Research Assignment

Case # 1

The lawyer’s aim when he pulled back his total working capital from his

business bank account was to economize on interest from taking out a

mortgage on home, while being capable of subtracting the interest loan

because it is used to refill capital and in the burden of produce income.

Agreeing to CICA Handbook, expenses used to gain income are, in fact

deductible. CICA does not define the term interest, the Supreme Court of

Canada defines interest as “the return for the use by one person of a sum of

money, belonging to, in a colloquial sense, or owed to another.” By definition,

the amount of money owed from the loan taken out by the lawyer in order to

replenish his capital would be considered. Interest expenses that are incurred

to earn income are deductible as described by CICA. Due to this reason, it

would appear that the interest created by the loan to replace the capital is

fully deductible. This would be a true statement, in my opinion.

The fact that the lawyer has used capital from his company in order to

purchase a home is belief of what tax planning should be. CICA has seen it all

and has created provisions even for tax avoidance of this nature. If this were a

completely acceptable practice, it would

be common practice among the business world and it simply is not. The

implications of mixing business with personal affairs have become very

awkward in nature and appropriate policies are needed to be introduced. The

practice of using capital in order to finance a personal mortgage seems

somewhat unjust. Using this research, I must introduce imputed interest to

this case. Imputed interest is defined as interest considered to be paid; even

through no interest, payment has been made. In effect of this, CICA

calculates the interest that should have been paid on the mortgage amount at

a fair rate and the Lawyer will be responsible for this amount with taxes.

Another reason the lawyer could be sting by this transaction is the fact

that he is using company’s funds in order to finance his personal mortgage.

The entire amount of the mortgage is used for personal purposes and thereby

the full amount will be added to the lawyer’s taxable income.

Practically, this bank loan expense is deductible. The mortgage according

to the lawyer’s notion is simply not interest free. The lawyer has already made

his mind and he might face a negative consequence at the end of the year if

he does not pay tax on this amount.

So as you can see, this “tax saving” plot the lawyer has attempted to

play may seem to save taxes and interest in somewhat of a loophole but in

the long run it works out to costing more. CICA is constantly updating and

amending its practices. They have employees that are well versed in all areas

of the tax code, this way of saving taxes is simply too easy to make logical

sense. The lawyer should have known that this situation was simply too good

to be true and consulted an accountant before making such a huge business

decision.
 Case- 1

The lawyer’s intentions when he withdrew his entire capital account from his law firm

was to save on interest from taking out a mortgage, while being able to deduct the interest to

repay the bank loan because it is used to replenish capital and in essence produce income.

According to CICA Handbook expenses used to gain income are, in fact deductible.

CICA does not define the term interest, rather they use the determination of the Supreme Court

of Canada which defines interest as “the return or consideration or compensation for the use or

retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to

another.” By definition the amount of monies owed from the loan taken out by the lawyer in

order to replenish his capital would be considered interest. Expenses that are incurred to earn

income are deductible under the CICA regulations. Because of this reasoning it would appear

that the interest created by the loan to replace the capital is fully deductible. This would be a

true statement, in my opinion.

The fact that the lawyer has used capital from his company in order to purchase a home

is belief of what tax planning should be. CICA has seen it all and has created provisions even

for tax avoidance of this nature. If this were a completely acceptable practice it would be

common practice among the business world and it simply is not. The implications of mixing

business with personal affairs becomes very sticky in nature and appropriate policies needed to

be introduced in order to bring a general fairness to this policy. The practice of using capital in

order to finance a personal mortgage seems somewhat unfair. According to my research,

imputed interest to combat this practice. Imputed interest is defined as interest considered to
be paid, even through no interest payment has been made. In essence CICA calculates the

interest that should have been paid on the mortgage amount at a fair rate and the Lawyer will

be responsible for this amount with taxes.

Another reason the lawyer could be burned by this transaction is the fact that he is, in

essence using company funds in order to finance his personal mortgage. Because this is not an

acceptable the lawyer will need to calculate a taxable benefit. The portion of the mortgage

100% that is used for personal purposes. The entire amount of the mortgage is used for

personal purposes and thereby the full amount will be added to the lawyer’s taxable income.

In closing, technically this bank loan expense is deductible. The mortgage, contrary to

the lawyer’s belief is simply not interest free. While the lawyer has attempted to take his tax

planning into his own hands he may have made a potentially toxic business decision. At year

end the lawyer could be surprised with a vary large tax bill that he has neither planned or saved

for.

So as you can see, this “tax saving” game the lawyer has attempted to play may seem to

save taxes and interest in somewhat of a loophole but in the long run it works out to costing

more. CICA is constantly updating and amending its practices. They have employees that are

well versed in all areas of the tax code, this way of saving taxes is simply too easy to make

logical sense. The lawyer should have known that this situation was simply too good to be true

and consulted an accountant before making such a brazen business decision.