What: Today, the Supreme Court of Canada released its decision and reasons in Lipson v Her Majesty the Queen. In a 4 to 3 decision, the Court ruled against the taxpayer. The decision considers the application of the General Anti-Avoidance Rule (GAAR) in the Income Tax Act to transactions involving the deduction of interest expense.
This ruling is an important precedent regarding the extent to which taxpayers are entitled to organize their affairs with certainty and predictability when incurring debt. It is also an important legal precedent on the interaction of the GAAR and the specific provisions of the Canadian tax legislation.
The decision will have far-reaching ramifications for many commercial transactions that involve the deduction of interest. This case also has international implications because of the new rules denying the deduction of interest on certain foreign affiliate financings.
Background on Lipson:
The case of Mr. Lipson involved the financing of a transaction that qualified for interest deductibility under the specific provisions of the Income Tax Act. The transaction was reassessed by the tax authorities under the GAAR to deny the tax advantage obtained as a result of the interest deduction.