A Barbados corporation ("PIN") allegedly developed marketing software. It did business mainly through franchise arrangements, under which it would often operate the franchisee's franchise as an agent. The taxpayer was one such franchisee. He covered the $200,000 franchise purchase price with a promissory note at 7.5% interest.
The Minister disallowed all the taxpayer's business deductions in connection with the franchise, on the basis that there was no business activity, and that the franchise and note were shams entered into predominantly for tax reasons. In the alternative, the deductions were unreasonable.
Bédard J disagreed. A thorough review of the evidence showed extensive and varied development efforts that were founded on a serious business plan. Accordingly, the expenses were also reasonable.