George E Lackie v. Her Majesty the Queen, [1978] CTC 157, 78 DTC 6128

Dube, J:—These are appeals from the assessments for the taxation years 1969, 1970. 1971 and 1972 with reference to amounts received by plaintiff’s spouse from Blacktop Construction Limited for the sale of gravel extracted from her property. The Minister assumed the amounts to be dependent upon the use of. or production from, the property, thus taxable income. The plaintiff claims that the proceeds Should be treated as capital in nature and not as income.

The relevant facts are not in dispute. On April 8, 1963 the plaintiff purchased a rural farm property in the Township of North Dumfries, in the Regional Municipality of Waterloo, Ontario, and took up residence there with his family. As the township opened a road through the area in 1964. gravel was discovered on the property and small quantities were sold during that period.

At a later date (the statement of claim specifies a deed registered November 9, 1966, but plaintiff recalls the date as being ‘about 1965”) plaintiff conveyed the farm to his wife Laura Lillian Lackie for about $80.000 ($82,500 in the statement of claim). By a licensing agreement dated October 1. 1969 between herself and Blacktop Construction Ltd. she granted “Blacktop'’ the sole and exclusive right and licence to the gravel on the property for the price of 20¢ per ton removed therefrom.

The agreement is for a period of five years and three months, commencing on October 1, 1969 and ending on December 31, 1974. Blacktop agrees to remove a minimum quantity of 50,000 tons during the period from October 1. 1969 until December 31, 1970 and each year thereafter for the duration of the agreement and to pay a minimum sum of $10,000 a year up to a total of $50,000 for the entire term of the lease. Blacktop is to provide statements and pay the minimum sum of $5,000 twice yearly. Clauses 3 and 4 of the agreement read as follows:

3. The Company shall remove from the Owner’s premises the minimum quantity of 50,000 tons of gravel products during the period from October 1, 1969 until December 31, 1970 and each year thereafter during the balance of this Lease and if the Company, does not remove from the Owner’s premises such quantities of gravel products, the Company shall pay the Owner the difference in value between the quantity actually removed and the quantity stipulated to be removed so that during the first period from October 1, 1969 until December 31, 1970 the Company shall pay the Owner the minimum sum of $10,000.00 and a further minimum sum of $10,000.00 each year for the balance of this Lease; provided that the cumulative value of the quantity of gravel products actually removed at the rate of $.20 per ton during the entire term of this Lease shall be set off and applied against the total of $50,000.00 minimum payments required to be paid during the entire term of this Lease.

4. The Company shall furnish to the Owner by August 15, 1970 a statement of the gravel products removed from the Owner’s premises during the period October 1, 1969 to July 31, 1970, inclusive and shall at the same time pay for such amount at the said rate of $.20 per ton for the gravel products removed during such period or, subject to the preceding paragraph, the minimum sum of $5,000.00, whichever is greater, and the Company shall by January 15, 1971 deliver a similar statement to the Owner for the period August 1, 1970 to December 31, 1970 and at the same time pay for same or, subject to the preceding paragraph, pay the minimum sum of $5,000.00, whichever is greater, and thereafter the Company shall deliver similar statements and make similar payments twice yearly on the 15th days of August and January for the period January 1st to July 31st and August 1st to December 31st respectively for the balance of the term of this Lease.

During the term of the agreement Blacktop in fact removed gravel for a value of only $28,334.31, but paid to plaintiff’s wife the agreed minimum of $50,000.

An analysis of the payments was filed at the trial and is reproduced here, in condensed form for convenience.

Plaintiff alleges that the payments are capital in nature for the following reasons: The existence of the minimum formula rendered the amounts not “dependent upon the use of or production from property’’ as provided in paragraph 12(1)(g) of the (new) Income Tax Act, SC 1970-71-72, c 63. The plaintiff is not in the business of selling gravel, he is in fact engaged in a rigging and millrighting business in Kitchener under the corporate name of Lackie Bros Ltd. He claims, in any event, that the proceeds should not be taxed in his hands because the proceeds were not “income from property” pursuant to subsection 74(1).

The relevant sections from the new Act read as follows:

12. (1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(g) any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph);

74. (1) Where a person has, on or after August 1, 1917, transferred property either directly or indirectly, by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, the income for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income of the transferor and not of the transferee.

