The taxpayer was formed on the amalgamation of two corporations, one of which ("UCCI") had previously incurred interest-bearing indebtedness to a financing affiliate within the Union Carbide group of companies and the other of which ("DCCI") was a Canadian subsidiary within the Dow group of companies that dealt at arm's length with UCCI and the financing affiliate. The U.S. parent of the taxpayer ("Dow") had acquired control of the U.S. parent of UCCI, and the amalgamation then occurred.
Mogan, D.J. found that s. 78(1) did not apply to the interest on such debt as the taxpayer was not related to UCCI or the financing affiliate in fact or by any deeming rule during the calendar year in which such interest was incurred.