians.
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