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.
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