The Minister disallowed the deduction by the taxpayer of guarantee fees paid by it to its US parent. The fees were calculated as 1% of the face amount of the commercial paper and other debts of the taxpayer that were guaranteed.
Noël J.A. accepted the submission of the Crown that the determination of an arm's length guarantee fee for purposes of ss. 247(2)(a) and (c) (and for purposes of s. 69(2) for the earlier taxation years in question) should take into account the fact that even without a guarantee, there would have been "implicit support" by the US parent of the taxpayer, i.e., the market would take into account reputational pressures on the US parent to support its subsidiary. It was necessary to take "into account all the circumstances which bear on the price whether they arise from the relationship" between the taxpayer and its non-resident contracting party or otherwise (para. 54). However, even taking into account the implicit support, the interest rate savings to the taxpayer as a result of receiving the guarantee exceeded the guarantee fees, so that the Tax Court had correctly found that amount of the guarantee fees did not exceed the amount that would have been agreed to by parties dealing at arm's length in the same circumstances.