A transaction should not "be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose." However, the formal validity of a transaction may be insufficient where giving full effect to the transaction would defeat the object and spirit of an allowance or benefit provision, or go contrary to a legislative intent to restrict the benefit of such provision to rights that had accrued prior to the transaction, or where the relevant provisions of the Act relate to an identified business function.
A transfer by the taxpayer of its flavouring business to an affiliated company with a history of losses (coupled with the agreement of the taxpayer to act as the affiliated company's agent respecting that business) was a legally effective transaction and also was effective for tax purposes.