Lee

The Income Tax Act is over 2500 pages long and is written in such form and language that even the “experts” have a difficult time coming to any agreement on its interpretation. So how do they expect the average Canadian to understand it? Perhaps the Act was written the way it is written to purposely deceive and confuse us into believing we have an intent to profit from our activities, i.e. a “source of income”, so they could tax it!

MODERATOR’S COMMENTS.

Hi Grant,

Thanks for your comment.

It is an interesting argument. The challenge with your thinking could be a lot of fun to pursue…. For instance, if you engaged in the thinking of “intent” all any business could simply start up for the purpose of having fun and have no intent of profit. The person would have to be willfully blind to the fact that they were making money.

It got me thinking and I did some poking in the income tax act.

While your argument has a logical thought train, it falls apart under the Income tax act.

You are 100% correct. If you have no source of income, then you do not pay tax on the money that did not come in.

I think you are right that income is not defined in the act.

However what is “taxable income” is clearly defined.

Thanks for playing with my head. I enjoyed the journey into the thinking.

Best Regards

Dan White
www.taxauditsolutions.ca

A B.C. taxpayer who fought the Canada Revenue Agency over a million-dollar tax bill he didn’t owe and won says the federal government misled him to believe he would be compensated for his financial losses.
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“They’re trying to now find a way to shove this under the rug or silence it so that they don’t get embarrassed,” 64-year-old Prince George resident Irvin Leroux said.

“Promises have been made at the political level,” added his wife, Jill Moore, “and still, here we are.”

Correspondence suggests Leroux’s MP, Conservative Dick Harris, was assured three years ago by the minister responsible that the government was prepared to compensate Leroux for Canada Revenue Agency errors that cost Leroux his business and his home. That settlement has not materialized.

“They took everything I was, everything I stood for, and destroyed it,” Leroux said.

CBC News made several requests to talk to Revenue Minister Jean-Pierre Blackburn about Leroux’s case but received no response.

Before their fight with the taxman, Leroux and his wife owned and operated a successful RV park in Valemount, B.C. In 2002, Irvin’s RV Park and Campground was awarded the prestigious SuperHost customer service award by B.C. Tourism.

Leroux said his tax troubles began in 1996, when an auditor from the tax agency showed up to look at the books. The auditor took Leroux’s business receipts and other records, he said, then misplaced those records at the CRA office.

“He told me someone had put them on the pile that was to be shredded,” Leroux said.

Without receipts to show his business expenses, numerous CRA audits over several years concluded Leroux owed almost $900,000 in personal income tax, plus over $100,000 in GST, including interest and penalties.

“I said, ‘You had all of these records. You knew I had paid out those expenses. You lost them, and now you’re telling me that you are going to disallow them all?’” Leroux recounted. “I said, ‘That’s fine, I will seek a tax lawyer. I will see you in court.’ ”

In 2005, he took his case to the Tax Court of Canada, where the CRA gave up in a so-called consent to judgment, essentially admitting its mistake. That reduced Leroux’s personal tax bill to zero and his GST bill to $20,000. Documents show that by 2006, Leroux was actually owed a $24,000 tax refund.

Years before his case got to tax court, however, the CRA had obtained a writ of seizure and sale against Leroux’s properties so it could move in and collect on his alleged tax debt, if necessary.

“These individuals have the right to come after every one of your assets without justification on what they are doing,” Leroux said.

Because its security was suddenly at risk, Leroux’s main creditor the Business Development Bank of Canada demanded in 2001 that he pay back his very large business loan.

That touched off a chain of events, Leroux said, that forced the sale at reduced prices of his business, his home and other assets, valued at approximately $4 million.

“I lost my house, I lost my business, I lost my land, I lost my income, I lost my savings I lost it all,” Leroux said. “Why? Because [the CRA] wouldn’t admit to their mistakes. They would sooner destroy me and try to bury me out there than admit they did wrong.”

“I’ve said to him the whole way, I will fight with you,” said Moore, his wife. “This is wrong. They can’t take it away and not even apologize. They can’t take it away and not be held accountable.”

