The taxpayer received fraudulent advances from a corporation (Groupe Norbourg) managed by her husband. She used the money to purchase a property that was used as the second residence of her family and a second property which was occupied by her father-in-law at no rent (although he paid the property expenses.) When the corporation failed, the receiver (RSM) made a claim against her for return of the money plus interest. She agreed to repay the money out of the sales proceeds of the property with interest at 6% (with this obligation secured by a mortgage). She sold the properties at a gain, and when she was assessed for the gain by the ARQ, she claimed (among other arguments) that the interest was a disposition expense under the Quebec equivalent of s. 40(1)(a)(i).
In rejecting this position, Vaillancourt JCQ stated (at paras. 32-34, TaxInterpretations translation):
The plaintiff … recognized having received the amounts from Groupe Norbourg without any right thereto, which constitutes an insurmountable obstacle to her argument that she paid the interest on a loan.
… [T]he plaintiff paid the interest to RSM for the sole purpose of buying time to repay the receiver the sums which she had received without any right thereto.
Such interest does not in consequence constitute and expense “made or incurred for the purpose of making the disposition” of the properties as provided in TA section 234(a).
The above factual characterization also prompted a rejection of her argument in the alternative that the interest was a currently deductible expense - even before getting to his finding that the properties in question were personal-use properties rather than rental properties.
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