The taxpayer borrowed approximately $1.9 million from a Canadian bank and used the proceeds to subscribe for preferred shares of a company ("Meager") that used the funds to acquire the shares of the two controlling shareholders of the taxpayer. Sarchuk TCJ. found (at p. 843) that:
"There could be no realistic expectation of dividend income from the preferred shares because Meager had no income source of substance independent of the existence of C.R.B.'s business ... . In essence, CRB financed its own acquisition."
Accordingly, the interest on the bank loan was non-deductible.
Sarchuk TCJ. also noted that any income source to which the loan might have related disappeared when the preferred shares were redeemed.