Specialty Manufacturing Ltd. v. Canada
A-659-97
McDonald J.A.
18/5/99
16 pp.
Appeal from T.C.C. decision disallowing deduction of $948,661 in respect of interest payments to two related U.S. corporations in 1984 to 1987 taxation years-Where interest payable by Canadian corporation to non-resident shareholder holding or controlling more than 25% interest in company, Act, s. 18(4) operating to limit any deduction of interest pursuant to Act, s. 20(1)(c) if debt to equity ratio of taxpayer corporation exceeding 3 to 1-Appellant arguing that, as Minister has admitted arrangements herein structured as if between arm's length parties, 1942 and 1980 tax treaties operating to preclude application of Act, s. 18(4)-Appeal dismissed-Only issue whether capital structure of appellant same as or different than arm's length capital structure-Obviously not same-Appellant had virtually no equity capital and was financed almost exclusively by loans from two U.S. corporations-Clearly, debt to equity ratio of over $10,000,000 debt to $100 equity does not resemble arm's length situation-Obviously, with virtually no equity capital, no arm's length lender would have issued loans to appellant in substantial amounts at issue herein, therefore clearly non-arm's length transactions-Accordingly, Minister entitled to use Act, s. 18(4) to restrict deductions claimed under Act, s. 20(1)(c)-Result authorized by both 1942 and 1980 tax treaties-Income Tax Act, S.C. 1970-71-72, c. 63, s. 18(4), 20(1)(c)(i)-Convention and Protocol Between Canada and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the Case of Income Taxes, being Schedule I of The CanadaUnited States of America Tax Convention Act, 1943, S.C. 1943-44, c. 21-Convention Between Canada and the United States of America with respect to Taxes on Income and on Capital, being Schedule I of the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20.