In order to finance the acquisition of U.S. companies, the taxpayer set up a tower structure. See above for details.
For U.S. tax purposes, GL&V was a corporation while NSULC and LLC were fiscally transparent. Therefore, for U.S. tax purposes, GL&V was considered to have made loans directly to, and received interest directly from, Holdings. For Canadian tax purposes, GL&V was fiscally transparent and NSULC and LLC were corporations.
Paris J. found that (for purposes of computing the taxpayer's income qua partner) GL&V U.S. income tax liabilities were paid "in respect of" its dividend income from the NSULC shares, even though the tax arose from Holdings' payments to LLC rather than NSULC's dividend payments to GL&V. The words "in respect of" do not require that the taxes be paid on the source of income - only that they be connected with or related to that income (para. 45). In this case they were connected because, if the taxpayer had not owned NSULC shares, it would not have had to pay U.S. tax.
However, by similar reasoning, GL&V's share of the U.S. income taxes was not deductible because those taxes were paid "in respect of income from a share of the capital stock of a foreign affiliate" (LLC). Paris J. stated (at para. 63):
I disagree with the appellant's position that the words "can reasonably be regarded" in subsection 20(12) do not enable the Minister to look through NSULC. It seems to me that this phrase, on its own, is a specific provision enabling the Minister to evaluate the economic substance of a transaction regardless of its legal form.