After Leroux’s tax bill was cancelled, his MP, 16-year veteran B.C. caucus chair Harris, stepped in and took his case to Ottawa.

Correspondence shows that in 2006, Harris had several discussions with then minister of national revenue Carol Skelton a member of Prime Minister Stephen Harper’s cabinet urging her to arrange compensation for his constituent’s losses.

At first, Skelton assured Harris that if Leroux filed a lawsuit against the government, an out-of-court settlement could be arranged, the documents suggest.

In a letter to the minister, Harris repeated what she had led him to believe: “I was told that ‘CRA does not have a mechanism to proactively pay damages however if Mr. Leroux launches a court challenge with a statement of claim, the department could settle out of court.’ ”

In an email to Leroux, Harris wrote: “I am convinced that things are going as we were promised. [The minister] wants the outcome of your case to be an example of how Revenue Canada must be held accountable for its abuses of Canadians.”

Later in 2006, when there was no sign of a settlement in the works, Harris wrote this angry email to the minister’s assistant:

“I am livid. This whole episode is the most inhumane treatment I have ever witnessed in my life. And I cannot believe that our own government would treat Canadians in this manner. Mr. Leroux is an honest, principled individual who had been driven to the brink many times by Revenue Canada. If Revenue Canada mount even the slightest objection to the statement of claim filing this week I ASSURE YOU AND THE MINISTER THAT ALL HELL IS GOING TO BREAK LOOSE. This is bulls–t!”

Harris refused a request by CBC News to be interviewed about the affair, however, saying, “I don’t consider the work that I am doing for [Leroux], that it should become a news story, somehow.”

In March, the CRA tried to have Leroux’s statement of claim thrown out of court. Leroux said he would have never filed the claim in the first place if he hadn’t been urged to by his MP, because he can’t afford a lawyer to pursue it.

Leroux said he now feels betrayed by the Harper government, including the prime minister. When Harper himself was campaigning to be leader of the Conservative party, Leroux said, he spoke to the future PM at length about his fight with the CRA.

“He said to me, ‘I guarantee you if I have your support and I get elected in as the leader of this party,’ he says, ‘I will give you my word I will look into this matter for you and get the matter resolved.’ Now, he’s forgotten my name.”

“We’re tapped out,” Moore said. “There are no more lawyers we can pay. No more accountants we can hire.”

“We don’t have a system in place to protect us,” Leroux added. “Because I’ve gone through the system. I’ve gone through the steps. And every time I walk the steps, I find there’s always something there to push me back down. Where is the justice?”

Internal CRA emails written by assistant commissioner Rod Quiney in August 2006, obtained by Leroux under the federal access to information law, summarize the agency’s position in his case:

“I believe we have been very fair and have in all respects provided the appropriate respect for his position and appropriate redress [by cancelling the debt],” Quiney wrote.

“No compensation will be paid,” he concluded.

Leroux is thoroughly disappointed in the Harper government he supported.

“The people we elected to look after this stuff and protect us, they’re not there, because the bureaucrats who did all of this stuff are instructing the politicians on what to do.”

Tax Man Appeals $1.3 million award according to www.saanichnews.com

by Vivian Moreau (News Staff)

A Saanich business man who won a landmark settlement against Canada Revenue Agency said he is ready to go to court again. The agency announced last week they will appeal the $1.3 million that the B.C. Supreme Court awarded Hal Neumann. The jury felt CRA investigators breached Neumann’s right to be free from unreasonable search and seizure under the Canadian Charter of Rights and Freedoms.

“I’m into it this far. I’m going to see it through to the end, “Neumann said.

His lawyer has told him the CRA will argue that the B.C. Supreme Court did not have the jurisdiction to hear the case.

“It’s an issue that should be of great interest,”he said. “It really concerns the essence of rights of innocent people in this country that most people take for granted: that the government says they have the right to come into your home and do whatever they want.”

