In order to settle the capital interest in a discretionary family trust of a beneficiary who is related to the trustees, that beneficiary agrees to renounce his interest in consideration for $200,000 paid as to $50,000 in cash and as to $150,000 by the issuance of a promissory note due in 5 years' time and bearing interest at 5%. Would the interest on the note be deductible? CRA responded (TaxInterpretations translation):
The interest calculated on the $150,000 note would not be deductible in accordance with the provisions of subparagraph 20(1)(c)(i) as there is no borrowed money... .
[Respecting] subparagraph 20(1)(c)(ii)…even if it were possible from a legal perspective to conclude that the note ... represented "an amount payable for property," ... it would not be possible to conclude ... that any "amount payable for property" was "for the purpose of gaining or producing income from the property." ...
[T]he reasoning in [Penn Ventilator] does not apply here. We also refer you to the comments ... in Bronfman Trust ... where, in similar circumstances ... the Court refused to consider the indirect use criterion in its decision.