Normally, you can deduct interest you owe on "borrowed money used for the purpose of earning income from a business or property". (ITA s. 20(1)(c)(i).) And why not? We shouldn't charge you tax on what you pay to make us money.
But courts have long held that "tax paid ... is not an expense for the purpose of earning the income" and "when a person has ascertained what his profits are, the use or destination of these profits is immaterial." (Roenisch v. Minister of National Revenue, 1930 CarswellNat 26,  Ex. C.R. 1, at para. 9.)
Since 1989, the ITA has had a specific rule prohibiting the deduction of tax, penalties, or interest owing on unpaid taxes. Today, the rule says:
18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of ...
(t) any amount paid or payable
(i) under this Act (other than tax paid or payable under Part XII.2 or Part XII.6),
(ii) as interest under Part IX of the Excise Tax Act, or
(iii) as interest under the Air Travellers Security Charge Act;
In his case, Mr. Doulis said that, instead of paying his taxes, he used the money to open an investment account offshore and that he reported the income and capital gains he earned. So, he thought he should be able to deduct the interest he owed on the unpaid taxes, having used the money to earn income. Justice Lamarre did not agree.
She said that s. 18(1)(t) applied (paras. 7-8). In any case, Mr. Doulis had not borrowed the money to earn income. Canada was not a "lender" and the money wasn't used to invest, she said, but to pay interest. (Paras. 13-15.)
If Mr. Doulis had been right, (leaving aside CRA's collection power) you could never pay taxes. You'd just invest the money and claim the interest expense, as your savings grew.
See Doulis v. The Queen, (2014 TCC Lamarre)