In this case, the taxpayer waived any right to be paid on a debt of a small business corporation, as part of a BIA proposal. So he lost access to an ABIL, because he did not own the debt at the end of the year, having given up all right to payment at that time. (The ABIL depends on your owning the debt at the end of the year it becomes bad: see ITA s. 50(1).)
Justice Favreau also agreed with CRA that because the debt was gone in October 2008, the creditor (taxpayer) could no longer claim interest expense on money borrowed to make the loan to the corporation.
“[39] As the proposal administrator said, the renunciation of the liquidation dividend flowing from the appellant’s loan had the result that the debt was eliminated by the terms of the proposal itself and ceased to exist. The appellant had thus disposed of the debt for tax purposes. Without that renunciation, the proposal would not have been accepted by the creditors.
“[40] The recognition of a gain on the forgiveness of the debt by the corporation is the logical consequence of the extinction or annulment of the debt of the appellant. At the end of the tax year 2008, no debt was owed by the corporation to the appellant.
“[41] As the debt of the appellant no longer existed on 31 December 2008, the requirements of section 50 of the Act could not apply and the appellant did not have a right to the ABIL.
“[42] Concerning the financing expense, I’m of the view that the Minister was justified in refusing the appellant the deduction for amounts claimed during the tax years 2008, 2009 and 2010 because his debt in relation to the corporation had ceased to exist following the renunciation of the liquidation dividend made in the context of the proposal. The interest paid by the appellant thus did not flow from amounts borrowed for the purpose of earning income from property as required by paragraph 20(1)(c) of the Act.”
But Justice Favreau does not discuss ITA s. 20.1, which says that interest paid on borrowed money may continue to be deductible, even though the source of income is gone. Why should not that rule apply?
See St-Hilaire c. La Reine, 2014 CCI 336 (Favreau); See Justice Favreau’s similar ruling in Delisle c. La Reine 2015 CCI 281