Dividend Vs. Bonus: How Your Remuneration Strategy May Affect Interest Deductibility

The Federal Court of Appeal ("FCA") in Swirsky v. R, 2014 FCA 36 recently upheld the Tax Court of Canada ("TCC")'s decision (2013 TCC 73) to disallow the deduction of interest pursuant to paragraph 20(1)(c) of the Income Tax Act (the "Act") on money that was borrowed to buy shares of the family's corporation. Two key factors led to the decision to disallow the interest expense. The first was the trial judge's finding of fact that the borrower's subjective intention when obtaining the loans was creditor-proofing. The second was the objective fact that the shares of the family's corporation had no history at paying dividends; instead the corporation had in the past remunerated its owner-manager by paying a bonus to him and providing advances via his shareholder loan account.