Glass v. MNR, 92 DTC 1759 (TCC)

The taxpayer borrowed money at prime plus 1/2% to acquire a mortgage in default which, after negotiation with the controlling shareholders of the mortgagor corporation, had its interest rate increased to prime plus 3%. The taxpayer was able to deduct his interest expense because he had a reasonable expectation of profit. However, when the mortgage was extinguished by virtue of the acquisition of the mortgaged property by a numbered company controlled by the taxpayer (which was financed through a non-interest bearing note owing to the taxpayer), the interest on the taxpayer's bank borrowing ceased to be deductible.

Pursuant to a written agreement with the existing shareholders, the taxpayer purchased 25% of the shares of a land development corporation for U.S. $5,000 and made an interest-free loan of U.S. $295,000 to the corporation. Because the loan was made as part and parcel of an acquisition of the 25% shareholder interest in the corporation, the loan was made to assist the corporation with its business, and the taxpayer genuinely believed that it was a good development, the ultimate loss realized by the taxpayer was deductible.

Following the acquisition by the taxpayer of a mortgage owing by a corporation in financial difficulties, the taxpayer resorted to power of sale proceedings against the corporation but the shareholders of the corporation instituted proceedings in an attempt to obtain a permanent injunction prohibiting the sale of the secured property. U.S. $150,000 paid by the taxpayer to the other shareholders to discontinue those proceedings was found to have been paid as "an integral part of acquiring the mortgage and being able to use it to force a sale" (p. 1763) and, accordingly, formed part of the cost to the taxpayer of the mortgage.