The taxpayers bought units in limited partnerships, each of which was to acquire a large yacht to be used for catered vacation charters. The purported business plan for the 36 partnerships represented a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356). The unit purchases were mostly financed by the taxpayers issuing interest-bearing promissory notes, to the partnerships which were falsely represented as being intended to act as security for loans arranged by the general partner to the partnership to finance its intended business.
Rossiter ACJ found (at para. 410):
No such loans existed, and the Limited Partnerships were never capitalized. The Appellants entered into the promissory notes based on fraudulent misrepresentations, and any contractual obligation to pay interest amounts is vitiated by fraud.
Although interest on the notes thus did not satisfy the test that "there must be a legal obligation to pay interest on the amount paid or payable," the other three tests for interest-deductibility were satisfied, including the income –producing purpose test, as to which he stated (at para. 409):
[D]espite the fact that the Appellants were defrauded of their interest payments, they had a reasonable expectation of income at the time of their investment... . The Appellants' expectation of income was only in the long-term and was an ancillary purpose of an otherwise tax-motivated investment, but it nonetheless qualifies... . [emphasis in original]