CRA finds that post-judgment interest paid by the defaulting beneficial owners of a real estate project was non-deductible

CRA considered that post-judgment interest paid by two individuals on their guarantee of loans made to two nominee corporations who held a real estate project on their behalf was non-deductible because the judgment itself did not represent a borrowing by them.

This is questionable.  Since they were the beneficial owners, they also were the true borrowers, and the post-judgment interest amounts could be considered to have been paid by them "pursuant to" their legal obligation to pay interest on their (initial) borrowings, which would not be extinguished until they paid the judgment.

The amount of the judgment was for the deficiency remaining after the creditors had realized on their mortgage by acquiring the properties.  CRA accepted that but for the issue referred to above, s. 20.1 (which was enacted to overcome the "dispearing source" doctrine - see Emerson and Tennant) would have applied to deem the loans still to be used for an income-producing purpose following the seizure of the properties, assuming the seizure occurred after the effective date of s. 20.1.

Neal Armstrong.  Summary of 12 March 2012 Memorandum 2011-0398721I7 under s. 20(1)(c).