Black – Tax Court of Canada finds that an ancillary income-earning purpose for making a loan whose terms were never finalized was sufficient to satisfy s. 20(1)(c)(i)
Conrad Black controlled both Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”). In 2004, the Delaware Court of Chancery ordered Black and Inc. jointly to pay to International damages equalling the amount of a “non-compete” payment of U.S$16,6 million that International had paid to Inc., plus interest thereon. Black used money borrowed from a third party ("Quest") at 12.68% interest to pay all of such damages, but argued that he had advanced such funds on behalf of Inc. in satisfaction of an interest-bearing loan that he had orally agreed to make in the same amount to Inc. Although the Audit Committee of Inc. had approved the receipt of a loan from Black, the relationship between the independent directors of Inc. and Black deteriorated, and the alleged loan by him to Inc. was never formally documented – and following subsequent litigation, all of Black’s alleged rights in that regard were extinguished in a settlement in which he agreed to pay damages to Inc.
Rossiter CJ accepted Black’s position that the borrowed money had been used by Black to make a loan to Inc., so that Black was entitled to an interest deduction on his borrowed funds, stating:
… Black and Inc. reached an agreement on the essential terms of the loan and left the details to be worked out at a later date. The fact that a formal document outlining those essential terms was to be prepared later on and signed … does not alter the validity of the earlier contract. …
Since Black had an obligation to pay interest expenses on the Quest Loan, Black had to earn interest income on the loan to Inc. in order for him to be made whole. …
… While I find that this was an ancillary purpose compared to his primary purpose of helping Inc., that was a bona fide objective of his investment, which is capable of providing the requisite purpose for interest deductibility under paragraph 20(1)(c).
Neal Armstrong. Summary of Black v. The Queen, 2019 TCC 135 under s. 20(1)(c).