The last year has provided no shortage of exciting and interesting tax cases that tax practitioners can learn from. Accordingly, the purpose of this paper is to review a select number of cases that we felt were important to highlight. Each case begins with a short summary followed by the facts, judicial reasoning and the take-away message.



Owner-manager remuneration is important to many businesses, especially family businesses. Swirsky emphasizes the importance of distinguishing between different forms of owner-manager remuneration in certain circumstances. In a nutshell, this case involves a question of interest deductibility wherein the Federal Court of Appeal held that interest was not deductible as the shares were not acquired to earn income.


Due to a downturn in the real estate market and failing partnership relations, the taxpayer, Mr. Swirsky, became concerned about creditors seizing the family owned corporation, Torgan (the "Corporation"). At this time (1991), the Corporation was the main source of income for Mr. Swirsky and his family. Mr. Swirsky's accountant devised a plan whereby Mr. Swirsky would sell some of the shares in the Corporation to his wife who would borrow monies to acquire such shares. Mr. Swirsky used the proceeds from the sale of the shares to repay his outstanding shareholder's loan to the Corporation. By using the monies to repay the shareholder loans, Mr. Swirsky assured that such monies would not be available to creditors and he avoided subsection 15(2) of the Act as the shareholder loans were repaid within the requisite time limitation.

Subsequent to the transaction, a valuation was also obtained and the sale of the shares was adjusted so that only the amount of shares needed to fully repay Mr. Swirsky's outstanding shareholder loan were sold. Thus, the main goal of creditor-proofing was achieved with the plan. The credit-proofing transaction was repeated twice more in the next few years.

The Corporation used the cash to purchase a guaranteed investment certificate and the interest on this investment was used to partially off-set the interest payable by Ms. Swirsky on the loan that was used to fund her share purchase. The additional interest owed on the bank loan by Ms. Swirsky (and the guarantee fee for the loan) were charged to Mr. Swirsky's shareholder loan account. Due to the attribution rule in subsection 74.1(1) of the Act, the interest charges were claimed as losses by Mr. Swirsky. Subsection 74.1(1) of the Act attributes income and losses on property transferred between spouses to the spouse who actually transferred the property. The intended use of the attribution rule did not appear to affect the Court's decision in this case.

The Corporation did not pay taxable dividends for a number of years after the transactions but did pay a capital dividend of $2.5 million to Ms. Swirsky in 1999. The Corporation paid a taxable dividend in 2003 to Ms. Swirsky which was attributed to Mr. Swirsky. The Minister denied Mr. Swirksy's interest deduction for the 1996 through 2003 taxation years.

Judicial Reasoning

The Tax Court of Canada (the "TCC") upheld the Minister's denial of the interest and guarantee fees claimed by Mr. Swirsky. In order to obtain an interest deduction, the Supreme Court of Canada (the "SCC") noted four conditions in Shell Canada Ltd. v. R.:2 the amount must be paid or payable in the year; the amount is paid or payable pursuant to a legal obligation; the borrowed money is used to earn non-exempt income from business or property; and the amount must be reasonable. The SCC in Entreprises Ludco ltee c. Canada3 stated that the test for determining the purpose of interest deductibility is whether considering all of the circumstances, the taxpayer had a reasonable expectation of income at the time the investment was made.

The Court notes that there is no evidence, prior to 1999 that the Corporation had any history of paying dividends and that monies were extracted from the Corporation by way of bonuses and loans. Interestingly, Mr. Swirsky argued that the fact there was a creditor proofing transaction was evidence in and of itself of the belief that the Corporation had future earning potential. Mr. Swirsky's testimony did not help his case as he testified that income did not come from the shares in the Corporation but rather the Corporation itself. In reaching their decision, the Court noted that there was no evidence of discussion or consideration being given to an income earning purpose to the share acquisition. Further, the Court noted that Mr. Swirsky did not make any representations or promises to his wife that dividends would be paid on the shares.