248. (1) In this Act,

“business” includes a profession, calling, trade, manufacture or undertaking

of any kind whatever and includes an adventure or concern in the nature of trade but does not include an office or employment;

“property” means property of any kind whatever whether real or personal

or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action, and

(b) unless a contrary intention is evident, money;

The above provisions would govern plaintiff's 1972 taxation year. The corresponding paragraph 6(1)(j), subsection 21(1) and paragraph 139(1)(e) were in effect during the three preceding years.

As stated in Richard De Boo Limited, Canada Tax Service, volume l, p 12-251, the purpose of paragraph 12(1)(g) is “to reach out further [than the general provisions of sections 3 and 8 of the Income Tax Act] and bring into income amounts that, though expressed as instalments of the sale price of property, are dependent entirely on the use of or production from that property”.

The basic theory behind the provision was clearly expressed by Rowlatt, J in Jones v Commissioners of Inland Revenue, [1920] 1 KB 711 at 714:

So it is, but there is no law of nature or any invariable principle that because it can be said that a certain payment is consideration for the transfer of property it must be looked upon as price in the character of principal. In each case regard must be had to what the sum is. A man may sell his property for a sum which is to be paid in instalments, and when that is the case the payments’to him are not income: Foley v Fletcher. Or a man may sell his property for an annuity. In that case the Income Tax Act applies. . . . On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendor’s hands. . . . In this case there is no difficulty in seeing what was intended. The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent upon the volume of business done; that is to say, he took something which rose or fell with the chances of the business. When a man does that he takes an income; it is in the nature of income, and on that ground I decide this case.

The decision in Smethurst (H M Inspector of Taxes) v Davy (1957), 37 TC 593, is often regarded as the foundation of Canadian jurisprudence in the matter of taxation and use of land. The taxpayer in that case was the occupier of land with several gravel pits. She gave permission for gravel to be excavated and received payments based on the amount of gravel taken. She claimed that the payments were made as the purchase price on sales of the gravel. The High Court held that the payments were for a right to use the land and fell within paragraph 31(1)(d) of the Finance Act, 1948, 11 & 12 Geo VI, c 49. Under that provision, profits arising from payments for any easement over or right to use any land in the United Kingdom are taxable. The Court held that the transaction was a profit a prendre. Lord Evershed, MR said at page 604 that “the digging of sand and gravel is comprehended within the general formula ‘use of land’ ”,

The Tax Appeal Board in J O Pallett v MNR, 22 Tax ABC 40; 59 DTC 230, dealt with the appeal of a farmer who had made an agreement to sell sand and gravel for a total of $22,000 in four instalments payable on fixed dates. The Board dismissed the appeal relying on the Smethurst case (supra). It relied also on M M Ross v MNR, [1950] CTC 169; 4 DTC 775, an Exchequer Court decision to the effect that use of property includes the yielding of hydrocarbons from an oil well. The Board said that the steps taken toward moving the gravel constitute putting the land to use.

In MNR v Lamon, [1963] CTC 68; 63 DTC 1039, the Exchequer Court held that the amounts received by the respondent baker for the sale of gravel were taxable under the provision of paragraph 6(1)(j) (the predecessor of 12(1)(g)). Cameron, J referred to the Smethurst case and said that the respondent, in selling gravel as she did, embarked on a scheme for profit-making and engaged in an adventure in the nature of trade.

In 1963 the Tax Appeal Board dealt with an appeal quite similar to the case at bar, Mouat v MNR, 32 Tax ABC 269; 63 DTC 548. Mouat discovered that his island lots, off the coast of British Columbia, contained a valuable deposit of shale and entered into a contract with Cameron for the removal of the shale over a period of 20 years at a royalty payment of 20¢ per cubic yard. In addition, he was guaranteed a fixed minimum payment of $5,000 a year. At the end of the first year, hardly any shale had been removed but the minimum $5,000 was paid. Fisher, QC held the amount taxable. He went as far as to say that “even the slightest use of the right brings the payment within the provisions of Section 6(1 )(j) of the Act”.

Another decision of Fisher, QC was referred to, but in support of plaintiff’s case. In Pacific Pine Co, Ltd v MNR, 26 Tax ABC 41; 61 DTC 95, the appellant sold his timber licence and the purchase price was to be paid in 16 quarterly instalments to be paid irrespective of the amount of timber cut. It was held that the provisions of paragraph 6(1 )(j) were not applicable “as the amounts received by the taxpayer were not dependent upon use of, or production from, property”.

