Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al., 80 DLR (3d) 449, [1978] 2 SCR 545

Supreme Court of Canada

Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al., [1978] 2 S.C.R. 545

Date: 1977-11-23

Canadian Industrial Gas & Oil Ltd. (Plaintiff) Appellant;

and

The Government of Saskatchewan and The Attorney General for the Province of Saskatchewan (Defendants) Respondents;

and

The Attorney General of Canada, The Attorney General of Quebec, The Attorney General of Manitoba, The Attorney General of Alberta Intervenants.

1976: November 8, 9, 10; 1977: November 23.

Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR SASKATCHEWAN

Constitutional law—Oil and gas legislation—Whether ultra vires—Direct or indirect taxation—Regulation of trade and commerce—British North America Act, 1867, ss. 91(2), 92(2), (13)—The Oil and Gas Conservation, Stabilization and Development Act, 1973, 1973-74 (Sask.), c. 72, amended by 1973-74 (Sask.), c. 73—An Act to amend The Mineral Resources Act, 1973-74 (Sask.), c. 64—The Petroleum and Natural Gas Regulations, 1969 (Sask.).

The constitutional validity of certain statutes enacted by the Legislature of the Province of Saskatchewan and regulations enacted pursuant thereto was challenged by the appellant, a corporation engaged in the exploration for, drilling for and production of oil and natural gas in Saskatchewan and owning freehold leases, Crown leases and royalty interests in that Province. The appellant was unsuccessful in seeking to obtain a declaration of their invalidity, both at trial and on appeal to the Court of Appeal for Saskatchewan. It then appealed, with leave, to this Court from the judgment of the Court of Appeal.

The legislation was enacted following the sharp rise in the price of oil on the world market which occurred in 1973, and, in summary, it had the following effect: 1. Production revenues from freehold lands were subjected to what was called a “mineral income tax”. The tax was one hundred per cent of the difference between the price received at the well-head and the “basic well-head price”, a statutory figure approximately equal to the

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price per barrel received by producers prior to the energy crisis. The owner’s interest in oil and gas rights in producing tracts of less than 1,280 acres were exempted from the tax. Deductions approved by the Minister of Mineral Resources were allowed in respect of increases in production costs and extraordinary transportation costs. Provision was made for the Minister to determine the well-head value of the oil where he was of the opinion that oil had been disposed of at less than its fair value. 2. All petroleum and natural gas in all producing tracts within the Province were expropriated and subjected to what was called a “royalty surcharge”. Oil and gas rights owned by one person in producing tracts not exceeding 1,280 acres were exempted. Although introduced by regulation rather than statute, the royalty surcharge is calculated in the same manner as the mineral income tax. For all practical purposes they are the same, save one exception. The well-head value for the purposes of royalty surcharge is the higher of the price received at the well-head and the price per barrel listed in the Minister’s order.

The statutes and regulations in question were: (1) The Oil and Gas Conservation, Stabilization and Development Act, 1973-74 (Sask.), c. 72 (Bill 42); (2) An Act to amend The Oil and Gas Conservation, Stabilization and Development Act, 1973-74 (Sask.), c. 73 (Bill 128); (3) An Act to amend The Mineral Resources Act, 1973-74 (Sask.), c. 64 (Bill 127); (4) Amendments to The Petroleum and Natural Gas Regulations, 1969, under The Mineral Resources Act, as enacted by (a) Order in Council 95/74 (b) Order in Council 1238/74.

The appellant’s attack upon the legislation was made upon two grounds: 1. It was contended that both the mineral income tax and the royalty surcharge constitute indirect taxation, and are therefore beyond the power of the Province to impose, the provincial legislative powers being limited to direct taxation within the Province under s. 92(2) of the British North America Act. 2. It was contended that the legislation relates to the regulation of interprovincial and international trade and commerce, a matter over which the Federal Parliament has exclusive legislative power under s. 91(2) of the British North America Act.

Held (Dickson and de Grandpré JJ. dissenting): The appeal should be allowed.

Per Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon and Beetz JJ.: The taxation scheme comprising the mineral income tax and the royalty surcharge does not constitute direct taxation within the

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Province and is therefore outside the scope of the provincial power under s. 92(2) of the British North America Act.

Both the mineral income tax and the royalty surcharge are taxes upon the production of oil virtually all of which is produced for export from Saskatchewan. These taxing provisions have the following impact upon the Saskatchewan oil producer. 1. He is effectively precluded from recovering in respect of the oil which he produces any return greater than the basic well‑head price per barrel. He is subjected to an income freeze at that figure and can obtain no more than that. 2. He is compelled to sell his product at a price which will equal what the Minister determines to be the fair value of the oil which he produces. He must do this, because his production of oil is subject to a tax per barrel representing the difference between fair value and basic wellhead price. If he is the lessee of mineral rights in lands in respect of which the mineral rights were expropriated by the Crown, he does not even have the option to discontinue production. Discontinuance of production without ministerial consent is subject to a heavy penalty.

The tax in question is essentially an export tax imposed upon oil production. In the past a tax of this nature has been considered to be an indirect tax. In essence the producer is a conduit through which the increased value of each barrel of oil above the basic well-head price is channeled into the hands of the Crown by way of tax. The increase in value is itself the tax and it is paid by the purchaser of the oil.

As to the issue with respect to the regulation of trade and commerce, the effect of the legislation is to set a floor price for Saskatchewan oil purchased for export by the appropriation of its potential incremental value in interprovincial and international markets, or to ensure that the incremental value is not appropriated by persons outside the Province. The legislation gave power to the Minister to fix the price receivable by Saskatchewan oil producers on their export sales of a commodity that has almost no local market in Saskatchewan. Provincial legislative authority does not extend to fixing the price to be charged or received in respect of the sale of goods in the export market. It involves the regulation of inter-provincial trade and trenches upon s. 91(2) of the British North America Act.

Accordingly, the statutory provisions, and the regulations and orders enacted and made relating to the imposition of the mineral income tax and the royalty surcharge, are ultra vires of the Saskatchewan Legisla-

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ture. It followed that Part 1 of Bill 42 is ultra vires of the Legislature. Part II of the Act amended The Mineral Taxation Act, 1972 (Sask.), c. 79, by increasing the rate of tax. As this is an acreage tax imposed upon interests in land, it is valid. Part III of the Act not having been proclaimed a decision as to its validity, at this time, was unnecessary. Part IV of the Act, which deals with the expropriation of oil and gas rights, was within the legislative jurisdiction of the Province as being legislation relating to property and civil rights under s. 92(13) of the British North America Act. For the same reason Part V of the Act which provides for amendments to The Oil and Gas Conservation Act was upheld. In Part VI, which is headed “General”, ss. 41 and 42 are related to the carrying into effect of Part I and to the collection of the royalty surcharge and for that reason are invalid. The amendments to Part I contained in Bill 128 are equally invalid.

Bill 127, which relates to the amendments to The Petroleum and Natural Gas Regulations providing for the imposition of the royalty surcharge, is ultra vires of the Legislature.

Those Petroleum and Natural Gas Regulations which imposed the royalty surcharge and the various orders made by the Minister of Mineral Resources pursuant to Part I of Bill 42 are also invalid.

The appellant is entitled to judgment against the Government for the recovery of the sums paid by way of mineral income tax and royalty surcharge, with interest thereon from the respective dates of payment up to the date of repayment.

A.-G. for British Columbia v. McDonald Murphy Lumber Co. Ltd., [1930] A.C. 357, followed; Carnation Co. Ltd. v. Quebec Agricultural Marketing Board, [1968] S.C.R. 238, distinguished; R. v. Caledonian Collieries, Ltd., [1928] A.C. 358; Atlantic Smoke Shops Ltd. v. Conlon, [1943] A.C. 550; Cairns Construction Ltd. v. Government of Saskatchewan, [1960] S.C.R. 619; Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, [1931] S.C.R. 357; Reference re The Farm Products Marketing Act, [1957] S.C.R. 198; Amax Potash Ltd. v. Government of Saskatchewan, [1977] 2 S.C.R. 576, referred to.

Per Dickson and de Grandpré JJ., dissenting: The mineral income tax is not an income tax; it is, however, a direct tax, and therefore within provincial competence. The purchasers would be paying the same price whether the tax existed or not. This fact conclusively prevents the levy from being in the nature of an indirect tax or an

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export tax. It is not passed on to purchasers to augment the price they would otherwise pay. Instead, they pay exactly the price they would pay in the absence of the tax and the producers are taxed on the profits they would otherwise receive.

Although in name a royalty, the royalty surcharge is, in substance, a tax. Except as affecting lessees under pre-existing Crown leases, it is a levy compulsorily imposed on previously existing contractual rights by a public authority for public purposes. It is patent that the consensual agreement and mutuality ordinarily found in a lessor-lessee relationship is entirely absent in the relationship between the Crown and persons subjected to the royalty surcharge. Royalty surcharge is the same one hundred per cent levy as is imposed in other terms as mineral income tax. That it is a tax is not fatal. In object and purpose and mode of exaction it is congruent with mineral income tax. It is therefore direct and falls within provincial competence.

There was nothing in the case to lead to the conclusion that the taxation measures imposed by the Province were merely a colourable device for assuming control of extraprovincial trade. The language of the impugned statutes does not disclose an intention on the part of the Province to regulate, or control, or impede the marketing or export of oil from Saskatchewan. Nor was there anything in the extraneous evidence to form the basis of an argument that the impugned legislation in its effect regulated interprovincial or international trade. The entire legislative scheme is aimed at taxation and its effect, if any, upon extraprovincial trade and commerce is incidental and non-disabling.

APPEAL from a judgment of the Court of Appeal for Saskatchewan[1], dismissing an appeal from a judgment of Hughes J. Appeal allowed, Dickson and de Granpré JJ. dissenting.

J.J. Robinette, Q.C., W.M. Elliott, Q.C., and M.A. Gerwing, for the plaintiff, appellant.

G.J.D. Taylor, Q.C., K. Lysyk, Q.C., and R.S. Meldrum, Q.C., for the defendants, respondents.

T.B. Smith, Q.C., and J. Mabbutt, for the Attorney General of Canada.

P. Lamontagne, Q.C., and J.D. Knoppers, for the Attorney General of Quebec.

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J.D. Frost, for the Attorney General of Manitoba.

W. Henkel, Q.C., and E.B. Corenblum, for the Attorney General of Alberta.

The judgment of Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon and Beetz JJ. was delivered by

MARTLAND J.—The question in issue in this appeal is as to the constitutional validity of certain statutes enacted by the Legislature of the Province of Saskatchewan and regulations enacted pursuant thereto, to which reference will be made hereafter. Their validity was challenged by the appellant, a corporation engaged in the exploration for, drilling for and production of oil and natural gas in Saskatchewan and owning freehold leases, Crown leases and royalty interests in that Province. The respondents are the Government of the Province of Saskatchewan and the Attorney General of that Province. The appellant was unsuccessful in seeking to obtain a declaration of their invalidity, both at trial and on appeal to the Court of Appeal for Saskatchewan. It appeals, with leave, to this Court from the judgment of the Court of Appeal.

The legislation was enacted following the sharp rise in the price of oil on the world market which occurred in 1973. The effect of the legislation has been summarized in the reasons of my brother Dickson, which I have had the advantage of reading. For purposes of convenience I substantially repeat that summary here:

First, production revenues from freehold lands were subjected to what was called a “mineral income tax”. The tax was one hundred per cent of the difference between the price received at the well-head and the “basic well-head price”, a statutory figure approximately equal to the price per barrel received by producers prior to the energy crisis. The owner’s interest in oil and gas rights in producing tracts of less than 1,280 acres were exempted from tax. Deductions approved by the Minister of Mineral Resources were allowed in respect of increases in production costs and extraordinary transportation costs. Provision was made for the Minister to determine the well-head value of the oil where he was of the opinion that oil had been disposed of at less than its fair value.

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Secondly, all petroleum and natural gas in all producing tracts within the Province were expropriated and subjected to what was called a “royalty surcharge”. Oil and gas rights owned by one person in producing tracts not exceeding 1,280 acres were exempted. Although introduced by regulation rather than statute, the royalty surcharge is calculated in the same manner as the mineral income tax. For all practical purposes they are the same, save one exception. The well-head value for the purposes of royalty surcharge is the higher of the price received at the well-head and the price per barrel listed in the Minister’s order.

