The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. After finding that the issuance of the second note did not constitute a payment by novation, CRA went on to find that there also was not resulting payment or crediting of the interest. In this regard, it quoted from the Québec Cartier decision, and stated:
[T]he Taxpayer did not pay the increased and annually capitalized interest and did not credit the Vendor with such interest when the note payable on XXXXXXXXXX was issued on XXXXXXXXXX.