Loans and Financing Charges

Cases

Bowater Canadian Ltd. v. The Queen, 87 DTC 5287, [1987] 2 CTC 47 (FCA)

As a condition to the sale of a company ("Bulkley") in which the taxpayer and another corporation ("Bathurst") had substantial loan and share investments and which had been experiencing financial difficulties, the taxpayer and Bathurst agreed to equally guarantee new bank loans which replaced bank loans under which the taxpayer and Bathurst had already been liable as guarantors. The financial difficulties of Bulkley continued under its new purchaser, and no payments were made by Bulkley on the new bank loans. On October 4, 1977 Bathurst acquired the remaining balance of the new notes from the banks for their principal amount and the taxpayer agreed on that date to pay its 1/2 share of this amount to Bathurst in instalments together with interest thereon. In 1978, the taxpayer also incurred interest expenses on money borrowed from the Bank of Montreal to pay off the amounts owing to Bathurst under the October 4, 1977 agreement.

Both categories of interest were non-deductible by virtue of s. 18(1)(b). The original loans had been guaranteed by the taxpayer and Bathurst to enable Bulkley to complete its sawmill and in order to provide it with working capital, the refinancing did not change the capital character of the indebtedness nor the taxpayer's status as guarantor, and the fact that the taxpayer was in the business of rendering financial services to its affiliates did not render the interest costs arising out of the guarantee, revenue disbursements.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) interest incurred to acquired defaulted debt 159

The Queen v. Lehndorff Realty Developments Ltd., 86 DTC 6610, [1987] 1 CTC 42 (FCTD)

A German limited partnership ("Canada Grund") having control of the taxpayer, in consideration of the taxpayer's promise to indemnify it from foreign exchange losses, advanced loans to, and invested in preference shares of, real estate corporations in which the taxpayer had a substantial interest. Payments by the taxpayer of the foreign exchange losses realized by Canada Grund were deductible, the taxpayer having established that the indemnity was necessary to obtain further financing of the real estate corporations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 172 - Subsection 172(1) 33

Isaac Meisels Investments Ltd. v. The Queen, 85 DTC 5029, [1985] CTC 7 (FCTD)

Non-interest bearing advances to a subsidiary of the taxpayer were not made for the purpose of earning income.

The Queen v. Merban Capital Corp. Ltd., 85 DTC 5014, [1985] 1 CTC 1 (FCTD), rev'd 89 DTC 5404 (FCA)

The taxpayer guaranteed the obligations of its subsidiary ("MKH") and a subsidiary in turn of MKH ("Holdings") to pay interest on bank loans incurred in connection with a business acquisition by Holdings. It was found for various reasons including the minimal expected income of MKH and Holdings that "the Bank could not conceivably look to either of the intervening companies for any interest payments," and the taxpayer accordingly was liable to the Bank as primary obligor. The payments made by the taxpayer to the Bank were deductible on general principles without any analysis being required of their precise nature. "[I]t is in accordance with the scheme of the Income Tax Act that financing or other charges incurred by a taxpayer on monies borrowed for business purposes or to secure gains or profits are deductible expenses."

Brunette Investments Ltd. v. The Queen, 81 DTC 5367, [1981] CTC 486 (FCTD)

An "administration fee" charged by a management company ("WP") to the taxpayer represented the amount of an advance that WP had made to an insolvent sister company of the taxpayer and which WP sought to recover instead from the taxpayer. The fee accordingly was not paid for the purpose of producing income from the taxpayer's business and was non-deductible.

The Queen v. Doral Investment Corp., 79 DTC 5316, [1979] CTC 398 (FCTD)

The Court rejected an argument that a non-interest bearing loan was made by the taxpayer company to a second company ("East End") in order to earn future management fees from East End, and thus in order to earn income. The taxpayer's management fees already were guaranteed by a long-term contract with East End.

The Queen v. Laidlaw Transport Ltd., 77 DTC 5091, [1977] CTC 151 (FCTD)

A fee of $61,317 which a subsidiary paid to its parent for services that the parent (primarily in the person of its shareholder and officer) performed in connection with taking the parent public so as to obtain funds to expand the subsidiary's business, was found to be deductible.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Old 99

Montreal Coke and Manufacturing Co. v. MNR, [1944] A.C. 126, [1944] CTC 94 (P.C.)

Expenses incurred by the taxpayers in redeeming outstanding bonds before maturity and reborrowing at lower rates of interest, including redemption premiums, underwriter discounts and legal and printing expenses, were not "disbursements or expenses ... wholly, exclusively and necessarily laid out or expended for the purpose of earning the income" for purposes of s. 6(a) of the Income War Tax Act given that such expenditures were not directly related to the trading operations conducted by the taxpayers.

Administrative Policy

14 June 2017 External T.I. 2016-0666411E5 - Negative returns on investments

negative interest is deductible under s. 9 if there is a reasonable expectation of receiving (positive) interest

The interest rate on deposits held with a financial institution fluctuates during the year so that in some months, positive interest accrues and in other months, there is a negative return on the deposits. Does the negative return constitute negative interest that reduces the positive interest - or is it something else?

CRA responded:

The negative return to the client would…not constitute interest (or negative interest)… [and] the positive interest on the Deposits would not be offset or reduced by the negative returns.

…[T]he client would have a reasonable expectation of earning interest income on the Deposits such that the limitation under paragraph 18(1)(a) would not apply. Accordingly, the negative returns on the Deposits would likely be an eligible deduction in computing the client’s profits under subsection 9(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) capital loss on loan with nil interest rate may be denied by s. 40(2)(g)(ii) 107
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) negative interest not a contra to positive interest 139