A partnership ("ICON") of which the taxpayer became a limited partner purchased software from a subsidiary ("Trafalgar Capital") of the developer of the software in consideration for cash (as to 30% of the purchase price) and a promissory note (for the balance), with the taxpayer then assuming a portion of the promissory note as part consideration for his units in ICON. ICON licensed the program to a Bermuda limited partnership ("ICAP") of which Trafalgar Capital was the general partner. An agreement between ICON and Trafalgar Capital guaranteed an average annual revenue of no less than 12% on leveraged trading funds used by ICAP over the ten-year term of the promissory note and provided that in the event the software did not generate this return, ICON could replace the board of directors of Trafalgar Capital. Campbell J. found that there were no bona fide arrangements for repayment of the promissory note given that (i) an acceleration clause under the promissory note likely would never be triggered because of the ability to ICON to replace the board of directors of Trafalgar Capital, (ii) limited partners who resided outside Canada were not required to provide any security or collateral, (iii) there was no genuine risk of loss because the limited partners as debtors under the promissory note had the benefit of the revenue guarantee of Trafalgar Capital which they could invoke in the event that they were called upon to pay the note, and (iv) the nature of the legal arrangements was quite unclear, whereas a bona fide "arrangement should readily be seen to be binding upon the parties; it should be prima facie obvious" (p. 254).
Furthermore, an alleged implicit set-off arrangement did not establish that interest was paid on the promissory notes within the 60-day period stipulated by subsection 143.2(7) given that Trafalgar Capital (in its own capacity rather than as general partner) did not owe money to either ICON or to each partner, and there was a failure to produce documentation as required under s. 143.2(13).