The Federal Court of Appeal has allowed The TDL Group Co. (TDL)
to deduct interest on borrowed money which was used to acquire
common shares of a wholly-owned US subsidiary, reversing the Tax
Court decision rendered last year. The Tax Court had denied the
deduction of interest, concluding there was no reasonable
expectation of TDL earning non-exempt income from the common shares
acquired with the borrowed money. This decision reaffirms the
generally accepted position that interest on money borrowed to
acquire common shares is deductible (provided there is a
possibility of earning non-exempt income, such as dividends on the
shares).
TDL had borrowed $234 million indirectly from its ultimate US
parent (Wendy's) on an interest-bearing basis and used the
borrowing to purchase additional common shares in a wholly-owned US
subsidiary (Tim's US). Tim's US lent the monies received
from TDL's share subscription to Wendy's on an
interest-free basis. The series of transactions
