Bowater Canadian Limited v. Her Majesty the Queen, [1986] 1 CTC 240

Cullen, J.:—This action is an appeal against the disallowance by the Minister of National Revenue to the deduction of interest expense in the amounts of $75,898 for 1977, $254,629 for 1978 and $238,604 for 1979. The Minister treated the amounts of $75,898 for 1977, $127,314 for 1978 and $119,302 for 1979 as allowable capital losses.

The plaintiff is a corporation incorporated under the laws of Canada and carries on business as a holding company which renders financial and administrative services to other corporation associated with it. Mr. Fraser Robbins, who held many senior positions with the plaintiff company, said: “Our business is financing and providing technical and administrative services to our subsidiaries/' He stated that the plaintiff “finances subsidiaries and makes our profit from dividends and interest/' Counsel for the plaintiff argued, “We borrow money and lend it out for profit."

A partial agreed statement of facts was filed as Exhibit #2 in this action. It reads in part:

1. The Plaintiff is a corporation incorporated under the laws of Canada and carries on business as a holding company which renders financial and administrative services to other corporations associated with it.

2. By agreement dated June 21, 1965, the Plaintiff and Bathurst Paper Limited, a predecessor corporation to Consolidated-Bathurst Limited (both hereinafter referred to as “Bathurst”), acquired in equal proportions by means of subscriptions for treasury stock a majority of the shares of Bulkley Valley Pulp & Timber Limited, subsequently renamed Bulkley Valley Forest Industries Limited (both hereinafter referred to as “Bulkley Valley”), and agreed to provide financial, technical and other assistance to Bulkley Valley in connection with an agreement it entered into with the Province of British Columbia under which Bulkley Valley was granted cutting rights for pulpwood in the Prince Rupert Forest District on the understanding that it would build a pulp mill to service the area.

3. pursuant to the terms of a voting trust agreement dated June 21, 1965, the minority shareholders of Bulkley Valley agreed to deposit all their voting shares with a voting trustee so that all shares of Bulkley Valley would be voted in accordance with the direction of a nominee of the Plaintiff and of Bathurst.

4. After the 1965 agreement whereby the Plaintiff and Bathurst acquired control of Bulkley Valley, Bulkley Valley proceeded to develop and operate the pulp wood harvesting area in the course of which it built a town site, roads and a large sawmill. Commencing with the 1965 agreement and up to May 1, 1972, the Plaintiff and Bathurst provided the following financial assistance to Bulkley Valley:

(a) the Plaintiff and Bathurst each acquired 663,510 common shares of Bulkley Valley at a cost to each of them of $7,938,234 each holding repesenting almost 50% of the issued share capital of Bulkley Valley;

(b) the Plaintiff and Bathurst each acquired 10% convertible notes of Bulkley

Valley having a face value of $1,886,400, at a cost to each of them of $1,886,400;

(c) the Plaintiff and Bathurst each acquired subordinated debentures with an

aggregated face value of $9,750,000, at a cost to each of them of $9,750,000.

5. After the sawmill had been built and was in operation, it was determined that Bulkley Valley required additional working capital and needed assistance as well in the completion of the Sawmill Development. In the result, the Plaintiff and Bathurst each guaranteed one-half of the bank loans made to Bulkley Valley under Bank Loan Agreements dated April 18, 1969 and October 6, 1970, to a maximum guarantee of $10,000,000 each. The Plaintiff did not receive a fee from Bulk- ley Valley for providing the guarantee.

6. After numerous difficulties had been experienced in the operations of the sawmill it was decided in 1971 by the Plaintiff and Bathurst that the Bulkley Valley operation would either be closed down or sold.

7. In 1972, Northwood Pulp Limited (“Northwood”), a subsidiary of Noranda Mines Limited, agreed to purchase the shares of Bulkley Valley from the Plaintiff and Bathurst so as to consolidate the Bulkley Valley operations with its own operations in the region.

8. In order to facilitate this purchase it was necessary for the previous financing arrangements for Bulkley Valley to be reorganized and this was done pursuant to the Financing Agreement dated May 1, 1972 made between the Plaintiff, Bathurst, Northwood, Bulkley Valley and the Bank of Montreal, the Royal Bank of Canada and the Mercantile Bank of Canada.

