Moras – Tax Court of Canada finds that s. 20.1(2)(c) allowed a taxpayer to deduct interest on personally-owed debt following a drop-down

Prior to the transfer of his accountancy practice in 2007 to his corporation, the taxpayer borrowed under a home equity line of credit to fund alleged expenses of that practice. Following the drop-down, the outstanding balance was maintained. Favreau J allowed in full the deduction by the taxpayer of his HELOC interest for two subsequent years, stating:

[P]aragraph 20.1(2)(c) specifically provides that the portion of the borrowed money outstanding when the business ceases operating shall be deemed to be used by the taxpayer at any subsequent time for the purpose of earning income from the business.

An oddity is that CRA initially had disallowed the deduction of all of the HELOC-financed expenses, and then at trial conceded that 2/3 of them were deductible – yet Favreau J allowed all of the related interest to be deducted under s. 20.1(2)(c). Although not discussed, perhaps this could be explained on the basis that the taxpayer had succeeded in “demolishing” the basis for the full interest denial by CRA, so that the onus now shifted to the Crown to demonstrate that some portion of the interest was still non-deductible on more factual grounds, which it failed to do.

The self-represented taxpayer apparently did not argue that the shares of his corporation had replaced his accountancy practice as an income-producing source.

Neal Armstrong. Summary of Moras v. The Queen, 2019 TCC 111 under s. 20.1(2)(c).