May 18, 2016
The Federal Court of Appeal (FCA) has overturned a decision by the Tax Court of Canada (TCC) that dealt with interest deductibility. The FCA’s finding in TDL Group Co. v. Canada disagreed with the Tax Court which ruled TDL could not receive a deduction for interest paid during the first seven months of an intra-corporate loan. Reporter Julius Melnitzer discussed the FCA’s decision in an article for Lexpert Magazine and interviewed Osler partner Patrick Marley who represented TDL in the appeal. “The appeal reasoning is consistent with the Supreme Court of Canada’s guidance on interest deductibility and restores certainty to the law,” says Patrick.
According to the article, the TCC had decided TDL’s loan had no income-earning purpose for its initial seven months, despite the CRA allowing TDL’s interest payments from the eighth month on. However, the FCA found that the loan, initially given to Wendy’s International Inc. on an interest-free basis, was always intended to be interesting-bearing as the loan was restructured after seven months to bear interest from its commencement. The FCA also recognized that both the interest-free and the interest-bearing periods were part of the same transaction.
Patrick believes that a decision to uphold the TCC’s ruling would not have bode well for corporate taxpayers.
“One argument we made was that, if the Tax Court was right, taxpayers who borrowed money to buy shares in a company like Alphabet [formerly Google] that has never paid a dividend and has a policy of never paying them, could have its interest payments disallowed,” Patrick says.
For more information about the ruling, read Julius Melnitzer’s full article, “Tax certainty restored” online at Lexpert Magazine – May Issue 2016.