JUDSON, J.:—This is an appeal by the Minister of National Revenue from the judgment of the Exchequer Court which allowed an appeal from the decision of the Tax Appeal Board. This decision had rejected the taxpayer’s contention that he was entitled in computing his income for the year 1957 to deduct a sum of $62,500 paid by him to the Dominion Bank under a guarantee of the indebtedness of Locksley Petroleums Limited signed in 1951. My opinion is that the appeal should be allowed and that the decision of the Board confirming the Minister’s assessment should be restored.
In February 1951, the respondent and R. M. Montague made an agreement with William Buechner and Sam Yeske to acquire an interest in a company known as Locksley Petroleums Limited. Buechner and Yeske had obtained a farmout agreement from Imperial Oil on a quarter section of land in Alberta. This they assigned to the Locksley company in return for 1,000 shares and a two and a half per cent gross royalty. They or the company were obligated to drill four wells on the property. In February 1951, when they made their agreement with the respondent and R. M. Montague, his associate, three wells remained to be drilled and financed.
The agreement is simple. The shares were divided so that each associate held a quarter interest and the gross royalty was similarly divided. The respondent and Montague also each received three-quarters of one Net Royalty Trust Unit. In return they agreed to guarantee the company’s indebtedness to the Dominion Bank up to the sum of $125,000, the liability of each guarantor being limited to the sum of $62,500. The respondent and Montague also stipulated that the company should assign to the bank the lease which it held on the property as security for the money to be borrowed by the bank and the liability of the guarantors. The total consideration which the respondent received for becoming liable on a guarantee for $62,500 was 250 shares in the company, one-quarter of the gross royalty of two and one-half per cent and three-quarters of one Net Royalty Trust Unit. This consideration was treated as income on a valuation of $4,500 by the Minister of National Revenue and taxed accordingly.
I have no difficulty in defining the character of this transaction. The company needed money for the drilling of three wells. The convenient way of supplying this money was by a bank loan with the respondent’s guarantee to the extent of $62,500. The guarantee meant that at some time the respondent might have to step into the bank’s shoes to this extent. This happened in 1957. He was then subrogated to the bank’s position. He subsequently proved as a creditor in the company’s bankruptcy and received two dividends — one in 1959 for $6,119 and the other in 1961 for $3,200. The transaction was a deferred loan to the company, part of which was recovered in the bankruptcy. These bankruptcy dividends, contrary to the obiter dictum in the judgment of the Exchequer Court, were not income but a partial recovery of a capital loss. They are in no way analogous to the consideration received in 1951 as the respondent’s remuneration for the guarantee, which I have characterized as a deferred loan.
It is enough therefore to decide this case to say that in my opinion the loss here is a loss of capital and that its deduction is prohibited by Section 12(1) (b) of the Act.
I would allow the appeal with costs here and in the Exchequer Court and restore the assessment appealed from.