9. Under these new financing arrangements dated May 1, 1972:

(a) Northwood acquired all the common shares of Bulkley Valley at a price of $0.05 per share subject to the Upward Price Adjustment Agreement also dated May 1, 1972 which provided for an increase in the purchase price in the event Bulkley Valley generated Excess Cash Profit, as defined, during the period from February 1, 1972 to December 31, 1981;

(b) the Plaintiff and Bathurst each agreed to sell to Northwood the subordinated debentures which each owned in Bulkley Valley for a purchase price of $5.00;

(c) the Plaintiff and Bathurst each agreed to sell to Northwood on January 1, 1982 the 10% convertible notes which each owned in Bulkley Valley for a purchase price of $5.00;

(d) Northwood agreed to make a new loan to Bulkley Valley to reduce its bank loans to $11,905,000;

(e) the remaining Bulkley Valley bank loans, in the amount of $11,905,000, which were still guaranteed as to one-half each by the Plaintiff and Bathurst, were refinanced with the proceeds of the issue by Bulkley Valley of Series B Notes, bearing interest at the rate of 1 /2% above prime, to the Bank of Montreal, the Royal Bank of Canada and the Mercantile Bank of Canada.

10. In recognition of their obligations under the original bank guarantees, the Plaintiff and Bathurst each agreed with the banks both to guarantee and to pay one-half of the amounts owing in respect of the Series B Notes including principal and interest and the banks agreed to assign the Series B Notes to the Plaintiff and Bathurst as and when they were paid by the Plaintiff and Bathurst. The Plaintiff did not receive a fee from Bulkley Valley for entering into this agreement with the banks.

11. The obligation of Bulkley Valley was to make payments under the Series B Notes, if demanded, only if it had sufficient cash profit to do so. However, the obligations of Bathurst and the Plaintiff to make payments under these Notes pursuant to the Financing Agreement with the banks was absolute in that each was obliged to pay when due the amounts secured by the Notes whether or not Bulkley Valley had sufficient profits to do so.

12. In recognition of the continuing interest and responsibility of the Plaintiff and Bathurst in the business and operations of Bulkley Valley set out in the Financing Agreement and the Upward Price Adjustment Agreement, Northwood, Bulkley Valley, the Plaintiff and Bathurst entered into the Miscellaneous Covenants Agreement, also dated May 1, 1972, which provided, inter alia, that the Plaintiff and Bathurst would each become entitled to a cash payment in the amount of $500,000 in the event Bulkley Valley's Gross Cash Flow, as defined, for its fiscal periods from February 1,1972 to December 31, 1981 exceeded an aggregate of $9,300,000.

13. Bulkley Valley did not make any payments under the Series B Notes but all payments were made in equal proportions by the Plaintiff and Bathurst.

14. By October 4, 1977, Bathurst and the Plaintiff had each paid directly to the banks in respect of the Series B Notes the sum of $2,760,000 plus interest and as a result each of Bathurst and the Plaintiff had acquired Series B Notes in that amount from the banks.

15. By October 4, 1977 Bulkley Valley had not generated Excess Cash Profit, as defined in the Upward Price Adjustment Agreement, and accordingly, no adjustment to the original $0.05 per share purchase price paid to the Plaintiff and Bathurst by Northwood for the common shares of Bulkley Valley had been made.

16. However, the Plaintiff and Bathurst had been informed by Northwood that for the period commencing February 1, 1972 and ending December 31, 1978 it estimated that the Gross Cash Flow, as defined in the Miscellaneous Covenants Agreement, would exceed $9,300,000 so as to entitle the Plaintiff and Bathurst to be paid the amount of $500,000 each pursuant to that agreement.

17. On October 4, 1977 Bathurst purchased from the banks the remaining Series B Notes held by them in the principal amount of $6,385,000.

18. On October 4, 1977 the Plaintiff entered into an agreement with Bathurst under which the Plaintiff ackowledged its indebtedness to Bathurst in the amount of one-half of $6,385,000 or $3,192,500 and agreed to pay that amount together with interest at the rate of one and one-half (1 /2%) per cent above prime to Bathurst as follows:

January 1, 1978 — $690,000 January 1, 1979 — 690,000 January 1, 1980 — 690,000 January 1, 1981 — 690,000 January 1, 1982 — 432,500

19. In addition, under the agreement dated October 4, 1977, the Plaintiff transferred to Bathurst its Series B Notes in the principal amount of $2,760,000 for a purchase price of $1.00 together with the 10% convertible notes with a face value of $1,886,400 for a purchase price of $5.00. Bathurst subsequently sold the 10% convertible notes it had acquired from the Plaintiff to Northwood for $5.00.

