The taxpayer and his brother established a partnership to acquire a real estate investment and received $15,000 from each of 19 potential limited partners on the basis that that money would be returned, with interest, to the investors if all 30 limited partnership shares in the partnership (rather than just 19) were not sold to investors. Notwithstanding that this condition was not satisfied, the money along with unauthorized mortgage financing was used to acquire the property, and the property later was repossessed by the mortgagee. The Ontario Court (General Division) found that the taxpayer and his brother were liable for the fraudulent misrepresentation of the brother, and the Ontario Court of Appeal characterized the taxpayer's actions as a breach of trust.
Rothstein J.A. found that even if damages collected from the taxpayer otherwise were deductible, their deduction was prohibited by s. 18(1)(b) as the payment was on account of capital, stating (at para. 14):
The amount the applicant was ordered to repay...were funds advanced on account of capital, tht is, for the acquisition of farm property. The repayment ordered was a repayment of capital.