The TCC briefly considered the Crown's argument made under subsection 74.5(11) of the Act noting that any inquiry under this provision would be factual and would focus on the main reasons for the transfer. However, the Court dismissed this argument because the Crown raised the argument late in the proceeding and thus pursuant to Anchor Pointe Energy Ltd. v. R.,4 the Crown bore the onus of proving that one of the main reasons for the transfer of the shares was to reduce tax – an onus the Crown did not meet. Further the TCC stated that the general anti-avoidance rule (the "GAAR") found in section 245 of the Act did not apply to the transaction as it was not shown that the primary purpose of the transaction was to obtain a tax benefit.

The Federal Court of Appeal (the "FCA") upheld the decision that Mr. Swirsky should not be allowed an interest deduction as his wife did not acquire the Corporation's shares for the purpose of earning income. In short, the FCA agreed with the TCC that Ms. Swirsky did not have a reasonable expectation of earning income when she acquired the shares. Mr. Swirsky challenged the TCC decision on the basis that the Court relied too heavily upon Ms. Swirsky's stated subjective intention with respect to the acquisition of the shares and not enough on the objective manifestations of that intention. The FCA responded by noting that there was no evidence of a dividend having been made prior to 1999, bonuses are not related to shareholdings; family expenses were paid by the Corporation and treated as loans regardless of whether the family members held shares; there was no dividend policy in place; the transaction was designed so that Ms. Swirsky would not have to pay interest out of her own pocket; and it could be inferred that Ms. Swirsky had a reasonable expectation of receiving a capital dividend. It should be noted that paragraph 20(1)(c) of the Act only allows interest to be deducted to the extent that it was incurred to earn taxable income and as such, a capital dividend does not qualify.

The Message

The taxpayer was not able to deduct his interest in this case due to incorrect legal form. In other words, future interest charges of the Corporation would have been deductible if the Corporation had previously paid the excess income in the form of dividends rather than paying salaries and bonuses. The Corporation was actually a good investment as it generated a consistent surplus. It is typical of many family owned Corporations to solve a negative shareholder loan balance at the end of the year by simply paying a bonus, however, caution to this approach should be exercised. In situations like this we recommend that practitioners establish their intention clearly in the documents that implement the transaction.

It should be remembered that the test for interest deductibility is the taxpayer's reasonable expectation of receiving income from the business or property at the time the property is acquired, not what occurs subsequently. However, the TCC appears to look to events subsequent to the acquisition of the shares when considering Mr. Swirsky's interest deductibility. For instance, the Court notes that dividends were not paid prior to 1999; however, the initial share transfer occurred in 1991 and as such, this is the relevant point in time for the initial acquisition. Each acquisition of shares should also have been looked at separately in the Court's analysis as the reasonable expectation of income could have theoretically been different for the shares acquired in different years. In short, the Court appears to justify their position using hindsight.

We query whether there is an implied expectation that individuals holding common shares of a private corporation have an expectation, other than to earn dividends, from the shares since there is no ready market for private share sales and often such sales are restricted in the articles of the corporation.



The ability of an entity to claim an interest deduction is an important consideration for practitioners in corporate restructuring transactions. In Toldo, interest was incurred on promissory notes that were used to fund a share re-purchase for cancellation. The shares acquired were subsequently cancelled by the corporation. In short, the interest was held not to be deductible by the TCC because the property was not used to earn income.


In Toldo there were two issues under appeal, interest deductibility and the deductibility of professional fees, both incurred in respect of a corporate reorganization. The assets of the taxpayer, Toldo, consisted mainly of shares of other corporations. Toldo controlled twelve other corporations. Prior to 2006, Toldo was owned by three family members, Mr. Toldo, his sister and his father. A dispute arose between family members and a settlement was negotiated which resulted in the sale of the sister's shares (the "Subject Shares") to Toldo. In ten separate transactions, the Subject Shares were transferred to Toldo. Half of the payment for the Subject Shares was made in cash while the other half was funded by promissory notes. It appears that Toldo used loaned funds from its subsidiary corporations to fund the initial payment of the Subject Shares. Toldo later borrowed from the bank to satisfy payment of the promissory notes. Interest on both the promissory notes and bank loan totaled approximately $1.2 million. The Subject Shares were cancelled immediately upon their purchase.

