Swirsky - Tax Court appears to find that if a spouse didn't understand that a borrowing was for an income-producing purpose, the interest is non-deductible

For creditor-proofing reasons, 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 shares of the taxpayer in the corporation.  The intention of the tax planner may have been that interest on a GIC in the same amount as the loan (which the corporation had acquired under the circular transactions) would be paid (under a payment direction arrangement) to her as dividends on her purchased shares, with such dividends then applied to pay the interest on the trust company loan.

Even though the dividends ultimately paid to Ms. Swirsky on her shares in fact exceeded the interest payable by her, Paris J nonetheless found that the interest was non-deductible because Ms. Swirsky's only understanding of the transactions was a vague one that they were for creditor-proofing purposes, and she had no knowledge of any plan for her to receive dividends.  It also did not help that in fact the interest payments were borne by the taxpayer (through charges to his loan account with the corporation) rather than Ms. Swirsky.  Consequently, there was no loss on the shares to be attributed to the taxpayer under s. 74.5(1).

This case may suggest that a transaction which, if implemented properly, would be considered by an experienced tax planner to have an income-producing purpose under post-Singleton tracing doctrines, will not satisfy this test if the borrower has no knowledge of an income-producing aspect of the plan.

Neal Armstrong.  Summaries of Swirsky v. The Queen, 2013 TCC 73 under ss. 20(1)(c), 74.5(11), 245(3), 245(4) and General Concepts - Onus.