Non-arm’s length interest

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 Qu├ębec, 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.

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