20. Since the Plaintiff would have been entitled to a payment in the amount of $500,000 under the Miscellaneous Covenants Agreement, as part of the October 4, 1977 agreement with Bathurst, the Plaintiff received the amount of $500,000 in satisfaction of its rights under the Miscellaneous Covenants Agreement and both the Plaintiff and Bathurst entered into agreements with Northwood and the banks terminating any further rights and obligations of the Plaintiff and Bathurst under the financing arrangements of May 1, 1972 including the Financing Agreement, the Upward Price Adjustment Agreement and the Miscellaneous Covenants Agreement.

21. In computing its income for the 1977 taxation year, the Plaintiff included the $500,000 as operating income. Subsequently, on reassessing the Plaintiffs 1977 taxation year, the Minister of National Revenue, at the Plaintiff’s request, treated the $500,000 as a capital gain.

22. In 1978, the Plaintiff exercised its right of repayment in respect of the balance of the amounts payable to Bathurst under the October 4, 1977 agreement. Thus the following payments representing the portion of the interest due on the principal sum remaining unpaid under the October 4, 1977 agreement with Bathurst were made in the taxation year 1977 and 1978 to Bathurst:

1977

(1 [1] /2% above prime) — $ 75,898

1978

(1 1 /2% above prime) — $105,937

23. In order to exercise its right of prepayment above referred to, the Plaintiff borrowed funds from the Bank of Montreal at an interest rate of one half (2%) per cent above prime. Therefore the following interest payments were made to the Bank of Montreal in the 1978 and 1979 taxation years:

1978

(2%) above prime) — $148,692

1979

pulpwood in the Prince Rupert Forest District on the understanding that it would build a pulp mill to service the area, and that was Bulkley Valley’s business, not the business of the plaintiff or Bathurst. The two companies did not enter into a partnership to engage in this business but rather bought shares and agreed to provide “financial, technical and other assistance" to Bulkley Valley. It is conceded that the plaintiff and Bathurst together controlled the actions to be taken by Bulkley Valley and the manner it would conduct its business, but neither one alone had authority over the conduct of the business and the two companies also had obligations under a trust agreement to other shareholders who admittedly held a very small interest in Bulkley Valley.

The agreement between the plaintiff and Bathurst in June of 1965 charted the course these two companies would follow, namely, buying shares, acquiring 10 per cent convertible notes and subordinated debentures. It is important to note that the plaintiff and Bathurst each guaranteed one-half of the bank loans made to Bulkley Valley to a maximum of $10 million each. The plaintiff did not get a fee — it was in fact doing exactly the same thing as Bathurst — guaranteeing a loan, no doubt to protect its shareholder interest.

The decision was made by the plaintiff and Bathurst in 1971 to close down the operation or sell it — a joint decision of the two major shareholders. Northwood provided an opportunity to sell but it was necessary for previous financing arrangements of Bulkley Valley to be reorganized. It was Bulkley Valley that would close down if Northwood had not appeared on the scene. Bulkley Valley received a loan from Northwood to reduce its bank loans to $11,905,000 with the plaintiff and Bathurst continuing its guarantee as to one-half each. The loans to Bulkley Valley were refinanced with the proceeds of the issue by Bulkley Valley of Series B Notes to the banks involved. In recognition of their obligations under the original bank guarantees, the plaintiff and Bathurst each agreed with the banks both to guarantee and to pay one-half of the amounts owing in respect of the Series B Notes including principal and interest and of course as payments were made the Series B Notes would be assigned to the plaintiff and Bathurst. It should be noted that the obligation to pay for Series B Notes was absolute. Of course, if Bulkley Valley generated sufficient income they would pay for these Series B Notes and there would have been no payment then by the plaintiff and Bathurst. In fact Bulkley Valley never reached the stage where it was able to make these payments so all payments were made in equal proportions by the plaintiff and Bathurst.

In Canada Safeway Limited v. M.N.R., [1957] C.T.C. 335 at 336; 1957 D.T.C. 1239 at 1240, the issue was:

As stated in the respondent’s factum the question in issue in respect of each year is the validity of a claim by the appellant to deduct, in the computation of its income for income tax purposes, the interest payable by the appellant on borrowed money which had been used to purchase shares in MacDonalds Consolidated, Limited, the dividends from which latter company for the year constituted tax exempt income of the appellant.

Rand, J. at 345 (D.T.C. 1244),

The language in (i) “used for the purpose of earning income from a business” corresponds with that of section 5(1)(b) of the repealed Act and to what has been said of the latter there is nothing to be added: the business of a subsidiary is not that of the company. [Emphasis is mine.]