Judicial Reasoning

Toldo asserted that it should be able to deduct the interest expense as a normal business expense of a holding corporation because it was in the business of financing and earning income from investments in the subsidiary corporations and/or carrying on a banking business. The TCC noted that Toldo had no employees in which to carry on the business of banking and that the financial statements showed that Toldo was a recipient of funds from the subsidiary corporations. Thus, the TCC concluded that Toldo did not establish even a prima facie case that they carried on a business of loaning monies.

The SCC in Gifford v. R.,6 stated that where interest does not occur "on account of capital" it may be deducted as long as it meets the requirements outlined in paragraphs 8(1)(f) and 18(1)(a) of the Act and such deductibility is not precluded by another section of the Act. Thus, Gifford can allow interest to be deducted pursuant to section 9 of the Act in certain limited circumstances. Since the evidence did not prove the money was borrowed in the course of a money lending business then its deductibility is precluded by paragraph 18(1)(b) of the Act. The TCC stated that the purchase of the Subject Shares for cancellation did not relate to any other business carried on by Toldo. Therefore, the interest must meet the requirements of paragraph 20(1)(c) of the Act in order to be deductible.

It was argued that Toldo should be allowed an interest deduction pursuant to the "fill-in-the-hole" theory set out in Trans-Prairie Pipelines Ltd. v. Minister of National Revenue7 and Penn Ventilator Canada Ltd. v. R.8 In Trans-Prairie, the corporation issued bonds that were used to redeem preferred shares and the interest deduction was allowed under the theory that the bonds replaced the preferred shares which were used to finance the business. In Penn Ventilator, the corporation purchased and cancelled some of its common shares in order to solve a shareholder dispute that was disrupting the business of the corporation and that posed a threat to the corporation's liquidity. In the latter situation, the interest deduction was allowed as an exceptional circumstance.

For interest to be deductible under clauses 20(1)(c)(i) and 20(1)(c)(ii) of the Act the interest must arise from borrowed monies used for the purpose of earning income or an amount payable for property acquired for the purpose of gaining or producing income, respectively. The TCC stated that the Court should not ignore the direct use of the acquired property under either clauses 20(1)(c)(i) or 20(1)(c)(ii) of the Act, but in exceptional circumstances it may be appropriate for the Court to allow an interest deduction where there was an indirect effect from the acquisition of the property on a taxpayer's income-earning capacity. The TCC held that there was no direct use of the borrowed funds to earn income as the Subject Shares were purchased and cancelled. The TCC noted there was insufficient evidence of the corporation's business and how the shareholder dispute impacted the corporation's business. Further, the TCC noted that at the time the debt incurred, Toldo did not have any capital to return or retained earnings and thus the Court did not need to consider whether there was a "fill-in-the-hole" scenario that would constitute an exceptional circumstance.

The professional fees were associated with the corporate reorganization and thus the TCC held that these fees were incurred on account of capital and thus were not deductible pursuant to paragraph 18(1)(b) of the Act.

The Message

This well-reasoned decision is another reminder for practitioners to carefully consider whether interest will be deductible when they borrow funds to undertake a corporate reorganization. As the Subject Shares were acquired for cancellation, the property acquired was extinguished and thus the property was incapable of producing income and thus interest on the funds borrowed to acquire the property was not deductible. Gifford essentially limits a deduction under section 9 of the Act to banks and other similar entities whose business is that of lending money. While it may have been possible for Toldo to argue a situation analysis to Penn Ventilator, the taxpayer simply did not bring forth enough evidence to demonstrate how the shareholder dispute was jeopardizing the corporation's income earning potential.



