The taxpayer transferred shares in a family real estate development company ("Torgan") to his wife ("Ms. Swirsky") on three occasions in 1991, 1993 and 1995 for creditor-proofing reasons. In the 1991 transactions, his wife borrowed $2.5 million from a trust company ("Mutual Trust") at 11% interest to pay the shares' purchase price, the taxpayer used the sales proceeds to pay off loans owing by him to Torgan, and Torgan used the proceeds to purchase a $2.5 million GIC (bearing interest at 10%) from Mutual Trust. The GIC was assigned by Torgan to Mutual Trust to secure Torgan's guarantee of the Mutual Trust loan to Ms. Swirsky. The interest on the GIC was applied by Mutual Trust to the interest owing by Ms. Swirsky on her loan, and the balance of the interest was paid monthly by Torgan and charged to the taxpayer's loan account (para. 17). The regular application of the GIC interest by Mutual Trust also apparently was treated as advances by Torgan to the taxpayer rather Ms. Swirsky (para. 44), and Paris J. rejected submissions that this treatment of the funding of the interest payments was a mere bookkeeping error (para. 45).
The interest deducted by Ms. Swirsky on her loans totaled $1.445 million by the end of 2003. In 2003 Torgan paid a dividend of $1.573 million on Ms. Swirsky's shares (and dividends also were paid in 2004 and 2005; and a $2.5 million capital dividend was paid in 1999). The taxpayer deducted the interest expenses and other carrying costs of Ms. Swirsky in computing his income by virtue of s. 74.5(1) and also included the 2003 dividend in his income.
Paris J. found that the interest was not deductible to Ms. Swirsky (and, therefore, to the taxpayer under s. 74.5(1)) because she had not borrowed from Mutual Trust for the purpose of earning income from the shares. Operating income previously had been distributed as bonuses, and Ms. Swirsky had little basis for believing that dividends would be paid. Furthermore, her subjective intentions in borrowing the $2.5 million related entirely to creditor proofing.
In the Court of Appeal, Dawson JA stated (at para. 8) that "where the purpose or intention behind an action is to be ascertained, a court should objectively determine the purpose, guided by both objective and subjective manifestations of purpose," before going on to find that Paris J (contrary to the taxpayer's submission) had in, in fact given weight to a number of objective manifestations of purpose, including that Torgan had not paid any dividends prior to 1999 (with bonuses instead being paid) nor did it have a dividend policy in place, and that it could be inferred that Ms. Swirsky instead only had a reasonable expectation of receiving a capital dividend.