In the facts here Bulkley Valley is not Bowater.

Aside from the provisions of paragraph 20(1 )(c) of the Income Tax Act the plaintiff suggests that payments here were allowable as a cost of doing business but in the case of Sherritt Gordon Mines Ltd. v. M.N.R., [1968] C.T.C. 262; 68 D.T.C. 5180 Mr. Justice Kerr at 283 (D.T.C. 5193) states:

Having reached this conclusion, it is necessary to ask whether interest expense of this character may be deducted for income tax purposes in those years in which it is written off. I think there is no doubt that the interest is a capital outlay, the deduction of which in computing income for a taxation year, is prohibited by section 12(1)(b) unless its deduction is expressly permitted by some other provision of the Act.

and later at 290 (D.T.C. 5196):

Apart from section 11(2)(a), (c) and (cb) interest on borrrowed capital and the expenses covered by paragraph (cb) would not be deductible, because they are expenses in relation to capital and are not operating expenses.

Mr. Justice Addy in The Queen v. Marchand, [1978] C.T.C. 763 at 766; 78 D.T.C. 6507 at 6508, after referring to Thorson, P. in Daley v. M.N.R. [1950] C.T.C. 254; 50 D.T.C. 877, indicated two conditions necessary:

. . . I am of the opinion that a taxpayer can now deduct an amount from income only on two conditions: first, that it would be normal practice according to generally accepted accounting principles to deduct this sum from an income account, and secondly, that the prohibitory provisions of subsection 18(1) do not prevent such a deduction.

In my view, interest deducted in a prescribed case has always been considered a capital outlay.

I cannot, on the facts here, find that the plaintiff can succeed on its argument that the court must give effect to the common sense commercial reality of that which both place here. The case of Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.) is clearly distinguishable. There the plaintiff had to make an expenditure in the very special circumstances of that case, namely, payment for lands to widen a mining pit, and that case had to do with a capital expenditure, thus it was really an application of paragraph 18(1)(b) and not paragraph 20(1)(c) of the Income Tax Act.

Now, is the plaintiff able to bring itself within the provisions of subparagraph 20(1)(c)(i) of the Act? It has been necessary to repeat in these reasons some of the facts to give emphasis to what actually occurred in the series of events leading to this claim for relief. I will not belabour the point, but simply indicate that I agree with the propositions cited by the defendant.

The interest deducted must be applicable to the taxpayer’s business. As has been indicated, this is not the situation here. It was the business of Bulkley Valley, a joint venture of the plaintiff and Bathurst. They were two main shareholders on an equal basis. It is conceivable they could have used the vehicle of partnership but that was not the route they chose. Thus control was shared and not the exclusive prerogative of either party. There was no direct income received by the plaintiff that was the direct consequence of its action. Certainly if Bulkley Valley had been successful, the holdings would have increased in value, the shares of Bulkley Valley would have increased in value, a capital increase, and if the plaintiff sold its shares it would have been a capital gain. The defendant makes the point that there would have been a possibility of dividends but only that because two shareholders had to agree to do so.

Referring again to Canada Safeway (supra) at 345-46 (D.T.C. 1244):

The word “property” is introduced in paragraphs (i) and (ii) but I cannot see that it can help the appellant; the language “borrowed money used for the purpose of earning income from . . . property (other than property the income from which is exempt)” in (i) means the income produced by the exploitation of the property itself. There is nothing in this language to extend the application to an acquisition of “power” annexed to stock, and to the indirect and remote effects upon the company of action taken in the course of business of the subsidiary. [Emphasis is mine.]

In Stewart & Morrison Limited v. M.N.R., [1972] C.T.C. 73; 72 D.T.C. 6049, the Supreme Court of Canada seems to put to rest the business reality test. Here the appellant created a subsidiary, directed it, guaranteed loans etc. and money lost, which was written off as a bad debt. This was disallowed and called a capital loss.

At 74 (D.T.C. 6051) Judson, J. (for the Court) states:

We are not concerned in this appeal with what the result would have been if the appellant taxpayer had chosen to open its own branch office in New York. For reasons of its own it did not choose to operate in this way. It financed a subsidiary and lost its money.

(Exactly as here).