Many practitioners have clients who are subject to double taxation as residents of two countries. Even if clients are not residents of two countries, it is common for individuals and entities to have income from multiple countries. Generally speaking, the country where an individual earns income has the first right to tax this income as it is derived from that country; however, Canada may also have a right to tax the income since Canadian residents are taxed on their worldwide income regardless of where they earn the income. Thus, tax treaties are important in providing double taxation relief to individuals. At a basic level, treaties are agreements between countries where one country contracts out of the right to tax in certain pre-determined situations. Ordinarily the Treaty would prevail over the Act because of the legislation that implements the Treaty into Canadian law. For example, the Canada-U.K. Income Tax Convention Act 1980, states that this is the case to the extent of any inconsistency between the Act and the Treaty.

Unfortunately, Black was not able to avail himself to the benefits of Canada's tax treaty with the United Kingdom (the "Treaty") as the TCC ruled that the Treaty gives preference or priority for taxation but it does not apply to override Black's domestic tax obligations to Canada. Mr. Black has filed an appeal to the FCA.


Mr. Black was factually resident in both Canada and the United Kingdom during 2002 and as such potentially subject to tax by both countries. The TCC defined the issue at hand as whether the Treaty overrides the provisions of the Act so as to prevent the Crown from assessing the applicant under Part I of the Act on certain amounts of income, including the following types: duties of offices and employment performed in Canada; taxable benefits; taxable dividends; interest; and deemed interest on amounts loaned from corporations. The Crown argued that the Treaty did not prevail over the Act in this particular situation since the Treaty only prevails when there is conflict or contradictions between the Act and the Treaty.

By virtue of Article 4(2)(a) of the Treaty, commonly referred to as the tie-breaker rules, Mr. Black was deemed to be a resident of the United Kingdom and was liable to taxation therein. However, Mr. Black was not domiciled in the United Kingdom. Persons who are resident but not domiciled in the United Kingdom are only subject to taxation on non-source income that is remitted to or received in the United Kingdom. The parties agreed that according to the Treaty, Mr. Black is not required to pay tax in the United Kingdom until such time as the income is remitted to or received in the United Kingdom. Thus, if Mr. Black was not liable for tax in Canada under the Treaty or the Act, then he was not liable for tax anywhere on the majority of the income at issue.

Judicial Reasoning

The TCC notes that it is the Vienna Convention that requires the ordinary meaning to be given to the terms of the treaty in their content and in the light of its object and purpose. The SCC in Crown Forest Industries Ltd. v. R.9 stated that tax treaties should be given a liberal interpretation with a view to implementing the true intentions of the parties. The TCC stated that when interpreting the Treaty and its interaction with the Act that they must adopt a liberal and purposive approach, not a mechanical approach.

The TCC held that the phrase "resident of a Contracting State" is defined in the Treaty, but for purposes of the Treaty only and not for purposes of the Act. The TCC then held that there is no inconsistency between a resident for purposes of the Act and a resident for purposes of the Treaty. In reaching this holding, the TCC relies on the test for inconsistency expressed by the SCC in Friends of the Oldman River Society v. Canada (Minister of Transport):10 the statutes must be either so contradictory that following one law would require breaching the other or the two laws are unable to stand together. The TCC then went on to state that there is no provision that deems a person not to be resident in Canada once it has been determined they are resident of the United Kingdom for purposes of the Treaty.

Simply, the Treaty simply gives taxing preference to one state's claim of taxation but does not extinguish the other state's claim. In other words, the fact that a person is resident in the United Kingdom for purposes of the Treaty does not affect their status under Canadian law for non-treaty purposes. The TCC held that income is considered under the Treaty on an item-by-item basis and thus Canada will not lose its right to tax Mr. Black on items of income not subject to the Treaty.

The TCC notes that if Mr. Black had remitted his income to the United Kingdom, he would have been able to take advantage of Article 21 of the Treaty. The parties made submissions on subsection 250(5) of the Act but the TCC declined to comment on this provision as it was enacted in a later taxation year than the one at issue.

