https://decisia.lexum.com/tcc-cci/decisions/en/item/309257/index.do
Van Steenis v. The Queen (April 20, 2018 – 2018 TCC 78, Graham J.).
Précis: In 2007 Mr. Van Steenis borrowed $300,000 to purchase units of a mutual fund. Between 2007 and 2015 he received a return of capital from the fund of $196,850. He used some of that return to repay a portion of the loan but used the majority for personal purposes. Nevertheless he continued to deduct the full amount of interest on the loan. CRA reassessed denying an interest deduction for the returns of capital that had been used for personal purposes. The Tax Court dismissed the appeal. There was no order as to costs since this was an informal procedure appeal.
Decision: The law in this area is straightforward and quite well known:
[9] Mr. Van Steenis submits that he had no control over the characterization of monies distributed to him by the Fund. The choice to characterize those distributions as returns of capital was a choice made by the Fund. Mr. Van Steenis submits that “return of capital” is a description used by the mutual fund industry. He observes that the term is not used in the Act. He points out that, while a return of capital does represent a return of some of the capital held by a mutual fund, it does not necessarily represent the return of an individual unitholder’s capital. Mr. Van Steenis states that, because mutual funds are making distributions to many different unitholders, each of whom likely invested at a different price, it is possible that a given unitholder will receive a return of capital that exceeds the amount that he or she invested. Thus, Mr. Van Steenis reasons, there is no correlation between the funds described as being a return of capital and a unitholder’s actual capital.
[10] I disagree with Mr. Van Steenis’ characterization of what has occurred. Mr. Van Steenis borrowed money to buy the Units. Over the years, almost two-thirds of the money that he invested was returned to him. More than half of that returned money was put to use for personal purposes. In the years in question, that was its current use. As a result, I find that there was no longer any direct link between those borrowed funds and the investment in the Units. The fact that Mr. Van Steenis still owned all of the Units does not change this analysis. Thus Mr. Van Steenis was not entitled to deduct the interest relating to the portion used for personal purposes.
The Tax Court dismissed the appeal. There was no order as to costs since this was an informal procedure appeal.