Chase Manhattan Bank of Canada v. Canada
A-367-97
Noël J.A.
9/12/99
4 pp.
Appeal from Tax Court decision subsidiary of appellant not entitled to deduct interest paid on major portion of $36 million loan advanced by appellant-As subsidiary since wound up, appellant seeking to uphold deduction claimed in computation of subsidiary's income for 1986, 1987-From inception to 1985, subsidiary's financing provided by appellant in form of interest-bearing advances-Based on expectation appellant would thereafter be in taxable position, subsidiary would not, decided to shift cost of subsidiary's financing operations to appellant by having latter purchase share capital of subsidiary out of borrowed funds-Appellant bought additional common shares of subsidiary by offsetting interest-bearing advances owed to it ($37 million)-When appellant experienced loss in 1986, subsidiary reported gain, decided to reverse effect of February 1986 share purchase by appellant advancing to subsidiary interestbearing loan of $36 million-Minister disallowing deduction of interest paid by subsidiary to appellant, except for portion computed by reference to subsidiary's retained earnings as stood prior to payment of dividend-Recognized loan, up to amount of retained earnings, served to replenish working capital of subsidiary-Tax Court denying appeal, holding not showing loan used to fill "real hole" in capital requirements of subsidiary-Direct use of borrowed funds to pay dividend-At time of borrowing, capital used in business constituted by $39 million of share capital contributed by appellant shareholder-Amount not redeemed, cancelled-None of share capital converted to debt-Borrowing not replacement of moneys withdrawn for business-Continued operations of business after withdrawal of working capital suggesting other funds being used in conduct of business, no such inference arising herein-To succeed, incumbent upon appellant to demonstrate borrowed funds being put to eligible use by subsidiary during relevant taxation years-Not so demonstrated.