Swirsky - Federal Court of Appeal finds that interest on money borrowed to acquire shares of a company with no dividend-paying history was non-deductible

The taxpayer implemented a plan, involving circular transactions utilizing an economically defeased loan from a trust company, which had the effect of converting shareholder loans owing by him to the family corporation into interest-bearing loans owing by his wife (Ms. Swirsky) to the trust company, which she had incurred to acquire his shares.  Before affirming a finding of Paris J that Ms. Swirsky had not established an income-producing purpose for the money borrowed by her, Dawson JA noted that the family corporation had historically not paid any dividends (with bonuses instead being paid) nor did it have a dividend policy in place, and it could be inferred that Ms. Swirsky instead only had a reasonable expectation of receiving a capital dividend.

Although one should not read too much into findings made in the context of a tax scheme, these observations may not be comforting to those who deduct interest on loans incurred to acquire non-dividend bearing common shares.

Neal Armstrong.  Summaries of Swirsky v. The Queen, 2014 FCA 36, aff'g 2013 TCC 73, 2013 DTC 1078 [at 431], under s. 20(1)(c), General Concepts - onus, and General Concepts - intention.