The statutes and regulations under consideration are:

(1) The Oil and Gas Conservation, Stabilization and Development Act, 1973, S.S. 1973‑74, hereinafter referred to as “Bill 42”;

(2) An Act to amend the foregoing Act, being Chapter 73, S.S. 1973-74, hereinafter referred to as “Bill 128”;

(3) An Act to amend The Mineral Resources Act, Chapter 64, S.S. 1973-74, hereinafter referred to as “Bill 127”;

(4) Amendments to The Petroleum and Natural Gas Regulations, 1969, made under The Mineral Resources Act as made by:

(a) Order in Council 95/74, made pursuant to Section 18 of Bill 42 and confirmed by Section 1(a) of Bill 127;

(b) Order in Council 1238/74, made pursuant to Section 2 of Bill 127.

In reviewing the legislation, I will consider Bill 42 as amended by Bill 128, as all material amendments contained in Bill 128 are deemed to be retroactively effective as of January 1, 1974, the day on which Parts I and II of Bill 42 came into force. The remaining Parts of Bill 42, except Part III, came into force on the day of assent, December 19, 1974. Part III has not been proclaimed.

Section 3 of Bill 42 provides for the imposition of a mineral income tax payable monthly, commencing in January, 1974. This section reads:

3. A mineral income tax shall be paid as hereinafter required for each month, commencing with the month of

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January, 1974, by every person having an interest in the oil produced from a well in a producing tract.

The tax payable under s. 3 is calculated as set forth in subs. 4(1) of Bill 42, and is as follows:

4. (1) Subject to section 4A, the tax payable is an amount equal to the amount by which the well-head price received for each barrel of oil produced and sold in each month exceeds the basic well-head price, times the taxpayers’ share of the number of barrels of oil produced from the well from which the taxpayer shares the oil or the proceeds thereof subject to the allowance provided for in section 6.

The basic well-head price referred to in the preceding subsection is set out in Schedule II to Bill 42.

The well-head price referred to in subs. 4(1) means the price at the well-head of a barrel of oil produced in Saskatchewan and includes the wellhead value determined by the Minister under s. 4A. Under this section, when the Minister is of the opinion that oil, the income from which is subject to taxation, is being disposed of in any manner at less than its fair value, he determines what the well-head price should have been and calculates the tax payable on the basis of that determination.

Subsection 4(2) requires a producer of oil from a well to forward monthly a return to the Minister showing the production of oil from such well during the immediately preceding month and showing the well-head price received from the oil produced, the names and addresses of all persons entitled to share in the proceeds of the oil, the share of each in the production by way of royalty or otherwise, together with the amount payable with respect to each barrel or part of a barrel of the share of the oil.

The Act further provides that a person liable for the tax may deduct therefrom the cost of research, exploration, etc., where such undertakings are carried out with the approval of or under an agreement with the Minister. In the absence of the consent of or agreement with the Minister, the Minister may allow as a deduction part of the cost of exploration not exceeding fifty per cent of the total cost.

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An exemption from the tax provisions of the Bill is made in s. 5 with regard to oil and gas rights of an owner in producing tracts where the aggregate area of all producing tracts owned by such owner, or in respect of which he holds an interest other than a lease, does not exceed 1,280 acres.

Section 11, in effect, makes final and conclusive all determinations by the Minister relative to the imposition and calculation of the tax, and denies the review of such determination in any judicial proceedings. Section 17 authorizes the making of regulations by the Lieutenant‑Governor in Council.

Part IV of Bill 42 contains provisions for the expropriation of oil and gas rights in Saskatchewan. Under this Part, all petroleum and natural gas rights in all producing tracts in the Province, except those rights exempted from taxation by s. 5, are, as of January 1, 1974, deemed to be transferred to and vested in the Queen in the right of the Province of Saskatchewan, subject to leases existing and encumbrances registered prior to December 10, 1973.

Part IV further provides that the holder of a lease of oil and gas rights that have been expropriated is made subject to regulations 63 and 632? of The Petroleum and Natural Gas Regulations, 1969, as ratified by subss. 1A and 1B of s. 10 of The Mineral Resources Act, being Bill 127. Their effect is to make the oil production subject to payment of the royalty surcharge regulations in accordance with regulation 63 and regulation 63B.

Part IV then makes provision for compensation to those whose holdings have been expropriated, and where the expropriated rights are not under lease, the legislation provides for the Minister to issue to the former owner a Crown lease under The Petroleum and Natural Gas Regulations, 1969, thus allowing continuation of production on that basis.

By Order in Council No. 410/73, the Regulations governing the payment of royalties under Crown leases were amended by repealing ss. 57 to 65 inclusive, and substituting therefor new sec-

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tions. The pertinent new sections are s. 58 and s. 63. The royalty payable on the Crown leases is established by s. 58, which reads:

58. (1) The oil and gas produced from Crown lands acquired under these regulations, or under any former Petroleum and Natural Gas Regulations or under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council, shall for each calendar month be subject to a royalty, free and clear of all deductions as follows:

(a) with respect to oil, at a rate established on the total monthly production of each well as set forth in the following table and applied to ninety-eight and twelve one‑hundredths per cent of the total production from such well:

TABLE

The term of the royalty established by s. 58 is set out in s. 63, which is as follows:

63. The royalty provisions herein set forth shall continue in force from the first day of April, 1973, for a period of five years in the case of oil, and for a period of two years in the case of gas, and thereafter until such provisions are amended, revised or substituted by the Lieutenant Governor in Council.

By Order in Council 95/74, the above s. 63 was repealed and a new section substituted therefor. The pertinent part of this new s. 63 is subs. (1), which imposes a royalty surcharge. This section reads:

63. (1) Oil produced or deemed to be produced from Crown lands acquired under these regulations or under any former Petroleum and Natural Gas Regulations or

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under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council shall, for each calendar month, be subject to payment of a royalty surcharge calculated as follows:

(oil produced less Crown royalty oil less Road Allowance Crown levy) times (international well-head price less basic well-head price);

The amendments made by Order in Council 95/74 were contained in Schedule I to Bill 42, which, by s. 18, gave power to make amendments and which were declared to have the same force and effect as if statutorily enacted.

Part VI of Bill 42 contains, in s. 42, a provision which is of considerable importance. It reads as follows:

42. Where on or after the tenth day of December, 1973, any person having an interest in respect to the oil and gas rights acquired by the Crown under this Act:

(a) causes production to be stopped without the consent of the minister therefor, other than temporarily where necessary in order to make repairs, that may cause damage or loss, present or future, to the proven recoverable reserves, is guilty of an offence and liable on summary conviction to a fine of $1,000 for each day during which the offence continues;

(b) removes equipment for production, storage, treating or transportation without the prior consent therefor of the minister is guilty of an offence and liable on summary conviction to a fine of not less than $1,000 nor more than $10,000.

The effect of this section is that any person who is producing oil from lands in respect of which the Crown has expropriated the oil and gas rights has no right to elect not to produce oil which would become liable for payment of the royalty surcharge. He is compelled, by the imposition of a heavy penalty imposed for failure to comply, to continue the production of oil.

The Mineral Resources Act was amended by Bill 127, being 1973-74 (Sask.), c. 64. Section 2 of

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the amending Act added subss. (1A) and (1B) to s. 10 of the Act. Those subsections gave power to make amendments to The Petroleum and Natural Gas Regulations, 1969, as set out in the Schedule to the Act, and, with the exception of s. 63B, made the Regulations retroactive to January 1, 1974. Subsection 1B provided that Regulation 63B would come into force on January 1, 1974.

The Schedule to the Act contains the amendments which were made by Order in Council 1238/74. Section 60 and subs. 63(1), as finally amended, read:

60. Every sale of oil, unless otherwise ordered by the minister, shall include the Crown’s royalty share of oil, and for the purpose of determining the royalty payable to the Crown, the sale shall be deemed to be at the well-head value established by the minister.

63. (1) Oil produced or deemed to be produced from Crown lands acquired under these regulations or under any former Petroleum and Natural Gas Regulations or under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council shall, for each calendar month, be subject to payment of a royalty surcharge calculated as follows:

(oil produced less Crown royalty oil less Road Allowance Crown levy) times (well‑head value, as established by the minister less basic well-head price);…

The basic well-head price, for the purpose of the mineral income tax, was established for the period January 1, 1974, to May 31, 1974, by Schedules II and III to Bill 42. The basic well‑head price from and after June 1, 1974, was established by s. 63B of The Petroleum and Natural Gas Regulations as authorized and confirmed by the schedule to Bill 127.

For the purpose of calculating the royalty surcharge, the basic well-head price is set out in the Regulations. The end result has been that the same basic well-head price is used from month to month in determining both the mineral income tax and the royalty surcharge.

By the Minister’s Order WOV-01/74, the Minister ordered that the well-head value for the

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purpose of the payment of the mineral income tax, Crown royalty and the royalty surcharge on each type of crude oil produced in Saskatchewan should be the higher of the price received at the well-head and the price per barrel as listed in the order.

The Court was advised during argument that, subsequent to the trial of this action and while the appeal to the Court of Appeal was under consideration, Order WOV-01/74 was rescinded by Order WOV-01/75. This order contained a new and higher list of prices per barrel applicable from and after July 1975. Well-head value was stated to be the higher of the price per barrel received at the well-head and the price listed in the order. Unlike Order WOV-01/74 it does not refer to mineral income tax.

In summary, Bill 42 imposes a mineral income tax on the income received on oil produced in Saskatchewan in respect to producing properties. The royalty surcharge is made applicable in respect to production from Crown lands. In each case the determination of the basic well‑head price is the same; that is, by the Minister. In the case of the mineral income tax, the basic well-head price is set out in the schedules to the legislation. In the case of the royalty surcharge, the basic well-head price is set out in the regulations. The method of calculation is the same in each case. As the basic well-head price has been set at the same figure, whether by statute or by regulation, and as the well-head value had been set by the Minister at the same figure for the purposes of both the mineral income tax and the royalty surcharge, the calculation of the mineral income tax and the royalty surcharge has been the same. When effect is given to the expropriation provision of Bill 42, the mineral income tax would apply only to those tracts exempted by s. 27(2) of Bill 42. The royalty surcharge applies both to Crown-owned land, owned by the Crown prior to the enactment of Bill 42, and to oil rights vested in the Crown under the expropriation provisions of Bill 42.

The practical consequence of the application of this legislation is that the Government of Saskatchewan will acquire the benefit of all increases

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in the value of oil produced in that Province above the set basic well-head price fixed by the statute and regulations, which is approximately the same as that which existed in 1973 before the increase in world prices for oil. In this connection, there is the important fact that 98 per cent of all crude oil produced in Saskatchewan is destined for export from the Province either to Eastern Canada or the United States of America.

The appellant’s attack upon the legislation is made upon two grounds:

1. It is contended that both the mineral income tax and the royalty surcharge constitute indirect taxation, and are therefore beyond the power of the Province to impose, the provincial legislative powers being limited to direct taxation within the Province under s. 92(2) of the British North America Act.

2. It is contended that the legislation relates to the regulation of interprovincial and international trade and commerce, a matter over which the Federal Parliament has exclusive legislative power under s. 91(2) of the British North America Act.

Direct or Indirect Taxation

My brother Dickson has reviewed the leading authorities dealing with the distinction between direct and indirect taxation. It is not necessary for me to repeat that review here. He has pointed out that it has been settled that:

The dividing line between a direct and an indirect tax is referable to and ascertainable by the “general tendencies of the tax and the common understanding of men as to those tendencies. The general tendency of a tax is the relevant criterion”.

