The trustees of the respondent trust elected to make discretionary capital allocations to its beneficiary.
Instead of liquidating capital assets, the trustees retained the investments and financed the allocations by borrowing funds from a bank.
The trust deducted the interest on the borrowed money.
The Minister disallowed the deductions.
The Supreme Court of Canada held that the interest deduction requires tracing the use of borrowed funds to a specific eligible use.
Borrowing money for an ineligible direct purpose (capital allocation) does not entitle a taxpayer to deduct interest payments, even if it indirectly preserves income-earning property.
The appeal was allowed.
