When the taxpayer started business in 1954 it raised the capital required for its business by issuing common shares for $140,006 and preferred shares for $700,000. In 1956, the taxpayer raised $1 million by way of a bond issue for $700,000 and a common share issue for $300,000. The preferred shares were redeemed by using $300,000 from the common share issue and $400,000 out of the $700,000 received on the bond floatation.
After finding (p. 6353) that the income-producing use test refers to the dedication of "the mass of capital ... through all the different forms through which it passes while it remains in the business" rather than use in the sense of the initial payment made with money, Jackett P. went on to find that the interest on the $700,000 bond issue was deductible in full (rather than as to only 3/7 as alleged by the Crown) on the basis of the following characterization (p. 6354):
"Prior to the 1956 transactions, the appellant's capital used in its business consisted in part of $700,000 subscribed by preferred shareholders. As a result of those transactions, the $700,000 had been repaid to those shareholders and the appellant had borrowed $700,000 which, as a practical matter of business common sense, went to fill the hole left by redemption of the $700,000 preferred."