Van Steenis – Federal Court of Appeal affirms that “return of capital” distributions by a mutual fund reduced the unitholder’s deductible interest
The taxpayer borrowed $300,000 to purchase units of a mutual fund trust in 2007. The distributions made thereafter by the trust were exclusively return-of-capital distributions, and by 2015, about 2/3 of the taxpayer’s capital had been returned. Most of these distributions were used for personal purposes. The Tax Court had confirmed CRA's denial of a portion of the loan interest expense claimed in the 2013 to 2015 period, on the basis that the current use of a portion of the borrowed funds was now such personal use.
In dismissing the taxpayer’s appeal, Laskin JA stated:
We are not persuaded that the requirement to trace the borrowed money to a current eligible use applies only where there has been a disposition, in whole or in part, of the original investment. … The focus of [s. 20(1)(c)] is the current use of the borrowed money, not on the current ownership status of the property initially acquired with it.
Neal Armstrong. Summary of Van Steenis v. Canada, 2019 FCA 107 under s. 20(1)(c)(i).