TDL Group Co. – “indirect use” of borrowed funds is used as a sword by the Tax Court of Canada

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 eight months later. In denying an interest deduction to TDL on its borrowing during the eight-month period, Pizzitelli J found that TDL did not have "any reasonable expectation of earning non-exempt income of any kind" on its common share investment given inter alia Tim's U.S.’s history of losses, and its policy of applying cash flow to capital expenditures rather than dividends – plus a 10 year projection showing no dividends.

Pizzitelli J might have stopped there, but he went on to indicate that "the sole purpose of the borrowed funds [was] to facilitate an interest free loan to Wendy’s," i.e., he looked at the indirect use of the borrowed funds, namely, the direct use of them by Tim's U.S. To boot, he also indicated that borrowing to generate capital gains potentially could satisfy the income-producing purpose test under s. 20(1)(c), although that was no such capital gains purpose here.

Neal Armstrong. Summary of TDL Group Co. v. The Queen, 2015 TCC 60, under s. 20(1)(c).