February 6, 2026

Where an Interest Deduction Dispute Is Effectively Shaped

Keybrand shows how s. 20(1)(c) disputes turn on which explanation takes hold

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Keybrand Foods Inc. v. HMQ, shows how interest-deductibility disputes, and others like them, are shaped after reassessment as the objection record crystallizes the explanation of the business situation that will carry forward into the Tax Court appeal.

Key Takeaways

Keybrand's ABIL claim turned on how the share subscription was characterized at the time of acquisition, including whether the parties were dealing at arm’s length and what that meant for cost base.
In parallel, the record related to CRA's decision to deny Keybrand's interest deduction under s. 20(1)(c) reflected a single explanation of what the financing was understood to accomplish, with no competing account gaining traction through objection or appeal.
By the time the objection concluded, the CRA's framing was dominant and constrained how the Tax Court would read the transaction, regardless of the arguments that Keybrand advanced at the appeal stage.

The Situation

After its subsidiary Vidabode defaulted on a major obligation, Keybrand borrowed $14.4 million, subscribed for additional shares, and used the funds immediately to repay Vidabode’s lender. During the same period, Vidabode had no sales, no external financing, and no clear operational path forward. Keybrand began preparing for insolvency, and a receiver followed shortly afterward.

CRA denied Keybrand’s interest deduction under s. 20(1)(c) on reassessment. Keybrand also claimed an allowable business investment loss (ABIL) in respect of the Vidabode shares. The matter proceeded through objection and ultimately to court, where the reassessment was upheld, and Keybrand’s appeal was dismissed.

The other half of the appeal

ABIL and the share subscription characterization

An allowable business investment loss (ABIL) issue ran alongside the interest deductibility issue.

That issue turned on how the share subscription was characterized at the time it occurred, including whether Keybrand and Vidabode were dealing at arm’s length and what followed from that for cost base. The parties agreed that the fair market value of the shares at the time of acquisition was nil. The dispute, therefore, focused on whether Keybrand dealt at arm’s length with Vidabode when the shares were issued.

The Court upheld the Tax Court’s conclusion that, in light of the surrounding circumstances, the share issuance did not occur at arm’s length. As a result, the adjusted cost base of the shares was deemed to be nil, leaving no capital loss and no ABIL available on their disposition.

Although legally distinct, the ABIL and interest issues were driven by the same underlying record. In both cases, the characterization of the transaction turned on how the financing and share subscription were understood in context once the dispute moved into objection. When that explanation settled, it constrained the analysis across both issues.

What Made the Difference

The case did not turn on the technical structure of the borrowing in isolation. It turned on which explanation of the business reality was reflected consistently after reassessment, as that explanation took shape in the notice of objection, settled through the objection stage, and carried forward into the Tax Court appeal.

As the file progressed, the record increasingly centred on a single account: the borrowing functioned to remove third-party pressure and manage downside risk in a distressed situation, rather than to support a forward-looking income-earning strategy. That account fit the timing, sequencing, and surrounding decisions without requiring further inference.

By the time the dispute reached Tax Court, that explanation was no longer competing with another. It had become the reference point.

What Keybrand Actually Shows

Keybrand does not stand for a simple preference for “substance over form.” The borrowing and share subscription could have been described in more than one way.

What proved determinative was the absence of a competing explanation in the record linking the financing to a defined, forward-looking business objective capable of supporting the interest deduction.

The record showed how the money moved, but not what the business expected that money to change or generate in terms of income. Insolvency planning ran alongside the financing, with no clear distinction between a fallback and the intended path forward. And nothing about how the equity was put in changed how the business was run or what success would have looked like if the financing worked.

Read together, those signals left no clear basis in the record for treating the borrowing as income-oriented.

Why this matters after reassessment

The objection as the inflection point

For companies that meet the definition of a large corporation under the ITA, the notice of objection serves as more than a procedural response. It is the stage at which the dispute’s working explanation either remains fluid or begins to harden.

At this point:

the CRA has framed its view of the facts through the audit and reassessment,
the objection record, as it takes shape, narrows the interpretation of purpose, expectation, and outcome together, and
over time, incomplete explanations tend to work against the outcome being sought.

This dynamic helps explain why many cases reach court with constraints

The Signal for Business Leaders

Interest deductibility under s. 20(1)(c) provides a clear illustration, but the pattern is broader. In disputes involving financing, restructurings, or distressed investments, outcomes often turn on whether the objection-stage record was established and supports more than one credible explanation of what the business understood itself to be doing.

When a dominant explanation takes hold, later advocacy is either constrained or given room to operate.

Case Reference: Keybrand Foods Inc. v. Canada, 2020 FCA 201

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