Foreign Tax Interest Denied, Tax Court Loss Contained — Bank of Montreal v. HMK

Key Takeaways

• The Tax Court confirmed that foreign tax interest is not deductible — BMO lost on the law.

• The result was predictable, but BMO's strategy maximized potential upside while containing the downside when the law cut against them.

• BMO’s disciplined strategy (Rule 58 motion, agreed facts, narrowed issues) ensured the dispute was defined on their terms. 

The Situation

BMO carried on business through U.S. branches and was subject to both U.S. federal and New York City income taxes. After IRS audits for 1997–2001, BMO was assessed for additional tax and interest. For Canadian purposes, BMO deducted the foreign interest, arguing it reflected a business cost tied to its U.S. operations. CRA denied the deduction, relying on the principle that interest on unpaid income tax is not incurred to earn income.

The Tax Court agreed with CRA, holding that such interest is not deductible under the Income Tax Act.

What Made the Difference

On the law

The doctrine was clear: Canadian courts had already held that interest on income tax arrears is not deductible. Precedent drove the outcome.

On the strategy

BMO shaped the dispute from the outset. From the time it filed, the bank appears to have anticipated both the potential deduction and the likely challenge, embedding a strategy that would focus the case on a narrow legal issue. That discipline carried from filing through to litigation: agreed facts, a Rule 58 motion, and a clean record. The result was unfavourable, but the execution meant the loss was swift, predictable, and controlled.

The Signal for Business Leaders

A favourable result would have reshaped deductibility boundaries. However, the Tax Court’s conclusion followed established precedent: foreign tax interest is not deductible.

What distinguishes this case is how BMO managed the dispute. By embedding dispute-thinking from the time of filing and carrying that discipline through objection and litigation, the bank kept the case defined on narrow terms.

The strategy did not change the legal outcome, but it shaped the trajectory: potential upside was preserved if the law moved, and the downside was contained when it did not.

Case Reference:  Bank of Montreal v. His Majesty the King, 2025 TCC 113