The ultimate parent of the taxpayer's group ("Wendy's International") made a US$147,654,000 loan to a US subsidiary ("Delcan") at 7% interest, which then lent the money at 7.125% interest to the taxpayer. The taxpayer used the funds to subscribe for common shares of its wholly owned subsidiary ("Tim's U.S."), and Tim's U.S., in turn, lent the money interest-free back to the parent. It was intended that this be replaced by an interest-bearing note but, due to delays, this did not occur until eight months later.
Pizzitelli J upheld the Minister's disallowance of the taxpayer's interest deductions under s. 20(1)(c) during the eight-month period.
Respecting the direct use of the borrowed funds, he concluded (at para. 32) that the taxpayer did not have "any reasonable expectation of earning non-exempt income of any kind, directly or indirectly, at the time of its purchase of additional shares in Tim's U.S.," in light of its loss history, the need for cash flow to be reinvested in business expansion, and a 10-year projection showing no dividends. He also suggested (at para. 27, see also para. 31: "or even increased capital gains") that the generation of capital gains also could satisfy the income-earning purpose test in s. 20(1)(c), but that purpose also was not demonstrated.
He further concluded (also at para.32) that "the evidence clearly and unambiguously only points to the sole purpose of the borrowed funds as being to facilitate an interest free loan to Wendy's while creating an interest deduction for the Appellant."
Respecting the relevance of having regard to this intended use by Tim's U.S. of the share subscription proceeds, he stated (at paras. 26, 29):
While Singleton made it clear that there was no room to consider a series of transactions in determining the "use" of the funds ... , the determination of the "purpose" for buying the shares does not preclude looking at the indirect use of the funds or any other relevant factor. All circumstances must be considered. ...
[I]t is clear that for the "purpose" test in paragraph 20(1)(c), the use of funds by the borrower subsidiaries can be considered as part of all the circumstances.