He has also pointed out that certain well understood categories of taxation have been generally established as falling within one or other of these classes. Thus custom levies are recognized as being indirect taxes, whereas income and property taxes have been recognized as being direct taxes. Similarly, a commodity tax has, as a general rule, been regarded as an indirect tax. The appellant submits

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that the levies here in question are commodity taxes, and refers to the Privy Council decision in R. v. Caledonian Collieries, Limited[2], in which Lord Warrington of Clyffe made the following statement:

The respondents are producers of coal, a commodity the subject of commercial transactions. Their Lordships can have no doubt that the general tendency of a tax upon the sums received from the sale of the commodity which they produce and in which they deal is that they would seek to recover it in the price charged to a purchaser. Under particular circumstances the recovery of the tax may, it is true, be economically undesirable or practically impossible, but the general tendency of the tax remains.

It is said on behalf of the appellant that at the time a sale is made the tax has not become payable, and therefore cannot be passed on. Their Lordships cannot accept this contention; the tax will have to be paid, and there would be no more difficulty in adding to the selling price the amount of the tax in anticipation than there would be if it had been actually paid.

In that case the tax was imposed upon the gross revenue of every mine owner, at a rate not to exceed 2 per cent. The Privy Council considered that the general tendency of the tax would be for a mine owner to seek to recover the tax from his purchasers.

A sales tax, imposed upon vendors of goods, has been generally regarded as an indirect tax. On the other hand, where the tax, although collected through the vendor is actually paid by the ultimate consumer, the tax has been held to be direct. (Atlantic Smoke Shops Ltd. v. Conlon[3]; Cairns Construction Limited v. Government of Saskatchewan[4]). However, in the present case the tax is imposed upon and payable by the producer in relation to the sale price of the oil which is produced. It is a sales tax, but the contention of the respondents is that it is not an indirect tax because the legislation does not contemplate and seeks to preclude the recovery of the tax from the purchaser.

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The respondent contends that the mineral income tax is, as its name implies, an income tax, and so, a direct tax. I agree with the reasons of my brother Dickson for holding that that tax is not an income tax as that term is understood in the authorities which say that an income tax is a direct tax.

The respondent submits, with respect to the royalty surcharge, that it is not a tax, but that it is a genuine royalty payable to the Crown, as the owner of mineral rights, by its lessees who have been authorized to extract minerals from Crown lands. To determine the validity of this contention it is necessary to consider the nature of the legal relationship between the Crown and the persons from whom payment of the royalty surcharge is demanded.

Some of these persons were the holders of petroleum and natural gas leases from the owners of the freehold interest in such minerals. Their obligation to pay royalties depended upon the terms of the lease from the freehold owner. The effect of Part IV of Bill 42 was to expropriate the rights of the freehold owners in the petroleum and natural gas in their lands, save in the case of freehold owners of producing tracts which had an aggregate total area of 1,280 acres or less. Owners coming within this exemption would retain title to their petroleum and natural gas rights and the legal relationship between them and their lessees would continue. However, Bill 42 imposed on such lessees the obligation to pay mineral income tax in respect of their production.

With respect to lands not falling within the exemption, the owners were divested of their title, which was given, by the statute, to the Crown. This was accomplished by s. 28(1) of Bill 42, but the transfer to and vesting of title in the Crown was stated to be “subject to any lease affecting the same that may exist immediately preceding the tenth day of December, 1973”. The rights of leaseholders in this category were thus preserved. However, s. 33(2) subjected such lessees to the same royalty surcharge as was imposed upon lessees leasing directly from the Crown. It provided:

33(2). Any person having a lease of the oil and gas rights or any of them shall be subject to section 63 of

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The Petroleum and Natural Gas Regulations, 1969, when enacted pursuant to section 18 and shall be liable to pay the royalty surcharge provided for therein from the first day of January, 1974, as if the lease came within subsection (1) of section 63.

The levy thus imposed cannot, in my opinion, be a royalty. The royalty payable by the lessee was fixed by the terms of his lease, and that lease was preserved by the terms of s. 28(1). It was not expropriated by the Crown. The imposition upon the lessee of the royalty surcharge levy was, in my opinion, a tax upon the lessee’s share of the production to which he was lawfully entitled. I agree with my brother Dickson that this levy fell within the criteria laid down by Duff J., as he then was, in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction[5], at p. 363, for deciding whether a levy constituted a tax.

Another class of lessees upon whom the royalty surcharge is imposed consists of those who were the holders of Crown leases at the time the royalty surcharge was imposed. In respect of these it was argued by counsel for the respondents that the Crown leases themselves, samples of which were filed as exhibits, contemplate the imposition of such a royalty. These leases contained the following provision:

And also rendering and paying therefor unto the Lessor any royalties at such rates and in such manner and at such times as are from time to time prescribed by the Order of the Lieutenant Governor in Council: such rents and royalties to be free and clear of and from all rates,’ taxes and assessments and from all manner of deduction whatsoever.

I do not accept this submission. In my opinion the word “royalty” was used in the leases in its customary sense as meaning a share of the production obtained by the lessee. My view is reinforced by the use of the word “rate” which contemplates the determination of the proportions of production allocated to the lessor. The regulation which imposed the royalty surcharge imposed an obligation upon lessees, holding existing leases, to turn over to the Crown 100 per cent of the proceeds of production beyond the basic well-head price, as

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fixed by the Government. The existing royalties, which were genuine royalties, continued unchanged.

In my opinion the royalty surcharge made applicable to these Crown leases was not a royalty for which provision was made in the lease agreement. It was imposed as a levy upon the share of production to which, under the lease, the lessee was entitled, and was a tax upon production.

I agree with the reasons of my brother Dickson for concluding that the royalty surcharge is a tax imposed upon Crown lessees of the same nature as the mineral income tax imposed upon lessees holding leases from freehold owners. It is significant that the royalty surcharge is computed in the same manner as the mineral income tax, and that the proceeds of both are to be paid into the same fund.

The reasons given by the Court of Appeal for concluding that the mineral income tax was a direct tax are summarized in the following extract from the judgment:

I think it must be concluded that the tax is one which is demanded from the very persons whom it is intended and desired should pay it. It is not one which is demanded from persons in the expectation and intent that they shall indemnify themselves at the expense of others. In my view, the language of the sections under which the tax is imposed, calculated and payment directed, leaves no doubt but the legislators intended the tax to be paid by the persons upon whom it was imposed and from whom payment is demanded.

If there were any doubt as to this view, I think that doubt would be resolved by an appreciation of the situation that would result if the persons taxed attempted to indemnify themselves at the expense of the purchasers of the oil. If the tax paid pursuant to Bill 42 was added to the sale price of the crude at the well-head, then to the extent it was so passed on, it would increase the well-head price. The effect, therefore, would simply be to increase the tax by the amount which the wellhead price was so increased. In other words, such action by the taxpayers would result in no benefit to themselves, but could, if the selling price were increased by the total amount of the tax, substantially increase the tax collected by the Government. Surely such a result following from an attempt to pass on the tax clearly

[Page 563]

indicates that the Legislature intended the tax to be paid by those upon whom it was imposed and from whom payment was demanded.

With respect, my consideration of the real substance and intent of the legislation under review leads me to a different conclusion.

Both the mineral income tax and the royalty surcharge are taxes upon the production of oil virtually all of which is produced for export from the Province of Saskatchewan. Section 3 of Bill 42 imposes the mineral income tax upon every person having an interest in the oil produced from a well in a producing tract. Section 63(1) of The Petroleum and Natural Gas Regulations, 1969, requires payment of the royalty surcharge upon oil produced or deemed to be produced from Crown lands.

Section 4(1) of Bill 42 as originally enacted fixed the tax payable as being the amount of the difference between the basic well-head price and the international well-head price determined by the Minister. Bill 128 repealed that subsection and substituted the formula of the well-head price received for each barrel of oil produced and sold in each month less the basic well-head price. The operation of the new subsection was made subject to a new section, 4A.

Section 4A provides that where the Minister is of the opinion that oil, income from which is subject to tax, has been disposed of in any month at less than its fair value, he shall determine the well-head value of the oil sold, being the price which he determines should have been obtained, and it is that price, so determined by him, which governs in the computation of the tax and not the actual price received. The purpose of this important provision was twofold. First it enabled the Minister to prevent a reduction in the tax payable by reason of a sale at less than what he considered to be the fair value of the oil. Second it provided a basis for the computation of tax where oil produced from a Saskatchewan well had not been sold at the well-head but had been shipped out by the producer to be refined and sold.

[Page 564]

Under this section it is the Minister who has power to determine what he considers to be the fair value of the oil produced, which figure will be applicable in the computation of the tax payable. His determination of fair value is final and conclusive. Section 11 of Bill 42 so provides and also states that his determination is not subject to review by any court of law or by any certiorari, mandamus, prohibition, injunction or other proceeding whatsoever.

With respect to the computation of royalty surcharge, I have referred earlier to s. 63(1) of The Petroleum and Natural Gas Regulations, as finally amended, which imposes a royalty surcharge calculated as follows:

(oil produced less Crown royalty oil, less Road Allowance Crown levy) times (well-head value, as established by the minister less basic well-head price).

The effect of this provision is that the royalty surcharge is determined by subtracting from one figure (well-head value) established by the Minister, another figure (basic well-head price) established by the Crown in the regulations.

These taxing provisions, i.e. both mineral income tax and royalty surcharge, have the following impact upon the Saskatchewan oil producer. In the first place he is effectively precluded from recovering in respect of the oil which he produces any return greater than the basic well-head price per barrel. He is subjected to an income freeze at that figure and can obtain no more than that. In the second place, he is compelled to sell his product at a price which will equal what the Minister determines to be the fair value of the oil which he produces. He must do this, because his production of oil is subject to a tax per barrel representing the difference between fair value and basic well-head price. If he is the lessee of mineral rights in lands in respect of which the mineral rights were expropriated by the Crown, he does not even have the option to discontinue production. Discontinuance of production without ministerial consent is subject to a heavy penalty.

The tax under consideration is essentially an export tax imposed upon oil production. In the

[Page 565]

past a tax of this nature has been considered to be an indirect tax. In Attorney-General for British Columbia v. McDonald Murphy Lumber Co. Ltd.[6], the Privy Council considered the validity of a timber tax imposed by s. 58 of the Forest Act, R.S.B.C. 1924, c. 93, upon all timber cut within the Province, except that upon which a royalty was payable, but which provided for a rebate of nearly all of the tax in the case of timber used or manufactured in the Province. In his reasons in that case Lord MacMillan, at p. 364, said:

Mr. Lawrence, however, contended that although the tax might accurately be described as an export duty, this did not necessarily negative its being a direct tax within the meaning of the Act. Without reviewing afresh the niceties of discrimination between direct and indirect taxation it is enough to point out that an export tax is normally collected on merchantable goods in course of transit in pursuance of commercial transactions. Whether the tax is ultimately borne by the exporting seller at home or by the importing buyer abroad depends on the terms of the contract between them. It may be borne by the one or by the other. It was said in the present case that the conditions of the competitive market in the United States compelled the exporter of timber from British Columbia to that country to bear the whole burden of the tax himself. That, however, is a matter of the exigencies of a particular market, and is really irrelevant in determining the inherent character of the tax. While it is no doubt true that a tax levied on personal property, no less than a tax levied on real property, may be a direct tax where the taxpayer’s personal property is selected as the criterion of his ability to pay, a tax which, like the tax here in question, is levied on a commercial commodity on the occasion of its exportation in pursuance of trading transactions, cannot be described as a tax whose incidence is, by its nature, such that normally it is finally borne by the first payer, and is not susceptible of being passed on. On the contrary, the existence of an export tax is invariably an element in the fixing of prices, and the question whether it is to be borne by seller or purchaser in whole or in part is determined by the bargain made. The present tax thus exhibits the leading characteristic of an indirect tax as defined by authoritative decisions.

The mineral income tax and the royalty surcharge are taxes imposed in a somewhat unusual

[Page 566]

manner. The mineral income tax purports to be a direct tax upon income imposed upon the taxpayer, which he cannot pass on to his purchaser. The royalty surcharge, while carrying a different title, is the same in nature. What differentiates this legislation from other legislation imposing export taxes is that the true effect of the legislation is to impose a freeze upon the actual income which the producer exporter can derive from the sale of his product. All that he is permitted to retain on the sale of each barrel of oil is the basic well-head price. In addition to being subjected to an income freeze, he is compelled to sell his product at a price equivalent to what the Minister considers to be its fair value in order to obtain the funds necessary to meet the tax. This amount per barrel over and above the basic well-head price he must obtain from his purchaser as a part of the purchase price. In essence the producer is a conduit through which the increased value of each barrel of oil above the basic well-head price is channeled into the hands of the Crown by way of tax. The increase in value is itself the tax and it is paid by the purchaser of the oil.

