Gervais Auto – Quebec Court of Appeal finds that 10% interest on unsecured loans from shareholders was not unreasonable

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans from the family Holdcos that were its shareholders. When the ARQ reviewed the deductibility of the loan interest of 10% p.a., the taxpayer provided a very brief letter from Desjardins stating that for an unsecured “cash flow” loan the interest rate in 2015 would fall in the range of 9% to 12%, and then a more detailed letter from its accountants (Deloitte) that, based on Moody’s metrics, concluded that an interest rate for such loans should fall in the range of 7.89% to 12.39%. The ARQ reassessed to deny the claimed interest in excess of 7.89%, having regard to the Quebec equivalent of ITA s. 67 (TA s. 420).

Before reversing the decision below to confirm these reassessments, the Court of Appeal stated (at para. 13, TaxInterpretations translation):

The appellant was not required to make out a prima facie case that the 7.89% rate was unreasonable but, rather, that the assumption, on which the respondent relied in assessing it, that the 10% interest rate deducted from its income for the taxation years in issue was not "reasonable in the circumstances," … was prima facie … unsound.

Since the 10% rate actually used fell within what the above evidence indicated was a reasonable range, such a prima facie case had been established – so that the onus shifted to the ARQ, which had “failed to demonstrate by a preponderance of the evidence that the 10% interest rate was unreasonable within the meaning of TA section 420.”

Neal Armstrong. Summaries of Gervais Auto Inc. v. Agence du revenu du Québec, 2021 QCCA 459 under s. 20(1)(c) and General Concepts – Onus.