This article deals with the manner in which Canada has
complicated, and rendered controversial, what in most other
countries is straightforward — the deductibility of business
related interest expense. The reasons to write about it are
threefold: the almost-concurrent issuance of the Canada Revenue
Agency's administrative views on the matter and the judgment by
the Tax Court of Canada in a Canada- U.S. cross-border matter and,
separately, the OECD's base erosion and profit-shifting
initiative.
Interest deductibility rules are among the most basic features
of an income tax system, so an outside observer would tend to think
that there should be no fuss about them. Nothing is further from
the truth though. Interest deductibility is a highly controversial
topic both from a theoretical perspective1 and in its
practical application. This is especially true in Canada where the
persistent difficulties encountered in everyday interest
deductibility situations are highlighted