The TCC considered Article 27(2) of the Treaty and states that the purpose of this article is to allow the state of source to tax income that has not been remitted to the person's country of residence. The TCC held that a resident of Canada, like Mr. Black, is subject to tax on their worldwide income which includes income from employment in a third state, one that is not subject to the Treaty.

The Message

The TCC appeared to adopt a results-based approach, holding that since Mr. Black was not subject to a comprehensive tax system, as his income was not remitted to or received in the United Kingdom, he should not be able to benefit from the Treaty. Accordingly, the majority of his income (interestingly determined on an item-by-item basis) was subject to tax in Canada. The approach of the TCC appears to be questionable as they looked at each type of income separately to determine who had taxing authority. While the TCC did consider the residency tie-breaker provisions in Article 4 of the Treaty, the TCC spoke to income on an item-by-item basis and looked to the specific Treaty provisions dealing with each respective type of income to determine how such income should be taxed. This approach appears to bring into question how one should interpret a treaty, as one may have thought that the tie-breaker provisions in the Treaty, which determined Mr. Black to be resident of the United Kingdom, would have been determinative of his taxing position, thus giving the United Kingdom (and not Canada) the right to tax all income. It should be noted that the Article 4 residency provisions precede those provisions in the Treaty which speak to specific types of income.

Paragraph 110(1)(f) of the Act was not mentioned in the decision, but this is the mechanism by which a person who is resident in Canada can take a deduction on their tax return for an amount that is exempt from income tax in Canada because of a provision contained in a tax treaty.

Although not enacted in 2002, Article 20A(1) of the Treaty deals with other income stating that such income beneficially owned by a resident not specifically dealt with elsewhere in the Treaty will be taxable only in the place where the person is resident. If this Treaty provision had been in effect for the tax year in question, it appears some of Mr. Black's income would have been liable to tax in the United Kingdom regardless of whether it was remitted to or received in the United Kingdom. However, Article 20A(3) of the Treaty, also not enacted in 2002, allocates taxing authority to the jurisdiction from which specific income arises. Therefore, some of Mr. Black's income may have not been caught by Article 20A of the Treaty, if it was enacted, due to the more specific provision of Article 20A(3) of the Treaty.

Subsection 250(5) of the Act, which deems an individual not to be resident in Canada if that person is resident elsewhere as determined by a treaty, is another provision that would have to be considered should a case on this issue arise for a more current taxation year. Practitioners should be cautious of the potential interaction between subsection 250(5) of the Act and treaties. More specifically, we note that subsection 250(5) of the Act resides in Part XVII of the Act, which is the Interpretation section. Since subsection 250(5) deems a person who is resident in another country under a tax treaty not to be a resident of Canada. We query whether this person is resident for purposes of subsection 2(1) of the Act. It is the position of the CRA that the phrase "for purposes of the Act" does not equate with the phrase "for all purposes of the Act"; however if this is in fact the case then it appears subsection 250(5) of the Act should not be located in Part XVII of the Act.

One cited purpose of tax treaties is to prevent fiscal evasion - it is interesting to consider how this purpose may have affected the Court's decision. One also has to consider whether income that is not taxed by a treaty partner due to their own domestic laws simply becomes available for tax by Canada. If this decision is correct, practitioners with clients who are Canadian residents but who earn income in countries without a tax treaty with Canada, or where income earned is not specifically addressed by the relevant tax treaty with Canada, should be aware of the potential double tax implications.

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1. Swirsky v. R., 2013 TCC 73, affirmed 2014 FCA 36.

2. [1999] 3 S.C.R. 622.

3. 2001 SCC 62.

4. 2007 FCA 188.

5. A.P. Toldo Holding Corp. v. R., 2013 TCC 416.

6. 2004 SCC 15.

7. (1970) 70 D.T.C. 6351 (Can. Ex. Ct.).

8. 2002 D.T.C. 1498.

9. [1995] 2 S.C.R. 802.

10. [1992] 1 S.C.R. 3.

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