It is contended that the imposition of these taxes will not result in an increase in the price paid by oil purchasers, who would have been required to pay the same market price even if the taxes had not been imposed, and so there could be no passing on of the tax by the Saskatchewan producer to his purchaser. On this premise it is argued that the tax is not indirect. This, however, overlooks the all important fact that the scheme of the legislation under consideration involves the fixing of the maximum return of the Saskatchewan producers at the basic well-head price per barrel, while at the same time compelling him to sell at a higher price. There are two components in the sale price, first the basic well-head price and second the tax imposed. Both are intended by the legislation to be incorporated into the price payable by the purchaser. The purchaser pays the amount of the tax as a part of the purchase price.

For these reasons it is my opinion that the taxation scheme comprising the mineral income tax and the royalty surcharge does not constitute direct taxation within the Province and is therefore

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outside the scope of the provincial power under s. 92(2) of the British North America Act.

Regulation of Trade and Commerce

In considering this issue the important fact is, of course, that practically all of the oil to which the mineral income tax or the royalty surcharge becomes applicable is destined for interprovincial or international trade. Some of this oil is sold by producers at the well-head and thereafter transported from the Province by pipeline. Some of the oil is not sold at the well‑head, but is produced by companies for their own purposes, and is likewise transported out of the Province by pipeline. In either case the levy becomes applicable. The producer in the first case must, if he is to avoid pecuniary loss, sell at the well-head at the wellhead value established. The company which has its own oil production transported from the Province must, if it is to avoid pecuniary loss, ultimately dispose of the refined product at a price which will recoup the amount of the levy. Thus, the effect of the legislation is to set a floor price for Saskatchewan oil purchased for export by the appropriation of its potential incremental value in interprovincial and international markets, or to ensure that the incremental value is not appropriated by persons outside the Province.

Chief Justice Kerwin in the Reference re The Farm Products Marketing Act[7] said at p. 204:

Once a statute aims at “regulation of trade in matters of inter-provincial concern” it is beyond the competence of a Provincial Legislature.

At p. 205 he said:

The concept of trade and commerce, the regulation of which is confided to Parliament, is entirely separate and distinct from the regulation of mere sale and purchase agreements. Once an article enters into the flow of inter-provincial or external trade, the subject-matter and all its attendant circumstances cease to be a mere matter of local concern.

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The purpose of the legislation under review was accurately defined by Chief Justice Culliton in the Court of Appeal:

There is no doubt in my mind that both the Mineral Income tax and the royalty surcharge were imposed for one purpose, and one purpose only—to drain off substantial benefits that would have accrued to the producers due to the sudden and unprecedented price of crude oil.

The means used to achieve this end are to compel a Saskatchewan oil producer to effect the sale of the oil at a price determined by the Minister. The mineral income tax is defined as the difference between the basic well-head price and the price at which the oil is sold, but with the important proviso that if the Minister is of the opinion that the oil has been sold at less than its fair value, he can determine the price at which it should have been sold, and that price governs in determining the amount of the tax. The royalty surcharge, as provided under the Regulations requires the payment of the surcharge on oil produced on the basis of the difference between its well-head value, as established by the Minister, less the basic well‑head price. In either case the Minister is empowered to determine the well-head value of the oil which is produced which will govern the price at which the producer is compelled to sell the oil which he produces. In an effort to obtain for the provincial treasury the increases in the value of oil exported from Saskatchewan which began in. 1973, in the form of a tax upon the production of oil in Saskatchewan, the legislation gave power to the Minister to fix the price receivable by Saskatchewan oil producers on their export sales of a commodity that has almost no local market in Saskatchewan. Provincial legislative authority does not extend to fixing the price to be charged or received in respect of the sale of goods in the export market. It involves the regulation of interprovincial trade and trenches upon s. 91(2) of the British North America Act.

This is not a case similar to Carnation Co. Ltd. v. Quebec Agricultural Marketing Board[8], where the effect of the Regulations was to increase the

[Page 569]

cost of the milk purchased by Carnation in Quebec and processed there, mostly for sale outside Quebec. The legislation there indirectly affected Carnation’s export trade in the sense that its costs of production were increased, but was designed to establish a method for determining the price of milk sold by Quebec milk producers, to a purchaser in Quebec, who processed it there. Here the legislation is directly aimed at the production of oil destined for export and has the effect of regulating the export price, since the producer is effectively compelled to obtain that price on the sale of his product.

For these reasons, in my opinion, the statutory provisions, and the Regulations and orders enacted and made relating to the imposition of the mineral income tax and the royalty surcharge, are ultra vires of the Legislature of the Province of Saskatchewan. From this it follows that Part I of Bill 42 is ultra vires of the Legislature. Part II of the Act amended The Mineral Taxation Act, 1972 (Sask.), c. 79, by increasing the rate of tax. As this is an acreage tax imposed upon interests in land, in my opinion it is valid. Part III of this Act has never been proclaimed and a decision as to its validity, at this time, is unnecessary. Part IV of the Act deals with the expropriation of oil and gas rights. The validity of this Part was not seriously challenged in argument before this Court. I agree with the Court of Appeal that Part IV was within the legislative jurisdiction of the Province as being legislation relating to property and civil rights under s. 92(13) of the British North America Act. For the same reason I would uphold Part V of the Act which provides for amendments to The Oil and Gas Conservation Act. Part VI is headed “General”. In this Part, ss. 41 and 42 are related to the carrying into effect of Part I and to the collection of the royalty surcharge and for that reason are, in my opinion, invalid. The amendments to Part I contained in Bill 128 are equally invalid.

Bill 127, which relates to the amendments to The Petroleum and Natural Gas Regulations pro-

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viding for the imposition of the royalty surcharge, is, in my opinion, ultra vires of the Legislature.

Those Petroleum and Natural Gas Regulations which imposed the royalty surcharge and the various orders made by the Minister of Mineral Resources pursuant to Part I of Bill 42 must also be found to be invalid.

The appellant seeks to recover the amounts which it has paid to the Crown by way of mineral income tax and royalty surcharge as having been collected without legal authority. In answer to this claim the respondent relied upon s. 5(7) of The Proceedings against the Crown Act, R.S.S. 1965, c. 87. The constitutional validity of that provision was considered by this Court in Amax Potash Ltd. v. Government of Saskatchewan[9], and it was held to be ultra vires of the Saskatchewan Legislature. In my opinion the appellant is entitled to judgment against the Government for the recovery of the sums paid by way of mineral income tax and royalty surcharge, with interest thereon from the respective dates of payment up to the date of repayment. If the parties are unable to agree upon the amount of the judgment there should be an accounting. The appellant is entitled to costs throughout as against the respondent Government. There should be no costs payable by or to any of the intervenants.

The judgment of Dickson and de Grandpré JJ. was delivered by

DICKSON J. (dissenting)—The question raised in this appeal is whether a complex of legislation, enacted by the Legislature of Saskatchewan, following the onset in late 1973 of what has been called the “energy crisis”, is intra vires the Legislature of Saskatchewan.

In 1973 the Organization of Petroleum Exporting Countries increased unexpectedly and to unprecedented levels the price of Middle East oil. That action had world-wide effect upon the value of crude oil and refined petroleum products. The Legislature of Saskatchewan felt the vital interests

[Page 571]

of its citizenry engaged. It responded by enacting legislation in December 1973. The purpose of the legislative scheme was to divert the enhanced value of Saskatchewan oil from the producing oil companies and other owners, to the provincial coffers. This was accomplished by two means.

First, production revenues from freehold lands were subjected to what was called a “mineral income tax”. The tax was one hundred per cent of the difference between the price received at the well-head and the “basic well-head price”, a statutory figure approximately equal to the price per barrel received by producers prior to the energy crisis. Oil and gas rights in producing tracts of less than 1,280 acres were exempted from tax. Deductions approved by the Minister of Mineral Resources were allowed in respect of increases in production costs and extraordinary transportation costs. Provision was made for the Minister to determine the well-head value of the oil where he was of the opinion that oil had been disposed of at less than its fair value.

Secondly, all petroleum and natural gas in all producing tracts within the Province were expropriated and subjected to what was called a “royalty surcharge”. Oil and gas rights owned by one person in producing tracts not exceeding 1,280 acres were exempted. Although introduced by regulation rather than statute, the royalty surcharge is calculated in the same manner as the mineral income tax. For all practical purposes they are the same, save one exception. The well-head value for the purposes of royalty surcharge is the higher of the price received at the well-head and the price per barrel listed in the Minister’s order.

I

Virtually all of the crude oil produced in Saskatchewan is exported from the Province. In 1973, only 1.8 per cent of Saskatchewan crude was used in Saskatchewan refineries; 43.9 per cent was used in provinces of Canada other than Saskatchewan;

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and 54.3 per cent was exported to the United States. This is attributable in part to the fact that most of the oil produced in the Province is medium or heavy crude which, when refined, produces a heavy residue of bunker oil suitable only for use in heavy industry, which is not present in Saskatchewan. Another contributing factor is the fact that the flow of the pipeline through which the oil leaves the Province is from west to east. Light and medium crudes, suitable for use in Saskatchewan, are produced in the south eastern part of the Province, far from the refineries at Regina and Moose Jaw. These refineries are served by oil from the Province of Alberta.

The appellant, Canadian Industrial Gas & Oil Ltd., is a producer of crude oil in Saskatchewan and sells its entire production at the well site. Virtually all of its product leaves the Province by pipeline for refining by others in more easterly provinces of Canada or in the United States. The appellant owns a variety of interests including freehold leases, Crown leases (granted to the appellant or to its predecessor in title, as lessee, subject to Crown royalty); non-operator interests under freehold leases and under Crown leases; royalty interests on freehold leases and on Crown leases; royalty trust certificates; freehold subject to leases to others. The total acreage involved for all types of interest is 156,011 acres, producing 46,000 to 51,000 barrels of oil per month. Prior to the enactment of the legislation, the validity of which is questioned in these proceedings, the appellant’s weighted average receipt per barrel for the Province amounted to $3.10, with direct field costs of 58 cents per barrel, exclusive of administrative overhead, depreciation, depletion and taxes.

Since the legislation came into force there have been no significant changes in the marketing of Saskatchewan crude oil. The levels of production and exports of oil have continued at a constant or slightly increased tempo, close to production capacity.

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II

The appellant’s attack upon the legislative scheme is made on two broad grounds. The first claim of invalidity rests on the submission that the mineral income tax and royalty surcharge are indirect taxes and hence beyond s. 92, Head 2, of the British North America Act, 1867, which empowers a Legislature to “make laws in relation to matters coming within… direct taxation within the Province in order to the raising of a revenue for provincial purposes”. The second submission is that the legislation, as a whole, is in relation to the regulation of trade and commerce and thus within the exclusive jurisdiction of the federal parliament under s. 91, Head 2, of the Act. Section 121 is not relied upon.

Notwithstanding very able argument by Mr. Robinette, counsel for the appellant, and by Mr. Smith, counsel for the Attorney General of Canada, I have reached the conclusion that the appeal must fail. After reading and re-reading the legislation, the evidence and what appear to be the relevant authorities, I adjudge:

1. That the mineral income tax is not an income tax; it is, however, a direct tax, and therefore within provincial competence.

2. That the royalty surcharge is not a royalty; it too is a tax but also a direct tax.

3. That the entire legislative scheme is aimed at taxation and its effect, if any, upon extraprovincial trade and commerce is incidental and non-disabling.

III

Before considering in detail the legislation, one or two observations of a general nature are warranted. This Court is sensitive to the freedom of action which must be allowed to the Legislatures to safeguard their legitimate interests as in their wisdom they see fit. It presumes that they have acted constitutionally. The onus of rebutting that presumption is upon the appellant. Before the Court concludes that the Province has transcended its constitutional powers the evidence must be clear and unmistakable; more than conjecture or

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speculation is needed to underpin a finding of constitutional incompetence.

On March 20, 1930, an agreement was entered into between the Government of Canada and the Government of Saskatchewan whereby the Government of Canada covenanted and agreed that the Province of Saskatchewan should own all public lands and mines and minerals and should administer and control natural resources within the Province from its entry into Confederation in 1905 and should be placed in a position of equality with the other Provinces of Confederation with respect to administration and control of its natural resources. The agreement effecting the natural resource transfer recited that:

[i] in order that the Province may be in the same position as the original Provinces of Confederation are in virtue of section one hundred and nine of the British North America Act, 1867, the interest of the Crown in all Crown lands, mines, minerals (precious and base) and royalties derived therefrom within the Province… shall… belong to the Province… and the said lands shall be administered by the Province for the purposes thereof….

The agreement was confirmed by federal and provincial legislation as well as the B.N.A. Act, 1930, 21 Geo. V, c. 26 (Imp.).

Subject to the limits imposed by the Canadian Constitution, the power of the Province to tax, control and manage its natural resources is plenary and absolute.

IV

The legislation, related Orders in Council and ministerial orders attacked in the proceedings are detailed in the constitutional question upon which leave to appeal to this Court was granted, namely:

Are the Oil and Gas Conservation Stabilization and Development Act, 7973, S.S. 1973‑74, (Bill 42); amendments thereto in S.S. 1973-74, c. 73 (Bill 128); an Act to amend the Mineral Resources Act S.S. 1973-4 c. 64 (Bill 127) amendments to the Mineral Taxation Act S.S. 1973-74 c. 65 (Bill 129); amendments to the Petroleum and Natural Gas Regulations, 1969, by

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Order in Council 95/74 and Order in Council 1238/74 and Orders made pursuant to Bill 42 by the Minister of Mineral Resources

1 WOP-1/73 of Dec. 27, 1973
1 WOP-1/74 of Jan. 28, 1974
1 WOP-2/74 of Feb. 21, 1974
1 WOP-3/74 of Mar. 29, 1974
1 WOP-4/74 of Apr. 26, 1974
1 WOV-1/74 of Jul. 10, 1974

intra vires the Legislature of Saskatchewan?

The answer given at trial and on appeal was affirmative.

…

These are the salient features of the legislation:

The Oil and Gas Conservation, Stabilization and Development Act, 1973, (enacted December 19, 1973 and referred to as Bill 42) as amended by Bill 128, enacted May 10, 1974.

Part I—Mineral Income Tax

Section 3 of Bill 42 provides that a mineral income tax shall be paid for each month, commencing January, 1974, by every person having an interest in the oil produced from a well in a producing tract.

Section 4(1) provides that, subject to s. 4A, the tax payable is an amount equal to the amount by which the well-head price received for each barrel of oil produced and sold in each month exceeds the basic well-head price, times the taxpayer’s share of the number of barrels of oil produced from the well from which the taxpayer shares the oil or the proceeds thereof. “Basic well-head price” is defined. It means the price at the well-head of a barrel of oil produced in Saskatchewan set out in Schedule II to the Act. Schedule II lists the basic well-head price for each of four producing areas. For example, the basic well-head price of Kindersley-Kerrobert light crude oil, one of the crudes

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produced by the appellant, is stated to be $3.39 per barrel. “Well-head price” is also defined. It means the price at the well-head of a barrel of oil produced in Saskatchewan having regard to the grade of oil and the area of production, and includes where applicable, the well-head value determined by the Minister of Mineral Resources under s. 4A. The combined effect of ss. 3 and 4(1) is to require every person having an interest in the oil produced from a well in a producing tract to pay in tax the difference between the price per barrel received for the oil and the basic well-head price fixed by the statute.

Section 4A provides that where the Minister is of the opinion that oil, the income from which is subject to taxation under ss. 3 and 4, has been disposed of in any month at less than its fair value, he shall determine the well-head value of the oil so sold, being the price that he determines should have been obtained, having regard to the grade of oil and the area of production, and then determine the total tax payable on the basis of that well-head value being the well-head price.

Section 5 of the Act, referred to in argument as the “farmers’ section”, exempts from tax the owners of producing tracts, the aggregate acreage of which is less than 1,280 acres.

Section 6 provides that each producer of oil shall file a return every six months showing the amount of increased costs of production of oil produced and extraordinary transportation costs claimed by him as an allowance from tax. The Minister is required to consider each return filed and determine the amount to be allowed as a deduction. The determination of the Minister in this regard as well of well-head value and any deductions allowed under s. 14 for approved expenditures for research, exploration, or processing facilities are final and are not reviewable by any court of law.

The only other section of Part I to which reference might be made is s. 13 which states that a person is liable to pay tax under ss. 3, 4 and 4A

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only to the extent that he is not liable to pay the royalty surcharge imposed by The Petroleum and Natural Gas Regulations, 1969.

Part II—Mineral Taxation Act

This Part increases mineral tax under The Mineral Taxation Act, 1972 (Sask.), c. 79, from twenty cents per acre to fifty cents per acre. The validity of this tax increase is not challenged. It is a direct tax. See Canadian Pacific Railway Co. v. Attorney-General for Saskatchewan[10].

Part III—Wholesale Prices

This Part has not been proclaimed and nothing turns upon it.

Part IV—Acquisition of Certain Oil and Gas Rights

This is the expropriation part of the Act, to which reference has been made. As from January 1, 1974, all petroleum and natural gas in all producing tracts exceeding 1,280 acres are deemed, by s. 28(1) of the Act, to be transferred to and vested in Her Majesty the Queen in the right of the Province of Saskatchewan, subject to any lease affecting the same existing immediately preceding December 10, 1973, and encumbrances registered prior to that date. The effect is to transfer the reversionary interest in oil and gas in each such tract to the Crown. Provision is made for compensation out of future production. The validity of the expropriation, as such, is not attacked in these proceedings. Any person having a lease of oil and gas rights is made subject to The Petroleum and Natural Gas Regulations, 1969, and is liable to pay the royalty surcharge as if the lease were a Crown lease acquired under the Regulations.

Part V—Oil and Gas Conservation Act

This Part of the Act amends The Oil and Gas Conservation Act, 1966 (Sask.), c. 66, by restating the purpose of that Act and the powers of the Minister thereunder. As a result of the restate-

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ment, two subsections which might have been subject to question were repealed.

Part VI—General

Section 42 provides that any person having an interest in respect of oil and gas rights acquired by the Crown under the Act who causes production to be stopped without the consent of the Minister, other than temporarily where necessary in order to make repairs, is guilty of an offence.

Section 42A states that the purpose and intent of the Legislature is to confine the provisions of the Act within the competence of the Legislature and that all the provisions of the Act are to be construed so as to give effect to that purpose and intent. Subsection (2) of s. 42A provides for severability.

Order in Council 95/74 dated January 15, 1974

Section 18 of Bill 42, as enacted, authorized the Lieutenant-Governor in Council to make the amendments to The Petroleum and Natural Gas Regulations, 1969, contained in Schedule I to the Act. Pursuant to that authority, Order in Council 95/74 was passed amending ss. 57 and 63 of the Regulations to provide that oil produced or deemed to be produced from Crown lands would be subject to payment of a royalty surcharge calculated as follows:

(oil produced less Crown royalty less Road allowance Crown levy) times (international well-head price less basic well-head price).

“Basic well-head price” is defined in the Regulation in the same words as in Bill 42. “International well-head price” is defined as the price determined by the Minister as the value at the well-head of a barrel of oil produced in Saskatchewan having regard to (i) the price of international oil delivered at Chicago or such other place in the United States as the Minister might decide; and (ii) the grade of oil and transportation costs, but the Minister may determine the price to be a lesser price for all or any part of the oil produced in Saskatchewan. This expression, “international well-head

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price”, was contained in Bill 42 when enacted but was replaced by the phrase “well-head value” by Bill 128, with effect retroactive to January 1, 1974. The expression must therefore be ignored in determining constitutional validity.

Order in Council 95/74 also provided that the proceeds of the royalty surcharge should be paid into a fund entitled “Oil and Gas Stabilization and Development Fund”. As in the case of the mineral income tax, the amount of royalty surcharge may be reduced by expenditures for approved research, exploration, processing facilities and approved increases in the costs of production and extraordinary transportation costs.

An Act to amend The Mineral Resources Act, 1973-74 (Sask.), c. 64 (referred to as Bill 127)

This Act was passed on May 10, 1974, but retroactive to January 1, 1974. On the same date, May 10, 1974, Bill 128 was passed, retroactive to January 1, 1974. Section 13 of Bill 128 repealed s. 18 of Bill 42 which had authorized the amendments to The Petroleum and Natural Gas Regulations, 1969, to which Order in Council 95/74 had given effect. Bill 127 ratified and confirmed such amendments and empowered the Lieutenant-Governor in Council to make other amendments from time to time.

An Act to amend The Mineral Taxation Act, 1973-74 (Sask.), c. 65 (referred to as Bill 129)

This Act has the effect of voiding certain transfers and agreements made after December 10, 1973. Its purpose, it would appear, is to close the door to one means of tax avoidance. The validity of the Act was not questioned during argument.

Order in Council 1238/74 dated July 31, 1974

Order in Council 1238/74 amends The Petroleum and Natural Gas Regulations, 1969, in several respects: (i) by providing that every sale of oil, unless otherwise ordered by the Minister, will include the Crown’s royalty share of oil and that for the purpose of determining the royalty payable to the Crown, the sale would be deemed to be at the well-head value established by the Minister;

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(ii) by replacing, for the purpose of royalty surcharge, the expression “international well-head price” with the words “well-head value, as determined by the Minister”; (iii) by setting basic well-head prices for royalty surcharge purposes at the prices applicable to mineral income tax.

Ministerial Orders

The ministerial orders referred to in the question upon which leave to appeal was granted and their respective purposes may be summarized:

1 WOP-1/73 set the international well-head prices of crude oil for the purpose of mineral income tax and royalty surcharge for January, 1974, varying according to field and type of oil. The price for Kindersley-Kerrobert light crude oil was set at $4.01 per barrel. 1 WOP-1/74 set the international well-head prices for February, 1974. The price for Kindersley-Kerrobert light crude is stated to be $4.71 per barrel. 1 WOP-02/74 continued the same prices during March, 1974. 1 WOP-03/74 increased international well-head prices for April, 1974 to $6.41 per barrel in the case of Kindersley-Kerrobert light crude. The same prices were continued during May, 1974 by 1 WOP-04/74.

Order WOV-01/74, dated July 10, 1974, directed that the well-head value, for the purpose of crown royalty, mineral income tax and royalty surcharge would be the higher of the price per barrel received at the well-head or the price listed in the order. The prices listed are the same as the international well-head prices for the months of January to May, 1974. Order WOV‑01/74 also listed prices for the month of June, 1974, and thereafter until further notice, the price stated for the Kindersley-Kerrobert light crude being $6.41 per barrel. Although not included with the other Ministerial Orders mentioned in the order granting leave, the Court was advised during argument that on June 24, 1975, while the appeal to the Saskatchewan Court of Appeal was under consideration, Minister’s Order WOV-01/75 was issued rescinding Order WOV-01/74 and directing that well-head values for the purpose of payment of Crown royalty and royalty surcharge would be

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as stated in WOV-01/74 but that for the month of July, 1975 and thereafter, until otherwise ordered by the Minister, the crude oil prices would be the higher of the price per barrel received at the well-head and the price per barrel listed in Order WOV-01/75, in the case of Kindersley-Kerrobert light crude, $7.91 per barrel. Order WOV-01/75 is silent as to mineral income tax. I would assume the reason for this is the realization that the earlier order which assumed to fix basic well-head value prospectively for both mineral income tax and royalty surcharge was in excess of ministerial authority under s. 4A as affecting mineral income tax. That section contemplates an “after-the-sale” determination by the Minister and not a pricing in advance.

V

Direct or Indirect Taxation

The appellant claims that the mineral income tax and the royalty surcharge are indirect taxes and hence beyond the power of a provincial Legislature. The established guide for determining the validity of this submission is the classical formulation of John Stuart Mill (Principles of Political Economy, Book V, c. 3):

Taxes are either direct or indirect. A direct tax is one which is demanded from the very person who it is intended or desired should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another; such are the excise or customs.

