The shareholders of Opco loaned it money to permit it to acquire inventory. The loans were unsecured and bore interest at 10% yearly. The Court of Quebec, in light of the Quebec equivalent of section 67 of the ITA, denied the deduction of interest in excess of 7.89% yearly, which was the bottom end of a range of reasonable rates for similar loans provided by the taxpayers’ own expert (Deloitte). Neil Armstrong summary of Gervais Auto Inc. v. Agence du revenu du Québec, 2019 QCCQ 5894.
Update March 2, 2020: Eric Brown and Greg Johnson, “Interest Deductibility and the Burden of
Proof” (February 2020) 10:1 Canadian Tax Focus criticizes this decision for how it applied the burden of proof against the taxpayer.
Update May 10, 2021: James D Trougakos, “Status Quo Restored: Interest Deductibility and the Burden of Proof” 11:2 Canadian Tax Focus (May 2021) reports that the Quebec Court of Appeal has reversed this decision: 2021 QCCA 459. The taxpayer had demolished the Crown’s position that the interest rate used was unreasonable because the taxpayer’s evidence showed the rate was within a reasonable range. The taxpayer was not required to show that the rate used was more reasonable than a lower rate within the range.
