A recent Supreme court ruling finally confirms that rearranging your debt to benefit from interest deductibility of investment loans is allowed by Canada Revenue.
This is a popular tax planning technique by which those who own non-registered investments are advised to liquidate these investments and use the proceeds to pay off their mortgage. The investor would then obtain an investment 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, (Generally Anti-Avoidance Rules). To make a long story short, CRA were not able to established that the first transaction i.e. doing the debt-swap explained above, had 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. We are celebrating this ruling!
Here is the full story: