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Canada: Federal Court of Appeal agrees with TDL on scope of Canadian interest deductibility purpose test


John Leopardi

Alexandra Carbone

In March, the Federal Court of Appeal (FCA) overturned the Tax Court of Canada (TCC) judgment in The TDL Group Co. (TDL). The FCA allowed the interest deduction claimed by TDL on funds borrowed from its direct US parent, Delcan, that were used to purchase additional common shares of its wholly-owned subsidiary, Tim Donut US Limited (Tim US). A summary of the TCC decision was published on March 30 2015.

Wendy's International (Wendy's), a US company, made an interest-bearing loan to Delcan and, in turn, Delcan made an interest-bearing loan to TDL. TDL used the borrowed funds to subscribe for additional common shares of Tim US. The next day, Tim US used the subscription funds to make an interest-free loan to Wendy's, which was replaced with an interest-bearing loan seven months later. The Minister of National Revenue (the Minister) denied the interest deduction claimed by TDL for the seven month period, but not for the subsequent period.

The principal issue in TDL was whether the subscription for common shares of Tim US met one of the requirements under Canadian interest deductibility rules, namely that the borrowed money be used for the purpose of earning non-exempt income from a business or property.

In reversing the TCC's decision, the FCA stated that it was settled law that the purpose for which the borrowed funds were used was to be determined at the time TDL subscribed for shares of Tim US. In the FCA's opinion, the TCC erred when it considered that a reasonable expectation of income from the shares in the first seven months of ownership was required in order to meet the purpose test. The FCA effectively reasoned that because the Minister accepted that the purpose test was met after the seven month period, it must have been met at the time of the share subscription. Strangely, the FCA did not undertake its own analysis of whether the purpose test was met at any time. The FCA also commented that the TCC's concern with tax avoidance in this case led it to the wrong conclusion.

The FCA's decision is welcome and in line with common understanding of the application of Canadian interest deductibility rules. In general, it is the original purpose of a particular use of borrowed funds that should be considered in applying the purpose test and not an ongoing examination of the purpose of a particular investment.

John Leopardi ( and Alexandra Carbone (, Montréal

Blake, Cassels & Graydon

Tel: +1 (514) 982 5030 and +1 (514) 982 5034


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