Minister of National Revenue v. Roland O Bartlett, [1972] CTC 333, 72 DTC 6293

Cameron, DJ (judgment of the Court delivered from the Bench):— This is an appeal from a judgment of the Trial Division delivered on June 11, 1971, allowing an appeal from the respondent’s assessments under Part I of the Income Tax Act for the 1967 and 1968 taxation years.

The appeal concerns the respondent’s claim for exemption under subsection 83(2) of the Income Tax Act, which reads as follows:

83. (2) An amount that would otherwise be included in computing the income of an individual for a taxation year shall not be included in computing his income for the year if it is the consideration for

(a) a mining property or interest therein acquired by him as a result of his efforts as a prospector either alone or with others, or

(b) shares of the capital stock of a corporation received by him in consideration for property described in paragraph (a) that he has disposed of to the corporation,

unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.

The relevant facts are that the respondent had an interest in a mining property, which was sold under an agreement whereby the “consideration” for the sale was payment by the purchaser of “thirty per cent (30%) of the average net smelter returns per ton for gold and silver for each ton of ore extracted from the Vendor’s claim” and that, pursuant to that agreement, the respondent received $33,266.27 in 1967 and $29,249.06 in 1968.

It is common ground that the amounts received under the sale agreement are part of the “consideration” for ‘‘a mining property or interest therein” acquired by the respondent “as a result of his efforts as a prospector either alone or with others” within the meaning of those words in subsection 83(2) and that subsection 83(2) operates to require that they not be included in computing the respondent’s incomes under Part I of the Income Tax Act for the years in question unless each of those amounts is an “amount” received by him “as or on account of a rent, royalty or similar payment”. The appellant contends that each amount is such an amount and is therefore taken out of the exemption in subsection 83(2) by the concluding words of the subsection and the respondent contends that the amounts do not fall within the concluding words of subsection 83(2). The learned trial judge adopted the respondent’s contention.

The historical background necessary for a consideration of the problem may be summarized as follows:

1. It was established by Catherine Spooner v MNR, [1928-34] CTC 184; (1920-40), 1 DTC 258, that an annual payment based on production paid pursuant to an agreement for sale as consideration for the property sold was consideration for the sale of the property and therefore of a Capital nature and was not income from the property. It was there said that it was immaterial whether the amounts were a royalty because a royalty was not taxable as such.

2. Following the Spooner case, Parliament added a provision to the Income War Tax Act which read as follows:

3. (1) For the purposes of this Act, “income” . . . shall include . . .

(f) rents, royalties, annuities or other like periodical receipts which depend upon the production or use of any real or personal property, notwithstanding that the same are payable on account of the use or sale of any such property;

and which has been reproduced, in effect, in the Income Tax Act in paragraph 6(1 )(j), which reads as follows:

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(j) amounts received by the taxpayer in the year that were dependent upon use of or production from property whether or not they were instalments of the sale price of the property, but instalments of the sale price of agricultural land shall not be included by virtue of this paragraph;

3. Paragraph 3(1 )(f) of the Income War Tax Act has been applied in such cases as Ross v MNR, [1950] Ex CR 411; [1950] CTC 169: (1949-50), 4 DTC 775, and MNR v Wain-Town Gas and Oil Company, Limited, [1952] 2 SCR 377; [1952] CTC 147; 52 DTC 1138, with the result that periodic payments based on production have been brought into the computation of income for purposes of federal income tax even though they were, in fact, instalments of the sale price of a capital asset.

4. By chapter 18 of the Statutes of Canada 1965, there was added to the then subsection 83(2), which until then had ended with paragraph (b), the words “unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment”. These added words I shall hereinafter refer to as “the proviso” to subsection 83(2).

The learned trial judge in allowing the taxpayer’s appeals expressed his conclusion, in part, as follows (p 486):

In my view, while the concluding clause of Section 83(2) takes out of this exemption amounts paid which are received as royalties or similar payments, it does not go so far as to bring back into full application Section 6(1 )(j) since it does not make such amounts taxable “whether or not they were instalments of the sale price of the property”. We are thus, for this particular type of sale, put back in the position which existed before Section 6(1 )(j) and its predecessor 3(1 )(f) were passed and the Spooner case (supra) would apply.

