Brown – Tax Court of Canada appears to find that wholly-owned corporations that currently could not legally pay dividends were a source of income for s. 20(1)(c) purposes

Wong J accepted that interest was deducible by an individual on personal lines of credit (mostly secured on one of his two homes) drawn down by him in order to fund construction, and substantial unexpected renovation work, on two prospective rental properties, or to repay loans from family and friends which initially had funded some of this work.

Although the decision describes the properties as if they were held by the taxpayer, it seems likely that they instead were held through two wholly owned corporations, with the taxpayer being treated in the books of account as having advanced the borrowed funds to the two corporations, presumably on a non-interest-bearing basis. Wong J stated that she did “not believe that either corporation would have met the statutory solvency test for payment of dividends.”

Thus, this case may support the proposition that money borrowed to make interest-free advances, to a wholly-owned corporation that has no current legal ability to pay dividends, can be deductible.

Neal Armstrong. Summaries of Brown v. The Queen, 2020 TCC 84 under s. 20(1)(c)(i) and s. 20(3).