In Morrison v MNR, 37 Tax ABC 164; 65 DTC 25, another Tax Appeal Board decision, it was held that amounts received for the sale of rocks to build the Cape Breton causeway were not taxable within the meaning of 6(1)(j) because the farm did not “produce” the rock. If the appellant farmer “had conducted the blasting operations himself and sold the resulting production of rock, he might possibly have been liable under both Sections 6(1)(j) and 139(1)(e) of the Act”. The latter provision defines “business” as including an adventure in the nature of trade.

In Randle v MNR, 39 Tax ABC 46; 65 DTC. 507, the appellant received $2,271 in full settlement for the right of entry for the removal of clay subsoil for road building purposes. It was held that the transaction was not ‘‘an adventure in trade” nor was the amount received “dependent on the use of the property”. The amount was entirely “compensation for loss of a capital asset”.

In Hoffman v MNR, 39 Tax ABC 220; 65 DTC 617, the Board held that the sale of all of the marketable timber was just the appellant farmer’s first step in making the best realization of his farm property; it was not a transaction in the course of business. Weldon, QC provides a definition of profit à prendre at pages 230-31 [623]:

From the legal background to the phrase profit à prendre, quoted above, it is clear that the expression should be reserved to cover such typical Situations as the granting of a continuing licence or right to fish and to take away the catch, to hunt and to take away the bag, to dig and to take away the gravel, to cut and to remove the timber, and so on. In all of those examples, it is readily discernible that the licence or right, known as a profit à prendre, is used to cover some continuing activity which can be described in no better way than in the pertinent language of Section 6(1)(j) of the Act which reads as follows: a profit dependent upon use of or production from property.

A very recent decision of the Board, Porta-Test Manufacturing Ltd v MNR, [1977] CTC 2279; 77 DTC 222, deals with a licensing agreement including a minimum royalty. In 1974, pursuant to the minimum royalty payment provision of the agreement an additional $75,000 was received which the taxpayer argued was a capital gain realized in its 1971 taxation year from the sale of an exclusive right. The Board ruled that the agreement did not mention the sale of an exclusive right for a lump sum. St-Onge. QC said that “this clause was not written as a yardstick to fix the payment for an exclusive right, but to promote the sale of the appellant’s product’’.

Learned counsel for plaintiff claims that in this last decision the Board would have treated the minimum payment as a capital gain had it not considered it to be a royalty to increase sales.

In a nutshell, plaintiff submits that payments received under an agreement in writing for an exclusive right based on a minimum formula should be considered capital gain as they are not dependent upon the use of or production from property.

Several useful guidelines emerge from the decisions above referred to. Where property is sold for a set sum to be paid, in fixed instalments, those payments are not income. If it is sold for a share of the profits, the payments then bear the character of income, and so would annuities and royalties. If property is sold for a sum certain, plus annual sums dependent on the volume of business, those annual sums would be income. But if what is sold relates to the use of land, including excavation for gravel. that is a profit a prendre, thus taxable income. whether or not the sale is considered to be a “business” (under the provisions of the old paragraph 139(1)(e) or the new subsection 248(1)). Profit à prendre implies a continuing licence, or continuous right to use land; a single final transaction transferring all the property (ie gravel) would not be a profit a prendre.

I should think that if plaintiff's spouse had sold all the gravel, whether the amount: agreed upon had been paid in one lump sum, or by instalments, that would be described as a transaction in the nature of capital. (It is common ground that she was not in the business of selling gravel.) But we are faced here with the sale of some gravel over a continuous period, the use of land and a profit a prendre over more than five years. The agreement does provide a minimum of $50,000, but no maximum. Neither can it really be said that the agreement and the benefits derived therefrom are not dependent upon the volume of business: to recall the words of Rowlatt. J in Jones v Commissioners of Inland Revenue (supra), the vendor “took something which rose or fell with the chances of the “business”. True, the amounts could not fall below a certain floor, but above that. they could rise and fall, and in fact did rise and fall during the first part of the schedule.

Under the circumstances, I must confirm the assessments and dismiss the appeals.