The taxpayer made a second mortgage loan to a real esate developer ("Clearstream"). After Clearstream defaulted, the taxpayer arranged for an affiliated company ("Ontra-Desar") to purchase the mortgaged property, doing so (without the knowledge of Clearstream) as nominee and agent for the taxpayer. The consideration paid by Ontra-Desar was stated to include the discharge by it of the second mortgage liability of Clearstream to the taxpayer including the arrears interest. (The taxpayer did not want Clearstream to realize that it was the true purchaser, so that the second mortgage would automatically be extinguished as a result of the purchase.)
In finding that the taxpayer had received the arrears interest (and, therefore, was taxable on that amount under s. 6(1)(b) of the pre-1972 Act), Walsh J stated (at p. 5037) that the taxpayer "actually received the interest due to it on its loan as a result of paying less in cash to the vendor [through its nominee] to the same extent when the purchase price was paid." Walsh J further stated that even if the value of the lands (net of the first mortgage liability) had been insufficient to pay the amounts (including interest) owing to the appellant, the value of the lands acquired (net of the assumed first mortgage) would be attributed first to interest, with any remaining balance attributed to capital, so that any value shortfall would not have the effect of reducing the amount of interest considered to have been received by the taxpayer under s. 6(1)(b) of the pre-1972 Act.