BMO - Tax Court of Canada finds that arrears interest on US assessments of US branch taxes was non-deductible in computing BMO’s income

BMO was assessed in 2004 and 2006 for additional U.S. federal (and NYC) income tax and interest on business profits attributed to its US branch operations for its 1997 to 2001 taxation years.

In confirming (in the context of a Rule 58 question) the CRA denial of the deduction claimed by BMO for such arrears interest, MacPhee J found that the tax arrears did not satisfy the income-producing purpose test in s. 18(1)(a) because such tax was not incurred to earn income but instead was incurred as a consequence of BMO having earned income. As the tax arrears thus were not deductible pursuant to s. 18(1)(a), it followed that the deduction of the arrears interest thereon was also denied pursuant to s. 18(1)(a), i.e., it was “an expenditure which would not have been incurred except for the income earned by [BMO]”.

It did not matter that the deduction was not specifically denied by s. 18(1)(t) (which refers only to amounts payable under the Act).

Neal Armstrong. Summary of Bank of Montreal v. The King, 2025 TCC 113 under s. 18(1)(a) – income-producing purpose.