Borrowing to invest? Court ruling provides tax guidance
It really pays to know the rules – regardless of what game or activity you’re involved in. And this is no truer than in the world of tax planning. I’d like to share the story of a taxpayer who was handed a decision at the Tax Court of Canada (TCC) just two weeks ago that cost him.
On April 20, the TCC handed down its decision in the case of Van Steenis v. The Queen. In this story, Eric Van Steenis had borrowed $300,000 to invest in a mutual fund. He then deducted his interest costs in each of his tax years from 2007 to 2015 for all the interest he paid on those borrowed dollars.
Throughout those years, Mr. Van Steenis received distributions from his mutual funds that were a return of capital – a total of $196,850. He used these cash distributions partly to pay down the debt owing, but used most of the cash for personal purposes. The taxman reassessed him and denied a portion of the interest deductions he claimed on the basis that the borrowed funds were no longer used solely for the purpose of earning income. Mr. Van Steenis appealed the decision and lost the case. This comes as no surprise to Canadian tax geeks everywhere.