The taxpayer and his brother used money borrowed by them from the Royal Bank of Canada to purchase debentures from a Canadian-controlled private corporation ("Shoppers") or to refinance money previously borrowed to purchase debentures from Shoppers. When the Royal Bank called for repayment of the loans following the placing of Shoppers into receivership, the brother was unable to repay and the taxpayer repaid the full amount owing under both his and his brother's loans from the Royal Bank, and the taxpayer obtained an assignment of the security the Royal Bank previously had in respect of its loans to his brother. The brother was unable to pay his indebtedness to the taxpayer, and the taxpayer accepted the debentures owing to his brother by Shoppers in satisfaction of his brother's indebtedness to him (that had arisen under the law of contribution).
After noting that section 79, which applied to this transaction, had the effect of transferring the accrued loss on the (bad) debt owing to the taxpayer by his brother on to the Debentures owing by Shoppers that the taxpayer acquired from his brother, Hershfield J. found that in order for this preservation of loss to occur, the income-producing purpose attaching to the original advances made by the taxpayer to Shoppers should be subsumed in the purpose of the taxpayer in acquiring the Debentures of his brother, with the result that the loss claimed by the taxpayer in respect of those acquired Debentures should be considered to satisfy the income-producing purpose test in s. 40(2)(g)(ii). Furthermore, even if it were necessary to consider the purpose of the taxpayer in acquiring the brother's Debentures without relating back to the previous transaction, the fact that the taxpayer took the action of obtaining an assignment of the Royal Bank's security "necessarily implies a belief that the Debenture itself had potential value" (para. 47) so that there might be considered to have been a subordinate, albeit faint hope, of income in respect of the acquired Debenture, which would have been sufficient to satisfy the test in s. 40(2)(g)(ii). Accordingly, the taxpayer realized an allowable business investment loss in respect of his write-down of the Debentures acquired from his brother.