The case of L. Berman & Co. Ltd. v. M.N.R., [1961] C.T.C. 237 relied upon by the appellant in this case, is, in my opinion, not in point. In the Berman case the taxpayer made voluntary payments to strangers, i.e., the suppliers of its subsidiary, for the purpose of protecting its own good will from harm because the subsidiary had defaulted on its obligations. The basis of the decision in the Exchequer Court was this: “It paid the amounts because it had been doing business with the suppliers and was going to continue to do business with them. The payments were made by it for its own purposes and their amounts never became debts of United to the appellant [Berman].” [Emphasis is mine.]

Mr. Justice Mahoney in John A. Matheson v. The Queen, [1974] C.T.C. 186; 74 D.T.C. 6176 makes the point, “The plaintiff's position was clearly untenable by virtue of the fact that the borrowed money was used by company D to earn income from its business rather than by the plaintiff to earn income from his own business.” Mr. Justice Mahoney cites Canada Safeway (supra) which makes the same point. Mr. Justice Mahoney in John A. Matheson (supra) at 189 (D.T.C. 6179):

Another argument advanced is that the interest expense should be allowed the plaintiff because, as a result of the loan, his investment in Direct has increased in value. This argument ignores the distinction between income and capital appreciation and cannot be sustained.

And later:

While I may sympathize with the plaintiff inasmuch as it would likely have been possible to arrange matters in a way that could have permitted Direct, if not himself, to claim the interest expense, I must deal with the situation that in fact existed during the taxation years in question. Neither am I free to speculate on why matters were arranged as they were. The interest expense claimed by the plaintiff and disallowed by the Minister was not paid or incurred in respect of borrowed money used to earn income from the plaintiffs business or property and the reassessments are accordingly sustained.

With respect to the interpretation to be given to paragraph 20(1)(c) of Income Tax Act as to timing, Jackett, P. in Trans-Prairie Pipelines Ltd. v. M.N.R., [1970] C.T.C. 537 at 541; 70 D.T.C. 6351 at 6354 states:

Surely, what must have been intended by section 11(1)(c) was that the interest should be deductible for the years in which the borrowed capital was employed in the business rather than it should be deductible for the life of the loan as long as its first use was in the business. [Emphasis is mine.]

Citing my judgment in Russell I. Emerson v. The Queen, [1985] 1 C.T.C. 324; 85 D.T.C. 5236, Counsel for the defendant made the point that the source had disappeared in 1972, and this case deals with taxation in 1977, 1978 and 1979.

The third element missing here if one is to rely on paragraph 20(1 )(c) of the Income Tax Act is the fact that the payments by the plaintiff to Bathurst in 1977 and 1978 are interest due on principal remaining unpaid from agreement of October 4, 1977, i.e., part and parcel of guarantee given by the plaintiff and therefore not interest but allowable capital loss. The change of course on the guarantee in the liability is now to Bathurst and not the banks and must be treated in the same way as capital amounts. Let me state simply that the payment made by Bowater is not interest to Bo- water: it may be to the recipient. Interest portion on a guaranteed loan is not interest to the guarantor.

In C.I.R. v. Holder, High Court of Justice (Kings Bench Division), 1930, Viscount Dunedin states:

The Appellants were interested in a company called Blumfield, Limited (hereinafter referred to as “the company”) which had for many years been indebted to its bankers.

The Appellants, in some cases individually and in others jointly and severally, gave guarantees to the bank to secure the company's indebtedness. The Appellants undertook thereby “to pay and satisfy to the bank all and every the sum or sums of money which shall at any time be owing to the bank . . . on any account . . . together, with . . . all interest, discount and other bankers’ charges.'' The total liability ultimately enforceable against the guarantor or guarantors under each guarantee was limited to a definite sum.

From 1920 onwards, the company was continuously indebted to the bank and, in accordance with the usual custom of bankers, the interest on the amounts owing to the bnk from time to time was debited half-yearly to the company's capital account with the bank. Though from time to time payments were made by the company into the account, the amount due to the bank increased each half- year save that ending 31st December, 1924.

After being pressed by the bank to discharge the company's indebtedness, the Appellants, on the 17th November, 1926, paid to the bank the sum due on the company's account, this sum being covered by the guarantees that had been given by the Appellants. The sum paid by the Appellants was £64,482 165. 8d.

By examination of the bank accounts, the Appellants contend that it can be shown that, of this sum, £16,519 18s. 4d. represents interest added as aforesaid to the half-yearly rests and £1,341 18s. 1d. represents the interest due on the current half-year in which the whole sum was paid. They accordingly made a claim against the Commissioners of Inland Revenue for that whole sum.