The producer or importer of a commodity is called upon to pay a tax on it not with the intention to levy a peculiar contribution upon him, but to tax through him the consumers of the commodity, from whom it is supposed that he will recover the amount by means of an advance in price.

Mill’s well-known writings appeared not long before the drafting of the British North America Act, 1867, and were presumed by the Privy Council to be familiar to the Fathers of Confederation. The definition was first applied in A.-G. Quebec v.

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Reed[11]. In that case it was held that the question whether a tax is a direct or an indirect tax cannot depend upon special events which may vary in particular cases; the best general rule is to look to the time of payment and if at that time the incidence of the tax is uncertain then it cannot be called direct taxation. Mill’s test became firmly established in Bank of Toronto v. Lambe[12]. In that case Lord Hobhouse said that while it was proper and, indeed, necessary to have regard to the opinion of economists, the question is a legal one, viz. what the words mean as used in the statute. The problem is primarily one of law rather than of refined economic analysis. The dividing line between a direct and an indirect tax is referable to and ascertainable by the “general tendencies of the tax and the common understanding of men as to those tendencies”: Lambe’s case.

The general tendency of a tax is the relevant criterion. This must be distinguished from the ultimate incidence of the tax in the circumstances of the particular case: City of Halifax v. Fairbanks Estate[13], Attorney-General for British Columbia v. Kingcome Navigation Co. Ltd.[14]

In City of Charlottetown v. Foundation Maritime Co.[15], Rinfret J. pointed out that Mill’s canon is founded on the theory of the ultimate incidence of the tax, not the ultimate incidence depending on the special circumstances of individual cases.

The nature of the tax is a question of substance and does not turn on the language used by the Legislature: The King v. Caledonian Collieries Ltd.[16]

There can be no doubt that by the words “direct and indirect taxation” the Fathers of Confederation contemplated certain distinct categories of

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taxation, as well as a general test of directness. Only certain of such categories, such as income and property taxes, were to be available to the Legislatures. There were two reasons for this. The first was based on arcane political economy. It was thought that a direct tax would be more perceived than an indirect tax. The effect was thought to provide for greater scrutiny and resistence by the electorate with a resulting parsimony in public expenditure. The second reason proved wrong from the start. It was thought that provincial activities would be limited and revenue needs would be slim; the Legislatures, therefore, would have no necessity to resort to most tax pools.

Clearly, direct and indirect taxation are terms of historical reference, and although there is no reason to believe that the B.N.A. Act is not a document of evolving meaning, not limited to its original inspiration, jurisprudence, in so far as concerns particular forms of taxation like income or property taxes, has captured the historical spirit of “direct” and “indirect” taxation and preserved it. The effect of this was explained by Lord Cave in City of Halifax v. Fairbanks Estate[17] at p. 125:

What then is the effect to be given to Mill’s formula above quoted? No doubt it is valuable as providing a logical basis for the distinction already established between direct and indirect taxes, and perhaps also as a guide for determining as to any new or unfamiliar tax which may be imposed in which of the two categories it is to be placed; but it cannot have the effect of disturbing the established classification of the old and well known species of taxation, and making it necessary to apply a new test to every particular member of those species. The imposition of taxes on property and income, of death duties and of municipal and local rates is, according to the common understanding of the term, direct taxation, just as the exaction of a customs or excise duty on commodities or of a percentage duty on services would ordinarily be regarded as indirect taxation; and although new forms of taxation may from time to time be added to one category or the other in accordance with Mill’s formula, it would be wrong to use that formula as a ground for transferring a tax

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universally recognized as belonging to one class to a different class of taxation.

Historically well-understood categories of taxation have a known jurisprudential fate. Thus, a customs levy cannot be made by the Legislature whereas a property tax or income tax falls unquestionably within their competence. Careful constitutional analysis is required in respect of any unusual or hybrid form of taxation. A hybrid form of taxation may well have aspects which are direct and others which are indirect. By nineteenth century political economy, any element of indirectness was a stigma as tending to obfuscate the actions of the Legislature. That consideration is of minor importance today. In assessing the policy of a new form of taxation the jurisprudence offers no certain guide. One begins with the British North America Act, 1867, in which there are two additional criteria—(1) that the taxation be within the Province and (2) that it be in order to the raising of a revenue for provincial purposes. Implicit in this, and more important than a vestige of indirectness, is the prohibition of the imposition by a province of any tax upon citizens beyond its borders. Additionally, a province cannot, through the ostensible use of its power to tax, invade prohibited fields. It cannot by way of taxation regulate trade and commerce or prohibit the free admission of produce or manufactured goods from other provinces. It must confine itself to the raising of a revenue for provincial purposes.

VI

Argument was directed to the Court to the effect that the tax here in question is a commodity tax and, as such, the general tendency would be for the tax to be passed on and therefore categorized as indirect. It is true that a tax on any one commodity whether laid on its production, its importation, its carriage from place to place, or its sale will, as a general rule, raise the value and price of the commodity by at least the amount of the tax. Mill, Vol. II (1893 ed.) at p. 435. That is very old doctrine and for that reason a commodity

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tax is traditionally conceived as an indirect tax. The Courts have taken that as one criterion in characterizing the tax; Attorney General for British Columbia v. Canadian Pacific Railway Co.[18]; The King v. Caledonian Collieries Ltd., supra; Attorney-General for British Columbia v. McDonald Murphy Lumber Co., Ltd.[19] But there is a caveat. Taxes imposed on the consumers of particular commodities are often called, or seem to be, taxes on commodities but they are not. Consumer taxes are normally regarded as direct. See Attorney-General for British Columbia v. Kingcome Navigation Co. Ltd., supra, and Atlantic Smoke Shops Ltd. v. Conlon[20], as related to consumption of non-durable goods and Cairns Construction Ltd. v. Government of Saskatchewan[21], related to durable goods.

This appeal cannot be decided simply on the basis that the mineral income tax is levied on a commercial commodity. The Court is obliged to examine the legislation and relevant facts for the purpose of determining, by the application of the test formulated by Mill, as developed in the authorities, whether the tax is direct or indirect. In Atlantic Smoke Shops Ltd. v. Conlon, Viscount Simon L.C. asserted that two distinct categories of taxes should not be understood as relieving the courts of the obligation of examining each particular tax, or as justifying the classification of a tax as indirect simply because it was associated with the purchase of a commodity. A similar approach was taken in Attorney-General of British Columbia v. Esquimalt and Nanaimo Railway[22].

It is hard to see that the mineral income tax fits snugly into the commodity tax category. There are several rough edges. First, the tax falls upon a holder of certain rights in respect of part of the amount received. Secondly, unlike a true commodity tax—i.e., a fixed imposition or a percent-

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age of the commodity—s. 6 of the Act contemplates an imposition varying with production costs. If production costs rise, the share of the Province by taxation falls. Thirdly, the tax is not an “add-to-the-price” impost but rather a “take-from-the-owner” levy.

Finally, the tax does not fall on the product but only on certain entitled holders. Owners of rights having an aggregate area of less than 1,280 acres in producing tracts are exempted. For these reasons, the tax resists classification as a commodity tax in so far as constitutional jurisprudence knows that term. It must be subject, therefore, to further constitutional scrutiny.

VII

Counsel for the Province attempted to support the tax as constituting an income tax on the authority of Forbes v. Attorney-General of Manitoba[23]. The so-called “mineral income tax” is not an income tax in any generally recognized sense of the term. A true income tax means, for taxation purposes, a levy on gains and profits: The King v. Caledonian Collieries Ltd., supra. The evidence of Professor Barber in the case at bar confirms that view. He defined income tax as being, according to generally accepted accounting principles and business practice, a tax imposed on net income and in determining such net income any expenses incurred in earning that income are inherently deductible.

In Nickel Rim Mines Ltd. v. Attorney-General for Ontario[24], cited by counsel for the Province, the tax was held to be a direct tax but it was levied upon annual profits, determined after taking into account a “long list of deductions”. The tax was described by Wells J. as one on “net profits ascertained or estimated”. On appeal, Porter C.J.O. referred to the tax as a “profit tax”.

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In my view, the Nickel Rim case does not assist the Province. The tax is not levied upon net income. It is more in the nature of a gross revenue tax—as above a certain statutory figure it becomes a one hundred per cent levy—that has generally in the past been regarded as an indirect tax. The tax is in essence a flat sum which will vary according to the sale price of the oil but is not necessarily reflective of actual expense experience. Expenses are discretionary and not inherently deductible so as to fall within the definition of an income tax. If s. 4A should ever come into play the tax would be levied not on the price received but on a ministerial figure. In sum, an income tax is a tax upon gross receipts less expenses. In the instant tax it is possible that these two figures will be subject to ministerial determination.

VIII

It should be clear from the foregoing that neat constitutional categories are of marginal assistance in the present case. The tax resists such classification; it is a hybrid. It must be assessed in the light of constitutional analysis, keeping in mind the indicia to which I have above referred.

Can it be said, then, that the tax is one which is demanded from the very person who it is intended or desired should pay it, or can it be said, rather, that it is demanded from the oil producer in the expectation and intention that he shall indemnify himself at the expense of another? The question is not easily answered. An example might assist. If we assume a basic well-head price of $3 per barrel and a sale at $7 per barrel, the tax would amount to $4 per barrel. If basic well-head price and production costs remain constant but the selling price increases to $11 per barrel, the tax would amount to $8 per barrel. It is quite obvious that the oil producer will not be in a position to bear the tax of $4 or $8 out of the basic well-head price of $3 per barrel which he retains. On this view it is arguable that the tax is passed on to the purchaser as a component of price. I do not think, however, that this can be said to be the true view. An

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indirect tax is an amount which is added to what would otherwise be the price of the commodity or service. This appears from Mill’s formulation. He says that tax is indirect when the producer is called upon to pay a tax not with the intention of levying a contribution upon him, but to tax through him the consumers of the commodity, from whom it is supposed that he will recover the amount “by means of an advance in price”, i.e. as an “add-on”. In Attorney‑General of British Columbia v. Esquimalt and Nanaimo Railway Company[25], Lord Greene pointed out that in order to constitute an indirect tax the tax itself must have a general tendency to be passed on. If an article selling for $10 is subjected to a ten per cent customs duty, the general tendency would be simply to add the amount of the tax or more to the price of the commodity. The purchaser would then pay one dollar or more in excess of the amount he would have paid in the absence of the tax. In Security Export Co. v. Hetherington[26], at p. 558, Duff J. adopted the following definition of a direct tax, taken from the Oxford Dictionary:

One levied immediately upon the persons who are to bear the burden, as opposed to indirect taxes levied upon commodities, of which the price is thereby increased so that the persons on whom the incidence ultimately falls pay indirectly a proportion of taxation included in the price of the article. (Emphasis added.)

If the price is increased by reason of the tax, the tendency will be to have the consumer bear the increase. If the price is not increased, the tendency will be to have the producer bear the tax.

For myself, I can find nothing in the language of the Act nor in the oral or documentary evidence to suggest that the price of Saskatchewan oil was increased by the addition of the “mineral income tax” levied, or that the purchaser of Saskatchewan crude paid more per barrel than he would have paid in the absence of the tax. Nor can I discover anything which leads me to conclude that the Legislature of Saskatchewan acted on any view

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other than that of collecting maximum tax from the persons who are by the statute made liable to pay it, namely Saskatchewan oil producers.

There is a further consideration which should not be overlooked. If it had been intended that those subject to the tax would pass it on to others the inclusion of the “farmers’ section”, exempting tracts not exceeding 1,280 acres, would have been quite unnecessary.

The “farmers’ section” highlights the essential axis on which the present litigation revolves. It is a dispute concerning who, as between the producers and the Government of Saskatchewan, will reap the benefit of a fortuitous rise in the price of oil. In the case of producers holding rights in producing tracts in excess of 1,280 acres, the Legislature has determined the benefit shall accrue to provincial coffers; in the case of a producer in a smaller tract, the Legislature has abstained from imposition leaving the benefit in the producer’s pocket. The ultimate position of the final consumer is unaffected. It is also patent that any attempt by an oil producer to pass on an amount additional to the selling price would be self‑defeating. Every increase in selling price will be reflected by an equal increase in tax as, according to the formula, tax equals well-head price received minus basic well-head price.