Well we can’t all be masters of all trades, to paraphrase the old saw. I have also been corresponding with Fraser Smith, who is a planner, not a mortgage broker, so I think between the three of us we have it covered (if we can agree!). I first met Fraser just before I wrote my article three years ago, and he was very pleased with my good friend Jon Chevreau’s FP article last Saturday sub-titled “Smith Manoeuvre holds up in CRA Challenge”. I hadn’t seen that piece until Fraser pointed it out out me earlier today, and it does indeed seem to contradict your GAAR opinion. Going back to your original response, it seems that as you point out it is all in the promotion and intent.

I have been a student of mortgages for 2 decades, and I am all over any system that helps people get out from under the burden of any loan that is serviced with after tax income. Fraser calls that “bad debt” and that’s the way I think of it too. You call it good debt, but I assume you mean in comparison to consumer debt. I think of them as the same, again because you have to pay tax before you make the payments. My strategies are ALWAYS to get rid of both!

There is a very interesting system out of the US called “Money Merge” that is excellent for the US market, and works well there, but doesn’t carry the same impact in Canada, to my mind. It coaches people who have some discretionary income to maximize their prepayments. It is also US$3,500, unfortunately. My (Canadian) approach is to help people achieve the same end by creatively using the very same readvanceable type of mortgage that Fraser had such a major hand in creating.

Finally I would indeed like to talk to you about your accounting system. It sounds as though it could work very well with what we are planning to do. Let’s grab a coffee and talk about it. Drop me a line and let’s do it in the next few weeks.

Cheers

Tony

I like your response.
It is good that you are the mortgage guy and set me straight. Thanks for that.
I was operation on the belief of the 10% mandatory privilege of paying off a mortgage, even without that written in the contract. This was based on a company I am aware of promoting this in the market. Normally I tend to check my facts. This time I did not because one would assume that the company would have to be pretty sure of themselves to promote it as part of their business. I did some searches now … And I don’t see anything to that effect. Interesting.

I find it interesting that you are really into mortgage strategies… Can you tell me more about why people deal with you… What sets you apart from other brokers… I am always looking for people who know their stuff and go the extra mile.

Feel free to bounce ideas off me on tax or tax reduction strategies.

Also if you are interested… I have a joint venture going where we are going on line with a bookkeeping system that I developed. It is the only audit ready accounting software that I know of… It teaches the user about finance… Let me know if you are interested as it could be very useful for you in working with your clients.

Best Regards

Dan

Well, taxes are your game, and your expert insights are appreciated, but mortgages have been my game for quite a while, and you apparently haven’t had one for a number of years! I say that kindly, and in jest, because total annual prepayment privileges with the vast majority of lenders are now either 15% or 20% (20 especially, but not exclusively in variable rate mortgages which except for when 5 year mortgages were 4.25% I have consistently advocated). Also, most lenders now have sophisticated mortgage systems, and to compete with mortgage brokers even banks have had to set up prepayments to be made on any payment date, as long as they are $100 or more. If you have a weekly payment mortgage you can make 52 extra payments if you want!

This factor is what has led to the programs that incorporate extra payments monthly, typically but not always from T-SWP distributions. It also facilitates more rapid amortization for the frugal who somehow manage to find extra money to pay the mortgage down quite frequently, but not necessarily on the anniversary date.

Anyway, your tax/CRA insights are very helpful, and especially encouraging for me, as I am advising a company on structuring a rapid mortgage paydown program that is also a business, and that has incidental tax benefits that are by no means the main purpose. I will certainly heed your pragmatic suggestions in this regard.

Thanks again!

Cheers

Tony

I think you have it pretty clear now.

If I were going to do this program which has some smarts built in, (I don’t agree that it is genius in anything but marketing.) I would simply freeze/identify my existing mortgage amount, and then I could taking my allowable 10% annual mortgage prepayment allowed by law. The financial penalty for exercising the legal right to prepay is pretty small.

I would make my mortgage payments regularly as usual… Showing I am not playing games with my non tax deductable mortgage payments. At the end of each year, I would make my 10% prepayment. Simple, clear and legal. No games at this juncture.

I would arrange a HELOC, and invest my money in my chosen area. I would claim the income from the program/business and would take that money to make annual payments on my first mortgage. I would claim the HELOC interest as tax deductable.

