CCRA accepted that, under Ludco, the income-earning test referenced amounts added in computing income rather than net income, and indicated that, for example. a taxpayer could rely on the direct use test by selling shares in order to pay off personal debt, and then borrowing money to acquired replacement shares.
It indicated that cash damming is usually effected as follows:
A corporation opens two accounts in its financial institution. The only deposits to Account A are those arising from borrowed money and all other deposits (arising from transactions, etc., and not related to previously borrowed money) are made to Account B. The corporation ensures that all payments from Account A are for expenses that clearly meet the applicable conditions for interest deductibility. If some of the expenses paid from Account B were paid with borrowed money, the interest on that borrowing would not be deductible. Although some of the corporation's expenses are for purposes not otherwise eligible for interest deductibility, the borrowed money is used for specific eligible purposes and the taxpayer has clearly demonstrated those purposes.