The appellants borrowed money to purchase shares in foreign companies structured to avoid FAPI rules and provide tax advantages.
Over eight years, they received $600,000 in dividends and incurred $6 million in interest charges, which they deducted under s. 20(1)(c)(i) of the Income Tax Act.
The Minister disallowed the deductions, arguing the true purpose was to defer taxes and convert income into capital gains.
The Supreme Court of Canada allowed the appeal, holding that the test for interest deductibility is whether the taxpayer had a reasonable expectation of income at the time the investment was made.
The Court found the appellants had such an expectation, and the interest costs were deductible.