I would consider not using the income from my investments to pay down my HELOC. Rather I would put the returns back into my HELOC funded business, continue writing off the interest, and use the income to generate more returns on my income.

I see debt as both good and bad depending on the type of debt.

It is bad if you are paying for something decreasing in value.

I see debt is good if it is being used to accumulate wealth. That is why I would not pay down the HELOC… It is a good debt with tax deductible interest.

I would do my investment as an active business and not a passive investment activity. (I did mean income in my previous response.)

My right to pay off my mortgage with after tax dollars is undisputable. However a mortgage is a good debt and can only be paid with after tax income. To try otherwise will trap the person in GAAR.

So long as I am not doing the conversion process, I am fine.

I would be happy to defend any client who was doing it my way, in court as I know I would win.

In response to your last question the answer is “yes.”

How I would word it would be along the lines of…..

Convert your home equity to a money making machine. We can show you exactly how to do this and how you can grow your wealth. If you do this right, the side benefit to earning greater wealth is savings on income taxes. Interest paid on genuine business activities and specified investments is tax deductable. As a matter of fact, if you do this right, none of your income from this process will be taxable and you could earn enough income to more than pay off your home debt, should you decide that is what you want to do.

Best Regards

Dan

Thanks for your in-depth response. I see your point. It’s fine - important in fact - to pay off your mortgage, and it’s fine to use a line of credit secured by your home to invest and generate investment income (you said interest, but I think you meant income?), but what’s not fine is to participate in or construct a program whose stated or obvious purpose is to avoid taxes, rather than to undertake either of the above. Would that be a fair assessment of your point of view as regards GAAR?

One observation I’d like to make is that the “genius” of the Smith Manoeuvre, as I see it, was the invention of the re-advanceable line of credit that increases as the amortizing mortgage decreases. Anything one does to reduce the principle, which happens to generate non-deductible interest, would appear to be a good thing; and depending upon your point of view on leverage, anything one does to invest for the future on a regular, averaging basis would also appear to be a good thing, especially if the interest you’re charged on it is deductible.

My final question to you then is “if the promoter were not to advertize tax savings as main purpose of a program, or construct a program that is clearly set up for the purpose of converting a mortgage to tax deductibility, but to indicate that the paydown of a mortgage and the accumulation of an investment are the main reasons for the program, the tax savings being incidental, would that fact help the consumer when CRA comes calling, as long as the mortgagor keeps clear records of his investments, as you indicate in your response?”

Interesting debate!

Cheers

Tony

I do a lot of tax work helping clients who are attacked by CRA and I do a lot of tax strategies. Therefore I am used to dealing with how CRA thinks about GAAR and other approaches they have to decrease tax deductions by citizens.

Basically I see this as fundamentally simple. 90% of an auditors time is in dealing with how expenses relate to business. Auditors and Appeals Officers have the right to assume facts in absence of statements of fact on business expenses. Investing is a business activity to earn interest.

Where the SM and the SS fall in with the Lipson case is that they all look at “conversion” as a predominant purpose of the procedure.

While as you state the SM takes the long term process, it still leaves a paper trail that leaves it smelling like an avoidance procedure. That certainly is how I see it. A key issue is always that if in your heart you know you are trying to beat the system by a coy procedure, you know you are really doing illegal tax avoidance. I see it a bit different than tax evasion.

The common thread in these strategies is to have mortgage interest become tax deductible by making them appear legitimate through various proceedures. No matter how you slice it, if you are playing that Game, GAAR will get you.

There is a ton of 680 News and other ads on “conversion of mortgage interest to tax deductible interest.” This is where things fall apart.

What the simple insight is…. just intend to borrow money to invest…and have the paper trail to prove it and you are fine. Just keep paying off your mortgage as a separate activity.

CRA loves these plans as they get triple the money when they collect.

I looked very closely at the SM because I really wanted to be sound. I love doing this stuff. But I was very sure that this would get caught in GAAR.

I hope this helps to see my perspective, if I can help further, please let me know.

Best Regards

Dan