The taxpayer gifted a portion of his common shares of a family small business corporation to a trust for his children utilizing the rollover provisions of former s. 73(5) and then, approximately one month later, repurchased the shares in consideration for an interest-bearing promissory note. The trustee then issued a direction to him "to reinvest the interest payments due to the undersigned with respect to the Promissory Notes as you shall deem fit in the names of each of the children". the taxpayer was able to demonstrate that various expenditures he made on his children exceeded the amount of the interest on the notes.
In finding that no interest had been paid on the notes, Mogan TCJ. stated (at p. 155):
"In the absence of any evidence of accounting by Douglas to the trustee whereby the trustee could be satisfied that the annual interest payments had, in fact, been made and reinvested (whatever that word means) for the benefit of the children, I am not prepared to conclude that Douglas paid any interest ... ."
In any event, given that the dividends received on the shares that he repurchased were only a small fraction of the interest payable on the notes, the taxpayer was found to have repurchased the shares for the purpose of an estate plan rather than for an income-producing purpose.