Interest Paid to the CRA on a Tax Debt is not Deductable Expense of Gaining or Producing Income

Doulis v The Queen, 2014 TCC 26

The taxpayer deducted the interest due on an income tax debt owed to the CRA from income earned from his Isle of Man, UK, investment account.  He claimed that the indebtedness to the CRA was the source of funds used to invest in the Isle of Man, therefore used to gain or produce income, making the interest incurred deductable from that income pursuant to paragraphs 18(1)(a) and 20(1)(c) of the ITA.

The CRA reassessed the taxpayer to disallow the interest deduction, inter alia, on the basis that the amount was owed not due to a creditor-debtor relationship but by virtue of the statutory obligation to pay interest in respect of taxes owing for prior years (subsection 161(1) of the ITA), making the interest an amount paid or payable under the ITA and not deductable from income by virtue of paragraph 18(1)(t).

The TCC held that the deduction is expressly prohibited by subparagraph 18(1)(t)(i) as the interest amount is an amount paid or payable under the ITA imposed by subsection 161(1). No amount paid or payable under the ITA, other than tax paid or payable under Parts XII.2 and XII.6, may be deducted in computing income.  This was supported by Godsell v. The Queen, 96 DTC 1292, aff’d. 2001 FCA 196.  Additionally, (1) there was no evidence that the relationship between the CRA and the taxpayer was one of borrower-lender – the CRA did not agree to loan money to the taxpayer (a case where CRA was a lender was Minister of National Revenue v. T. E. McCool Ltd., [1950] S.C.R. 80); and (2) had there been a borrower-lender relationship, there was no clear evidence of the direct use of the money for investment.

See also Singleton v. Canada, 2001 SCC 61; LeCaine v. The Queen, 2009 TCC 382.

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