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Deux appels fiscaux liés à des prêts ICF dans des montages d’assurance vie 10/8 sont rejetés; le tribunal confirme un taux d’intérêt déductible de 4,18 %.
The Tax Court allowed the Crown to amend its reply to plead thin capitalization as an alternative basis for denying interest deductions, finding no uncompensable prejudice.
Appeal dismissed: court upheld Tax Court finding that Keybrand and Vidabode were not dealing at arm's length at the time of the December 2010 acquisition (Keybrand effectively directed both sides given Vidabode's financial dependence and lack of negotiation), and that the loan was not incurred with a reasonable expectation of earning income; therefore ABIL and interest deduction denied.
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The Court found BWS exercised de facto control over Vidabode (shareholder agreement rights to nominate directors and a chairman with a casting vote, guarantees, common mind and interlocking relationships), therefore BWS, the Appellant and Vidabode were not dealing at arm's length and s.69(1)(a) precluded the ABIL. The $14.45M borrowing to acquire shares was primarily to honor guarantees and, given Vidabode’s insolvent position and lack of a reasonable expectation of income in December 2010, interest was not deductible under s.20(1)(c). The $500,000 promissory note dated October 29, 2010 was m…
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The Court found on the evidence that Black directly used proceeds of the Quest Loan to make an interest-bearing loan to Hollinger Inc.; the parties manifested an intention to contract, essential terms (amount, interest rate tied to Quest Loan, timing) were reasonably ascertainable and consideration existed, so a binding loan existed. One of the purposes of the loan objectively was to earn interest (income), satisfying the purpose test under s.20(1)(c)(i), and therefore interest and related expenses were deductible; the unjust enrichment alternative was unnecessary and unsupported.
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Subsection 20.1(2) applied because the borrowed money outstanding when the appellant ceased carrying on the business was properly deemed to be used to earn income from the business in subsequent taxation years, thus permitting deduction of the interest amounts claimed for 2013 and 2014; prior allowance of related expenses by the CRA reinforced the finding that the borrowed funds financed business expenses.
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The court found that, on the true legal and factual matrix, Holdco conferred a taxable shareholder benefit on Paul C. Golini under subsection 15(1) equal to the economic value of the relief of obligation (accepted at $5,400,000) and that the appellant was entitled only to deduct the cash portion of interest ($80,000) for 2008; consequently the appeal was dismissed and the Minister's reassessment upheld. The court treated GAAR as an available alternative and found the transactions abusive of s.84(1) if analyzed from inception, but relied primarily on s.15(1) to decide the matter.
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The Tax Court erred in law by importing a temporal requirement and by allowing concerns about tax avoidance to negate the statutory purpose inquiry under s.20(1)(c)(i); the appellant's purpose is to be assessed at the time the funds were used, and the temporary interest‑free circle did not defeat the income‑earning purpose, so the interest was deductible and reasonable; appeal allowed and reassessment vacated.
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Leave granted because the Respondent established EY and Deloitte had information relevant to the determination of the promissory notes and interest rates, the Appellant’s nominee lacked knowledge and the Appellant could not produce the information, the Respondent had been unable to obtain the information voluntarily, and examinations would not unduly delay or cause unfairness; costs awarded as directed.
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The Court held the Minister correctly calculated the capital gain because the evidence did not show the borrowed funds were used to earn income from the Land nor could specific interest amounts be identified and allocated to the Land, so the interest and carrying charges could not be added to the adjusted cost base; further, the Estate failed to make the mandatory election under s.50(1)(a) in 2006 (or any year) so the alleged capital loss from shareholder loans is not available in 2008; appeal dismissed.
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