Background
In 2007, Van Steenis borrowed money to purchase units of a mutual fund. Each year from 2007 to 2015, Van Steenis received returns of capital from the mutual fund. The amount of the returns of capital eventually totaled nearly two-thirds of the initial investment. He used most of the distributions on personal expenses and some to reduce the principal on the loan. Each year, he deducted the full amount of the interest payments made on the loan under paragraph 20(1)(c). Throughout this time, he owned all the mutual fund units he originally purchased with the borrowed money.
The Minister disallowed a portion of the interest deduction for the 2013, 2014, and 2015 taxation years, on the basis that the borrowed money was not used for the purpose of gaining or producing income. Van Steenis appealed the assessment and lost at both Tax Court of Canada (“TCC”), 2018 TCC 78, and the Federal Court of Appeal (“FCA”), 2019 FCA 107. On December 5, 2019, the Supreme Court of Canada (“SCC”) dismissed Van Steenis’ application for leave to appeal without reasons, 2019 CarswellNat 5008.
TCC Decision
Paragraph 20(1)(c) permits the deduction of interest paid on borrowed money used for the purpose of gaining or producing income. The SCC in Shell held that paragraph 20(1)(c) required a sufficient direct link between the borrowed money and the current use of that money to gain or produce income, see Shell Canada Ltd v Canada, [1999] 3 SCR 622 at para 28. The parties agreed that Van Steenis originally borrowed for an eligible purpose; however, the parties disputed whether the current use of the borrowed money was to gain or produce income.
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