Where a parent company borrows money from a bank at prime plus 1%, uses the borrowed funds to invest in common shares of a newly-incorporated subsidiary which, in turn, subscribes for preference shares of a start-up subsidiary bearing a cumulative dividend of prime plus 1.25%, and the subsidiary loans the same funds on a limited-recourse basis to the parent for a five-year period at prime plus 1%, the interest expense of the parent will be deductible.
