Karen R. Sharlow

The appellant borrowed $1 million to purchase shares, later transferring them to a holding company in a section 85 rollover transaction for replacement shares with a fair market value of $1,000.

The Minister reassessed the appellant, limiting his interest deduction under section 20(1)(c)(i) of the Income Tax Act to the interest on $1,000.

The Supreme Court of Canada allowed the appeal, holding that the interest deduction is based on the amount of the original loan, not the value of the replacement property, provided the entire proceeds of disposition are reinvested in an eligible use property.

The respondent, Crown Forest, rented barges from Norsk, a Bahamian company with its sole office in the United States.

Crown Forest withheld 10 percent tax on the rental payments, claiming Norsk was a resident of the U.S. under the Canada-United States Income Tax Convention (1980).

The Minister assessed the withholding tax at 25 percent, arguing Norsk was not a U.S. resident.

The Supreme Court of Canada allowed the Crown's appeal, holding that Norsk's tax liability in the U.S. was based on its source income effectively connected with a U.S. trade or business, not on world-wide income.

Therefore, Norsk did not meet the criteria for residency under Article IV of the Convention, and the 25 percent withholding tax applied.