A subsidiary ("Leasing") of the appellant (the "Bank") had been financed with loan capital received by the Bank, which subsequently had been converted into share capital. Later, in order to shift losses to Leasing, Leasing paid a cash dividend of $45 million to the Bank which was financed, as to $36 million out of the borrowing from the Bank, and as to the balance with cash from its operations. Revenue Canada allowed the deduction of interest only on that amount of the borrowing that was matched by Leasing's retained earnings.
In confirming this treatment, Noël J.A. noted ( at pp. 6018-9) that none of the borrowed money was used to redeem or cancel the share capital, that none of the share capital was converted to debt, and that "except to the extent of the retained earnings the borrowing was not a replacement of monies that had been withdrawn for the business".