The taxpayer borrowed 216 million in Australian dollars under debentures bearing interest at 16.125% per annum and that had been issued at a 2% premium and then, under a master swap agreement: exchanged the Australian dollar principal amount for Japanese yen at the current spot rate of exchange; swapped the Japanese yen proceeds for Canadian dollars at the current spot rate of exchange; under a series of forward contracts agreed to purchase Australian dollars using Japanese yen on the interest payment date and the principal maturity date; and agreed to exchange Canadian dollar payments for Japanese yen at the relevant future dates. The effect was to convert the proceeds of the debenture issues into Canadian dollars as soon as it received the borrowed funds, and to secure the future delivery of foreign exchange necessary to make the periodic payments of interest and to retire the principal. Sexton J.A. rejected a submission of the Crown that the taxpayer's act of denominating the debentures in Australian dollars was in and of itself a transaction.
Sexton J.A. found that it was not possible to separate the currency of the borrowed funds from the borrowing itself so as to make the denomination of the borrowing a discrete transaction in and of itself, that the extended definition of transaction could not be interpreted to justify taking apart a transaction in order to isolate its business and tax purposes, and that, if the Crown's argument were correct, it could allege that the tax planning component of any transaction amounted to an event or arrangement, constituting a separate transaction. The finding of the Tax Court judge that the primary purpose of the Australian dollar borrowing transaction was for business purposes should not be overridden.