This case concerns the tax treatment of a sophisticated financing transaction, known as a “weak currency financing scheme”, undertaken by Shell Canada. In 1988, Shell Canada required about $100 million in United States currency (“US$”) for general corporate purposes. The market rate for a direct borrowing of US$ was 9.1 percent. Instead of borrowing US$ directly, however, Shell Canada entered into two agreements. The first agreement (the “Borrowing Contract”), involved the appellant borrowing $150 million in New Zealand currency (“NZ$”) at an interest rate of 15.4 percent per annum (which was found to be the market rate for borrowing NZ$). The second agreement (the “Purchasing Contract”), involved the appellant using the New Zealand funds to purchase US$100 million at the market price. In order to fulfill Shell Canada’s requirement for New Zealand dollars, the Purchasing Contract provided for the appellant to purchase enough New Zealand dollars to satisfy the interest payments under the Borrowing Contract and for the appellant to ...
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