(a) Could CRA confirm its position in IT-533, para. 31 notwithstanding certain comments in Swirsky? (b) Does CRA recognize that numerous years may pass before a corporation pays dividends, for example, a mineral or petroleum corporation at the exploration phase, without compromising interest deductibility on a loan incurred to acquire common shares? CRA responded (TaxInterpretations translation):
(a) The comments of the Tax Court of Canada in the Swirsky case respecting the absence of a history of payment of dividends have not effected a modification to our position in paragraph 31 of Interpretation Bulletin IT-533 respecting the deductibility of interest on a money borrowed for the purpose of acquiring common shares. Thus, where a taxpayer incurs a loan in order to acquire such shares on which no dividends have been paid, the interest respecting the loan will be deductible if we consider that at such moment there is a reasonable expectation of eventually receiving dividends on such shares. ...
(b) By itself, the fact that a corporation utilizes its entire liquidity for the purposes of carrying on its business for a certain period does not generally have the effect of limiting the potential for one of its shareholders to claim a deduction by virtue of subparagraph 20(1)(c)(i)...in respect of money borrowed for the purpose of acquiring its shares. However, we would conclude that there is not a reasonable expectation of receiving dividends when the facts and documents indicate clearly that the permanent policy ["politique permanente"] of the corporation is to not pay dividends on the shares in question.