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 (at para. 23) a submission of the Crown that the taxpayer's act of denominating the debentures in Australian dollars was in and of itself a transaction.
In rejecting a submission that there was an abuse because the borrowing was structured so as to result, in effect, in the deduction of Canadian dollar principal payment (i.e., the high nominal rate of Australian-dollar interest was matched with a capital gain that would be realized on maturity under the forward arrangements), Sexton J.A. indicated that the amounts labelled as interest clearly were interest and (at para. 33):
A recharacterization of a transaction is expressly permitted under section 245, but only after it has been established that there has been an avoidance transaction and that there would otherwise be a misuse or abuse."