Gervais Auto – Court of Quebec confirms that a 10% interest rate on an unsecured loan was unreasonably high

The taxpayer financed its inventory of used automobiles held for resale through unsecured loans totaling $6 million from its shareholders, bearing interest at 10% p.a. When the ARQ reviewed the deductibility of the interest, the taxpayer provided a letter from its accountants (Deloitte) that concluded, based on Moody’s metrics, 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%.

After referring to the Quebec equivalent of s. 67, and in finding that the taxpayer had not met its burden of establishing that such assessments were incorrect, Allen JCQ stated:

How can the plaintiff challenge the presumption of correctness of the notices of assessment where the 7.89% rate, considered to be reasonable and adopted by the defendant, falls within the range that its own expert considered to be a reasonable rate based on the current rates in the market for obligations with similar considerations and risks during the period in litigation?

Doubtless, the rate of 7.89% corresponds to the lowest rate in the range, but it nonetheless is within that range and cannot be considered to be prima facie unreasonable.

Neal Armstrong. Summary of Gervais Auto Inc. v. Agence du revenu du Québec, 2019 QCCQ 5894 under s. 20(1)(c).