TDL Group – Federal Court of Appeal sticks with the direct use test, so that interest on money borrowed to acquire (non-dividend producing) common shares of a subsidiary was deductible

The Canadian taxpayer ("TDL") used money, which it had indirectly borrowed from its U.S. parent ("Wendy’s"), to subscribe for common shares of its wholly-owned U.S. subsidiary ("Tim's U.S.") which, in turn, lent the money back to Wendy’s – initially on a non-interest-bearing basis until it was changed to interest-bearing seven months later (upon being contributed to a new U.S. subsidiary of Tim's U.S.). Pizzitelli J had denied an interest deduction to TDL on its borrowing during the seven-month period, finding that TDL did not have "any reasonable expectation of earning non-exempt income of any kind" on its common share investment in Tim’s U.S.

Dawson JA noted the “paradox” of finding that “there was no income-producing purpose during the first seven months…but an income earning purpose thereafter” given that the same common shares were held by TDL throughout, indicated that there was no requirement that the Tim's U.S. shares generate income during the first seven months of their holding, and stated:

[T]he temporary use of the subscription proceeds by Tim’s U.S. did not detract from the appellant’s income earning purpose behind its acquisition of additional shares in Tim’s U.S.

The interest was deductible.

Neal Armstrong. Summary of TDL Group Co. v. The Queen, 2016 FCA 67 under s. 20(1)(c).