The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal to fund the purchase of shares of a family company from the taxpayer for $562,500. A day later, the taxpayer and Jordanna borrowed, on a joint and several basis, $562,000 from the Bank secured by a mortgage on a new personal residence that they had just purchased, with the proceeds of that loan being used to pay off the loan the Bank had made to Jordanna. The taxpayer used the share sale proceeds to pay the vendor of the residence. The taxpayer filed his return on the basis that the inter-spousal rollover applied to the share sale and that s. 74.1(1) attributed to him the loss sustained by Jordanna resulting from the deduction of the interest expense on the mortgage loan from the dividend income she received on her purchased shares.
Bowman C.J. indicated (at p. 2692) that "paragraph 20.(1)(c) was intended to permit interest on money borrowed for commercial purposes to be deducted" and "that interest on money borrowed for personal use (such as buying a residence) is not deducible" and (at p. 2691) that "subsection 20(3) allows a deduction for interest on money borrowed to repay money previously borrowed for commercial purposes." Here, subsection 20(3) was being abused through "the purported attachment to the subsequent mortgage loan [of] the tax incidents of Jordanna's original and fleeting use of the proceeds of the first loan" (p. 2692).