K & D Logging – Tax Court of Canada finds that a s. 20(21) deduction cannot offset previously-recognized s. 17 income
The taxpayer (K & D) initially recognized interest from year to year at the prescribed rate under s. 17 on a loan to a Uruguay farming corporation (Interan) of which it was a 44% shareholder. It supposedly did not confirm that the loan was non-interest-bearing until years’ later, after the loan had become, in part, a bad debt and was only partially repaid.
K & D argued that it could obtain a deduction under s. 20(21), for the amount of the interest previously recognized by it, on the loan’s disposition (its partial repayment). In rejecting this position, Russell J stated:
Subsection 20(21) cannot apply where subsection 17(1) does. Allowing a subsection 20(21) deduction for reported income on the basis of fictional receivable interest would completely nullify the intended purpose and effect of subsection 17(1). It would leave the appellant in a better place than if the true situation of the Loan being non-interest bearing had governed from the start.
Russell J found in the alternative that even if the accumulated interest could be treated as an interest receivable amount, there could still be no s. 20(21) deduction given that the terms of the loan provided that repayments were to be applied to interest before principal, i.e., all of the loss was in the collection of principal rather than interest.
Neal Armstrong. Summary of K & D Logging Ltd. v. The King, 2023 TCC 23 under s. 20(21).