Reference was made in the Saskatchewan Courts, and in argument in this Court, to the international or “world” price of oil and the effect of such upon the pricing of Saskatchewan crude. It has been contended on behalf of the Province that the world price would place a ceiling on the price of Saskatchewan crude and, therefore, the Saskatchewan producer could not pass on the mineral income tax to the purchaser. Again, to take an example, if world price were $11 per barrel and basic well-head price $3 per barrel, the mineral income tax would amount to $8 per barrel. The producer could not recover this amount by increasing the price to $19 per barrel and for good reasons (i) his oil could not command that price in the market, and (ii) he would be deprived of the additional revenue by the mechanics of the Act.

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A similar question lurked, but remained unresolved, in the Grain Futures case, Attorney-General for Manitoba v. Attorney-General for Canada[27]. There An Act to provide for the collection of a Tax from persons selling grain for Future Delivery, 1923 (Man.), c. 17, was considered. The Act provided that on contracts of sale of grain for future delivery made at any exchange or similar institution in the Province, the seller, or his broker or agent, should pay a tax on the amount sold. When the case reached this Court, Duff J., in speaking of sales in an international market had this to say:

But a tax on production or upon sales may have, and in special circumstances undoubtedly has, no effect upon price. Where, for example, the ultimate price at which a commodity from time to time is sold is determined in an international market, and is known to everybody concerned, through daily quotations, an annually recurring tax will have no effect, even in determining the price so fixed, unless it be of such magnitude and levied in such circumstances as to reach the marginal supply. And obviously the ultimate price, once fixed in such circumstances, will govern the terms of transactions throughout the entire series, from the initial seller to the ultimate buyer. Again, to take another example, a tax levied on sales by western farmers of grain grown by themselves would be in fact, as well as in intention, a tax to be borne by the very person who is called upon to pay it; [1924] S.C.R. 317 at p. 322 (In the Matter of the Validity of the Manitoba Act).

This passage would tend to support the submission of the Province. Judgment on the further appeal to the Privy Council was delivered by Viscount Haldane. He referred to an agreed statement of facts, put in by the Attorneys General, from which it appeared that the ultimate market price for grain in Canada was determined in the “great importing markets in Great Britain and Europe”. His Lordship added “this is a ‘world price’ which is but little controlled by the producers, and which has to be looked at to cover all the items in costs of production and of transportation”. The Board did not decide whether the tendency for the seller to add to the price the amount of tax paid in respect of the sale was negatived because the price of

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grain was determined by the world market over which the seller had no control. The Board held that in so far as the statute sought to impose a tax on brokers, agents, factors and elevator companies, they would be expected to pass it on, and to that extent the tax was indirect. The task of separating out the cases of such persons and corporations from others in which there was a legitimate imposition of direct taxation was considered by the Board to be a matter of such complication as to be impracticable for a court of law. To the extent the case appears to recognize as direct a tax upon sales by principals of grain for future delivery it is helpful to the Province.

I might repeat a passage from the judgment of Turgeon J.A. in In re Grain Marketing Act, 1931[28], at p. 154, which echoes the opinion of Duff J. expressed in the Grain Futures case quoted above:

In the Lawson case, supra, the levies were held to be of such a nature as probably to affect the price of the product; they were therefore indirect taxes. In this case, I can see no such result. It is admitted that Saskatchewan grain is sold at prices fixed outside the province and by general conditions, and these deductions are taken out of the selling price after the grain is sold. They are clearly intended to be paid by the grower out of whose money they are retained. Consequently, they are direct and not indirect taxes, and their imposition would be legitimate if the Act was otherwise valid.

If Saskatchewan oil is sold in the market at prevailing market prices, as I understand to be the case, then I do not think it can properly be said that the Eastern Canadian oil consumer pays more by reason of imposition of the tax. There is no added “burden” to “cling” to the commodity unit. See Rand J. in C.P.R. v. A.-G. Saskatchewan, supra.

One of the cornerstones upon which appellant’s case rests is the contention that there resides in the Minister a general power to fix the price at which oil is sold, and that the oil producer, if he is to

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avoid pecuniary loss, must sell at the ministerially pre-determined price. That is simply not the case. The power of the Minister to determine well-head value in respect of mineral income tax is not an unrestrained and unrestricted general power; it is exerciseable only when oil is disposed of at less than fair value, and then, only after the sale has taken place. The purpose of s. 4A of Bill 42 is obviously to prevent such practices as sale of oil between related companies at artificially low prices. Well-head value is not arbitrarily set by the Minister—it is set by world and national forces determining the market price at the well-head. No evidence was adduced that the Minister has ever set a figure above market price, thus forcing producers into a loss position if unable to sell at the artificially high figure set. In the normal course of events the tax is the difference between basic well-head price and the market price received by the producer in the course of trade. If the producer seeks to evade tax by undercutting the price his product would command at fair market value, then the possibility of ministerial determination arises, but only then. The tax does not set the price. Price sets the tax.

When one comes to consider royalty surcharge, it is apparent that the combined operation of Order in Council 1238/74 and Ministerial Order WOV-01/75 is to the same effect. It will be recalled that royalty surcharge is the difference between basic well-head price and the higher of the price per barrel received at the well-head and the price per barrel listed in Order WOV‑01/75. As with mineral income tax, in the normal course the amount of tax payable will depend upon the price actually received for the oil and not upon any exercise of ministerial authority. The Minister’s power in both cases is a protective measure to discourage tax evasion:

The contention that the mineral income tax and royalty surcharge constitute an indirect tax or export tax must proceed, I think, from the inchoate fear that the Minister will use his powers, not for the intended purpose of preventing tax evasion, but for the purpose of imposing arbitrary and

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punitive well-head values, exceeding the prices which the oil would command in the market place. There is nothing in the language of the provisions, or on the record before us, to justify that fear.

I cannot stress too strongly the point that purchasers would be paying the same price whether the tax existed or not. This fact, to my mind, conclusively prevents the levy from being in the nature of an indirect tax or an export tax. It is not passed on to purchasers to augment the price they would otherwise pay. Instead, they pay exactly the price they would pay in the absence of the tax and the producers are taxed on the profits they would otherwise receive.

I would hold that, in its true nature and effect, the mineral income tax constitutes direct taxation within the Province in order to the raising of a revenue for provincial purposes.

IX

The Province seeks to sustain the constitutionality of the royalty surcharge imposed by The Oil and Natural Gas Regulations, 1969, on the basis that it is a “variable” royalty. The right of the Crown, in respect of Crown lands, to impose contractually a royalty and to vary such royalty is undisputed. The validity of a variable royalty was considered and affirmed in Attorney-General for Alberta v. Huggard Assets Ltd.[29] Failing that, it is said that the royalty surcharge can be supported as direct taxation or as legislation in relation to property and civil rights in the Province.

The first question to be determined in respect of royalty surcharge, therefore, is whether the royalty surcharge is a royalty or a tax. The answer to that question turns on whether the Province, in imposing royalty surcharge, was acting qua lessor or qua taxing authority. In other words, was the relationship of the Legislature vis-à-vis the oil producer that of lessor‑lessee, or was the true character of the relationship that of sovereign taxing authority‑taxpayer.

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According to s. 63(1) of The Petroleum and Natural Gas Regulations, 1969, the royalty surcharge is calculated by multiplying the oil produced (less Crown royalty less Road Allowance Crown levy) times (well-head value, as established by the Minister, less basic well‑head price). Wellhead value, it will be recalled, is the higher of the price received and the price stated in Ministerial Order WOV-01/75.

The characteristics of a royalty were noted by Maclean J. in B. & B. Royalties Ltd. v. The Minister of National Revenue[30]. In that case “royalty” was defined as, p. 92, “an interest in production reserved by the original lessor by way of rent for the right or privilege of taking oil or gas out of a designated tract of land”. Cameron J. in Ross v. The Minister of National Revenue[31], at p. 418, referred to royalties as “periodical payments either in kind or money which depend upon and vary in amount according to the production and use of the mine or well, and are payable for the right to explore for, bring into production and dispose of the oils or minerals yielded up”. In general terms, a royalty as applied to an oil and gas lease is a share, as provided in the lease, of the oil or gas produced, or the proceeds thereof, for the privilege of exploring for and recovering oil and gas. The conventional royalty is a flat percentage, frequently twelve and one-half per cent, of oil and gas produced. Section 58(1) of The Petroleum and Natural Gas Regulations, 1969, illustrates a conventional royalty on a graduated basis. A tax, on the other hand, is a compulsory contribution, imposed by the sovereign authority for public purposes or objects. Duff J. made that point in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction[32], at p. 363. He identified certain levies as taxes and in so doing applied the following criteria: (i) enforceable by law; (ii) imposed under the authority of the Legislature; (iii) imposed by a public body; (iv) for a public purpose. See also Lower Mainland Dairy Products Sales Adjustment Committee v. Crystal Dairy

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Ltd.[33] In Attorney-General for British Columbia v. Esquimalt and Nanaimo Railway Co., supra, a forest protection fund levy was said to be a tax since it was imposed compulsorily by legislation and was recoverable at the suit of the Crown, even though it applied to a limited class of persons, was for a specific purpose, and its proceeds did not fall into general revenue.

Section 63(1) of the Regulations imposes the royalty surcharge on “oil produced or deemed to be produced from Crown lands”. That imposition touches persons who are not in any contractual relationship with the Crown such as those who assigned Crown leases but retained a gross override, or those persons who purchased royalty trust certificates under the terms of a royalty trust. It is hard to see that these people stand in a contractual relationship with the Crown. The obligation arises by legislative command, not by a process of negotiation between free wills, resulting in a meeting of minds.

Section 33(2) of Bill 42, as amended, provides:

(2) Any person having a lease of the oil and gas rights or any of them shall be subject to section 63 and 635 of The Petroleum and Natural Gas Regulations, 1969, as amended and ratified and confirmed by subsections (1A) and (1B) of section 10 of The Mineral Resources Act, and shall be liable to pay the royalty surcharge provided for therein from the first day of January, 1974, as if the lease came within subsection (1) of section 63 and shall be subject to any amendments to the said sections that may be made from time to time. (Bill 128)

When oil and gas rights in the Province were expropriated, those rights would be subject in many instances to existing freehold oil and gas leases. Those leases would not contain the reddendum clause found in Crown leases, permitting the

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Crown to vary the rate of royalty from time to time. Section 33(2) subjected the lease holder, by statute, to the royalty surcharge but the point to note is that this was not pursuant to a negotiated and agreed reddendum clause in the lease. The only way the Crown could reach the persons holding freehold leases of expropriated oil and rights and obtain more than the royalty reserved in those leases would be by way of legislation amending the leases or by taxation. The obligation to pay the royalty surcharge arises ex lege and not ex contractu. Another distinguishing feature is that a conventional royalty is a percentage (normally fixed but which may, in the case of Crown leases, be varied by the lessor) of production. The royalty surcharge is the taking of everything in excess of a statutory figure.

Foreign also to any lessor-lessee relationship is the constraint imposed by s. 42 of Bill 42, which exposes to a fine of $1,000 per day any person who causes production to be stopped without ministerial consent.

In my view, although in name a royalty, the royalty surcharge is, in substance, a tax. Except as affecting lessees under pre-existing Crown leases, it is a levy compulsorily imposed on previously existing contractual rights by a public authority for public purposes. It is patent that the consensual agreement and mutuality ordinarily found in a lessor-lessee relationship is entirely absent in the relationship between the Crown and persons subjected to the royalty surcharge. Royalty surcharge is the same one hundred per cent levy as is imposed in other terms as mineral income tax. That it is a tax is not fatal. In object and purpose and mode of exaction it is congruent with mineral income tax. It is therefore direct and falls within provincial competence.