In his reasons for judgment Viscount Dunedin said:

I think that interest payable on an advance from a bank means interest on an advance made to the person paying. The guarantor does not pay on an advance made to him, but pays under his guarantee. It is true that he pays a sum which pays all interest due by the person to whom the advance is made, but his debt is his debt under the guarantee, not a debt in respect of the advance made to him.

Lord Dunedin at [16 T.C.] 567:

My Lords, I am of opinion that both contentions of the Respondents are right and that on a ground that is really common to both. Interest is the return given for the use of the advances and is due by the person who obtains the advances; the hability of the guarantor is direct to the creditor and is an undertaking to indemnify him against loss. The creditor computes his loss by the amount of the failure of the principal debtor to pay him principal and interest. In paying the amount of the indemnity, whether limited or otherwise, I am of opinion that the guarantor cannot be said to be paying interest to the creditor, though he is making good the loss of interest. The terms of the specimen guarantee included in the Stated Case is a guarantee for “‘all and every sum or sums of money which “shall at any time be owing to the bank” with a long list of how the debt may arise, including unpaid interest as a possible source of the indebtedness, and is in conformity with the view above expressed. I am therefore of opinion that Section 36(1) only relates to the person who has obtained the advances and that a guarantor does not pay interest to the bank within the meaning of the Section

And finally, is it really borrowed money? I do not believe so on the facts. The money was never borrowed from Bathurst. It would be straining the wording of subparagraph 20(1)(c)(ii) of the Act to say borrowing has occurred here. I agree with the defendant that to do so would “detract from the section and Parliament's precise wording or "intention"."

Lest the plaintiff wonder about my views on its arguments, let me just say they were all considered and each case cited was carefully read. I could not on the facts here find that the "plaintiff company" was the "business" within the meaning of subparagraph 20(1 )(c)(i) of the Act. Although I agree with Mr. Robbins that the plaintiff by its charter has the authority and right to borrow, lend, give financial and technical advice, it did so in exactly the same way as Bathurst. This was a joint venture using the route of purchasing shares in a corporation. It did not have control, because of Bathurst's 50 per cent holding, but even if it had I would be hard pressed to find that its appeal could succeed for earlier reasons given here. I have parrotted or pirated the position taken by the defendant because I accept its view of the law as being correct.

I wondered if there might have been some parallel between the plaintiff's case and two others, namely: The Queen v. MerBan Capital Corp. et al., [1985] 1 C.T.C. 1; 85 D.T.C. 5014 and The Queen v. RoyNat Ltd., [1981] C.T.C. 93; 81 D.T.C. 5072. There seemed to be a common thread running through these cases and the case here: the taxpayer undertakes to do more than what is demanded of a "guarantor." In the MerBan case, the obligation of the company to the bank was described as that of prime obligor, since as provided in an agreement between the bank and the company, the obligation of the company "shall be absolute and unconditional under any and all circumstances." As Joyal, J. put it: "It is fair to say that in essence a guaranty imposes a contingent liability on the guarantor, a liability which becomes very much real on the prime debtor's default.” Clearly in that case, there was no "contingent liability on the guarantor," but an absolute and unconditional liability.

In the RoyNat case (supra) RoyNat had advanced moneys on certain bonds issued by debtors who were required to pay interest on the bonds only and when they made a profit. RoyNat however wanted guarantees for the payment of the income on the bonds whether or not the debtors made a profit out of which interest on income would be paid. The guarantors eventually had to make good on their guarantees and RoyNat received the equivalent of interest from them. Addy, J. held that the guarantors undertook to pay interest even if the debtors are not contractually obliged to pay It.

In the within case, Bowater borrowed money from the bank to honour its "guarantee" following the October 4, 1977 agreement and the obligations that flowed from the said agreement could conceivably be termed as those of a prime obligor or debtor. This submission is predicated generally on paras. 11, 12 and 13 of the statement of claim and particularly on para. 12 where it is said that: .. the obligations of Bathurst and the Plaintiff to make payments under these Notes [ . .. ] was absolute in that each was obliged to pay when due the amounts secured by the Notes whether or not Bulkley Valley had sufficient profits to do so.” This suggestion is probably far-fetched. The plaintiff’s case would be a difficult one to make, MerBan was determined to be the prime debtor, and not solely the guarantor. Here, in relation to Bulkley Valley, Bowater was a mere creditor (on account of the Series B Notes being assigned to it after payments to the banks) rather than a debtor.

For the reasons given, therefore, the reassessments are accordingly sustained and the defendant shall be entitled to its costs after taxation thereof.

Appeal dismissed.