X

Counsel for appellant urged the Court to strike down the legislation as an infringement of Parliament’s exclusive authority respecting the regula-

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tion of trade and commerce. Appellant says: “the tax and surcharge are established in a way which enables the Province of Saskatchewan to control the minimum price at which Saskatchewan crude oil is sold. This control is imposed on a commodity almost exclusively consumed outside of Saskatchewan, either in the Canadian or international marketplace. This imposition of a minimum price by the Province to be passed on to consumers outside of the Province is an interference with the free flow of trade between provinces… so as to prevent producers in Saskatchewan from dealing unhampered with purchasers outside of Saskatchewan.”

Section 91, Head 2 of the British North America Act, 1867, has undergone a jurisprudential renaissance during the past fifty years. Appellant asks the Court to extend that revivification to an unprecedented degree. In Home Oil Distributors Ltd. v. Attorney-General for British Columbia[34], the Court held intra vires the Coal and Petroleum Products Control Board Act, 1937 (B.C.), c. 8, which provided for the appointment of a Board to regulate and control provincial coal and petroleum industries. The Board was empowered to fix the prices at which coal or petroleum products might be sold in the Province either at well-head or retail or otherwise for use in the Province. Raw supplies for the British Columbia refineries originated extraprovincially. Extraprovincial producers were dumping surplus fuel oil into British Columbia at low prices to the detriment of the local coal industry. The contention advanced was that the legislation was aimed at extraterritorial sources of supply and that it was an attempt to control through price fixing the interprovincial movement of products. That submission was rejected upon the authority of Shannon v. Lower Mainland Dairy Products Board[35]. The point was made that a degree of price regulation in support of legitimate provincial interests was tolerable even though affecting the entry of foreign oil.

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The notion that a Province may incidentally affect goods in interprovincial or international trade was developed in Carnation Company Ltd. v. Quebec Agricultural Marketing Board[36]. In that case it was held that a Province could obliquely affect such goods by increasing their cost if the legislation in object and purpose was in relation to a valid head of provincial power. Mr. Justice Martland, speaking for a unanimous Court said, at p. 252:

That the price determined by the orders may have a bearing upon the appellant’s export trade is unquestionable. It affects the cost of doing business. But so, also, do labour costs affect the cost of doing business of any company which may be engaged in export trade and yet there would seem to be little doubt as to the power of a province to regulate wage rates payable within a province, save as to an undertaking falling within the exceptions listed in s. 92(10) of the British North America Act. It is not the possibility that these orders might “affect” the appellant’s interprovincial trade which should determine their validity, but, rather, whether they were made “in relation to” the regulation of trade and commerce. This was a test applied, in another connection, by Duff J. (as he then was) in Gold Seal Limited v. Attorney-General for Alberta (1921), 62 S.C.R. 424, at 460.

The argument that the orders of the marketing board might have impact upon interprovincial trade was disposed of in these words, at p. 253:

I am not prepared to agree that, in determining that aim, the fact that these orders may have some impact upon the appellant’s interprovincial trade necessarily means that they constitute a regulation of trade and commerce within s. 91(2) and thus renders them invalid. The fact of such impact is a matter which may be relevant in determining their true aim and purpose, but it is not conclusive.

It is now well established that incidental effect is not a quantum measurement. It is tested by the design or aim of the legislation. That was held in Brant Dairy Company Limited v. Milk Commis-

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sion of Ontario[37], where Mr. Justice Judson said, at p. 166:

The test that determines whether a marketing plan or its administration is ultra vires the province is the test applied in the Manitoba Reference (Mr. Justice Martland at p. 703). Is it “designed to restrict or limit the free flow of trade between provinces as such”?

and in Attorney-General for Manitoba v. Manitoba Egg and Poultry Association[38], at p. 703, where the following observation appears, quoting Kerwin C.J. in the Reference Respecting The Farm Products Marketing Act[39]:

Once a statute aims at “regulation of trade in matters of interprovincial concern” it is beyond the competence of a Provincial Legislature.

The concept of a “current of commerce” as an aid to the interpretation of the commerce power in the United States is of long standing. The concept originated with Holmes J. in Swift & Co. v. United States[40]. It was applied in Stafford & Wallace[41] and in Chicago Board of Trade v. Olsen[42]. That idea as applied to s. 91, Head 2 of the B.N.A. Act was considered in the Farm Products Marketing Reference, supra, although no majority opinion is reflected in the judgments. Kerwin C.J. recognized the right of a Province to regulate a transaction of purchase and sale within the Province even if the purchaser had the intention of taking the product out of the Province. He said, at p. 204: “That is a matter of the regulation of contracts and not of trade as trade and in that respect the intention of the purchaser is immaterial.” Later in his judgment, however, the following passage appears, at p. 205: “Once an article enters into the flow of interprovincial or external trade, the subject matter and all its attendant circumstances cease to be a mere matter of local concern.” Mr. Justice Rand spoke to the same effect in these words, at p. 210: “…if in a trade activity, including manufac-

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ture or production, there is involved a matter of extraprovincial interest or concern its regulation thereafter in the aspect of trade is by that fact put beyond Provincial power.” Mr. Justice Locke (with whom Mr. Justice Nolan agreed) would exclude from Provincial regulatory power sales of produce where the producer sells his product to a person who purchased the same for export. Mr. Justice Fauteux (with whom Mr. Justice Taschereau agreed) held a different view, which he expressed in these words, at p. 256:

The suggestion that to be intraprovincial a transaction must be completed within the Province, in the sense that the product, object of the transaction, must be ultimately and exclusively consumed or be sold for delivery therein for such consumption, is one which would, if carried to its logical conclusion, strip from a Province its recognized power to provide for the regulation of marketing within such Province in disregard of the decisions of the Judicial Committee in Attorney-General for British Columbia v. Attorney-General for Canada et al., supra, and in Shannon v. Lower Mainland Dairy Products Board, supra.

Mr. Justice Abbott had this to say, at p. 264:

The power to regulate the sale within a Province of specific products, is not, in my opinion, affected by reason of the fact that some, or all, of such products may subsequently, in the same or in an altered form, be exported from that Province, unless it be shown, of course, that such regulation is merely a colourable device for assuming control of extraprovincial trade.

The conceptual tool of a “flow”, or “current”, or “stream” of commerce has been referred to by the Court in a number of subsequent cases, the most recent being MacDonald v. Vapor Canada Ltd.[43], at p. 27. The real question, unsettled in the jurisprudence, is the determination of when the product enters the export stream marking the start of the process of exportation. American jurisprudence has held that the distinguishing mark of an export product is shipment or entry with a common carri-

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er for transportation to another jurisdiction: Coe v. Errol[44], at p. 527; Richfield Oil Corp. v. State Board of Equalization[45]; Empresa Siderurgica v. Merced Co.[46] Implicit in the argument of the appellant is the assumption that federal regulatory power pursuant to s. 91(2) follows the flow of oil backward across provincial boundaries, back through provincial gathering systems and finally to the well-head. A secondary assumption is that sale at the well-head marks the start of the process of exportation. In the view I take of the case it is unnecessary to reach any conclusion as to the validity of either of these assumptions. It is, however, worth noting that neither American nor Canadian jurisprudence has ever gone that far.

I can find nothing in the present case to lead me to conclude that the taxation measures imposed by the Province of Saskatchewan were merely a colourable device for assuming control of extraprovincial trade. The language of the impugned statutes does not disclose an intention on the part of the Province to regulate, or control, or impede the marketing or export of oil from Saskatchewan. “Oil produced and sold” means produced and sold within the Provinces. “Well-head price” by definition means the price at the well-head of a barrel of oil produced in Saskatchewan. The mineral income tax and the royalty surcharge relate only to oil produced within Saskatchewan. The transactions are well-head transactions. There are no impediments to the free movement of goods as were found objectionable in Attorney-General for Manitoba v. Manitoba Egg and Poultry Association[47], and in Burns Foods Ltd. v. Attorney‑General for Manitoba[48].

Nor is there anything in the extraneous evidence to form the basis of an argument that the impugned legislation in its effect regulated inter-

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provincial or international trade. The evidence is all to the contrary and that evidence comes entirely from witnesses called on behalf of the appellant. Production and export of oil increased after the legislative scheme was implemented. Sales of oil by the appellant were continued in 1974 as in 1973 and previously.

The trial judge, Hughes J. made the following finding of fact:

I do emphasize that nothing has happened to suggest any intrusion or invasion on the part of the defendant with respect to the export of crude oil from this Province unless it is to be suggested that it is to be found in price regulation.

Chief Justice Culliton, speaking for a unanimous Court of Appeal, made a further finding:

Neither of the charges [i.e. mineral income tax and royalty surcharge] have any effect on price. As a matter of fact, the true situation is that the tax does not influence the price but rather, the price determines the tax.

On the basis of such concurrent findings it is hard to say that the flow of commerce was in any way impeded, unless it can be said to relate to price.

It was contended in argument that the effect was to place a floor price under Saskatchewan oil and thereby interfere with interprovincial trade. So far as mineral income tax is concerned the incidence of taxation is pegged to the price received for the oil at the well-head. Section 4A is an “after-the-event” provision which comes into play only if there was a sale at less than fair value. The emphasis on fair value ensures that the tax will not change the export oil price. The price of oil subject to the tax and the price of oil free of the tax, i.e. from the exempted 1,280-acre tracts, will be the same as the product crosses the provincial border. The ultimate position of consumers is unaffected. The only way in which extraprovincial consumers could have benefited would have been in the event of the Province freezing the price of oil, assuming constitutional competence to do so.

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One is free to speculate that, to the extent producers would be prepared to undercut the fair market value of their oil, the legislation discourages them from doing so by virtue of the constant tax liability. The possibility of price-cutting is highly theoretical, unsupported by evidence and in view of the inelasticity of demand for petroleum products, highly unlikely.

In Burns Foods Limited v. Attorney-General for Manitoba, supra, in striking down a regulation under The Natural Products Marketing Act of Manitoba which required packers in Manitoba to buy hogs only from the Manitoba Hog Producers Marketing Board, Mr. Justice Pigeon said this, at pp. 504-5:

It is a case of directly regulating extra-provincial trade operations in their essential aspects namely, the price and all the other conditions of sale.… The situation here is totally unlike that which obtained in Brant Dairy Co. v. Milk Commission of Ontario, [1973] S.C.R. 131, 30 D.L.R. (3d) 559. In that case, the challenge on constitutional grounds was dismissed because there was no evidence that the orders had any extra‑provincial effect.

The key word is “directly” for it leaves open the possibility for a scheme to affect incidentally inter-provincial trade, so long as the scheme is not in pith and substance in relation to interprovincial trade. This last proposition, while obvious in other areas of constitutional law, was remarkably absent in the cases respecting trade and commerce decided in the first half of this century.

The Province of Saskatchewan had a bona fide, legitimate and reasonable interest of its own to advance in enacting the legislation in question, as related to taxation and natural resources, out of all proportion to the burden, if there can be said to be a burden, imposed on the Canadian free trade economic unit through the legislation. The effect, if any, on the extraprovincial trade in oil is merely indirectly and remotely incidental to the manifest revenue‑producing object of the legislation under attack.

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XI

The Province pleaded s. 5(7) of The Proceedings against the Crown Act, R.S.S. 1965, c. 87, in response to the appellant’s claim for recovery of tax and this was a subsidiary question upon which leave to appeal to this Court was granted. The point does not arise in the disposition I would make of this appeal. I would only add that prior to argument in the present appeal, but subsequent to the decision of the Court of Appeal of Saskatchewan, this Court held that s. 5(7) was ultra vires the Legislature of Saskatchewan (Amax Potash Limited v. The Government of Saskatchewan, not yet reported[49]).

I would dismiss the appeal with costs to the respondent as against the appellant but without costs to any of the intervenants.

Appeal allowed with costs. DICKSON and DE GRANDPRE JJ. dissenting.

Solicitors for the plaintiff, appellant: MacPherson, Leslie & Tyerman, Regina.

Solicitors for the defendants, respondents: Goldenberg & Taylor, Saskatoon.

Solicitor for the Attorney General of Canada: D.S. Thorson, Ottawa.

Solicitor for the Attorney General of Quebec: R. Normand, Quebec.

Solicitor for the Attorney General of Manitoba: G.E. Pilkey, Winnipeg.

Solicitor for the Attorney General of Alberta: W.F. McLean, Edmonton.