This would seem to be a more reasonable interpretation of Section 83(2) than it would be to conclude that because the amounts of the annual payments were based on production from the property they must be considered as a “royalty or similar payment” even though the taxpayer had divested himself of all proprietary interests in the property. It also avoids what would otherwise be an apparent injustice to the prospector whom Section 83(2) is intended to favour in that if he sold his property on the basis that he would receive annual payments of a fixed amount (even though the purchaser might well have estimated the amount of these annual payments on the basis of what he anticipated the annual production of the property would be) he would be exempt from taxation on such payments, whereas, on the other hand, if, instead of the annual payments being in fixed amounts they were based on a percentage of the actual production of the property, which is a reasonable way of making such an agreement as was pointed out by Lord Macmillan in the passage cited from page 187 of the case of MNR v Catherine Spooner (supra), the prospector would be obliged to pay tax on the sum so received. I find, therefore, that, while the amounts received by the taxpayer in the present case may have been in the nature of “royalties or similar payments” they were not received by him as such, but rather as instalments on account of the purchase price of the property, though calculated on the basis of production from the property, and that the concluding clause of Section 83(2) does not take him out of the exemption provided in that section of the Act or have the result of making him taxable under Section 6(1 )(j) since the amounts were received as consideration for the sale of mining property acquired by him as a result of his efforts as a prospector, and not as royalties or similar payments for the use of same.

While much could perhaps be said in support of the view taken by the learned trial judge, we have reached the conclusion that the amounts in question for both years fall within the words of the proviso, namely, “royalties or similar payment’, with the result that on the facts of this case the exemptions provided in paragraphs (a) and (b) of subsection 83(2) are nullified by the terms of the proviso.

Reference may be made to the case of Ross v MNR (supra), in which I had to consider the provisions of paragraph 3(1 )(f) of the Income War Tax Act (supra), various definitions of the word “royalty”, and particularly the words “rents, royalties, annuities or other like periodical receipts . . .”. The facts are summarized in the headnote ([1950] Ex CR 411):

As executrix of the will of her late mother, Annie McDougall, who owned certain lands in the province of Alberta, appellant transferred all hydro carbons (oil and gas) except coal in said lands and the right to work the same to a company in consideration of a sum in cash and the execution of an incumbrance to secure to and for her benefit a further sum of $60,000 payable out of 10 per cent of oil produced from the land with the option, however, to the company to pay her the cash market value of such production. The company made certain payments in the years 1944 and 1945 which appellant did not include in the estate returns for those years.

In that case, I held that the payments received by the appellant were like royalties, if not royalties themselves, and that they came within that part of paragraph (f).

In MNR v Wain-Town Gas and Oil Co, Ltd (supra) paragraph 3(1)(f) of the Income War Tax Act was again under consideration. The finding of the majority of the Court is summarized in the headnote as follows ([1952] 2 SCR 377):

Held: In a business sense in Canada, the word “royalty” covers the payments made here and was so looked upon by the respondent when making its tax returns. Even if they were not received as royalties, they fall within the expression “other like periodical receipts”. They depend upon the use of the franchise (which is property). It is not the production of natural gas upon which depend the payments as it is only under the powers conferred by the franchise that natural gas may be supplied and conducted to the consumers thereof. Finally, receipts, so dependent, are income by virtue of s. 3(1 )(f), even though they are payable on account either of the use or sale of the franchise.

Rand, J, in a separate Opinion, agreed with the conclusion of the majority of the Court in allowing the appeal. He said, in part (at pp 385-6 [154, 1142]):

The word “royalty” in the agreement is not, of course, controlling, but it does bear upon the propriety of the use of the word, in the minds of business men, to describe the type of payment involved. The statutory language, dealing with the results of accounting processes determining economic gain in business, must, in large degree, use the vocabulary employed in them; and the meaning of the word as it appears in the statute must have regard to its general acceptation in the course of property and business transactions.

Now a rent is, primarily, something reserved, in some form or other, and in a conceptual sense, from property or property interest transferred from one person to another. The word “royalties” is best known, perhaps, as a term to express an interest in the nature generally of future payments upon a grant or lease of mines, such as gold, coal, petroleum or gas rights; and it makes no real difference in substance or as to the nature of the payments whether they arise through a “reservation”, strictly so-called, or a covenant.

The language of paragraph (f) seems to be directly related to that signification of the term, and I should take it to be beyond serious doubt that prima facie the payments here come within the expression “royalties . . . or other like periodical receipts”. The query then is whether they “depend upon the production or use” of any property. Purists in language might object to the word “use” in relation to carrying on a franchise; the franchise is perhaps more properly said to be “exercised” than “used”. But the words “production or use” are intended to cover a great many particulars of a general class of dealings with property, and to “use” a franchise would not at all be beyond the range of common parlance. I should say, then, that the word “use” is appropriate to the exercise of such a franchise; and that a franchise is personal property was not challenged.

We are all of the opinion that we are bound by the decision of the Supreme Court of Canada in the Wain-Town case.

Accordingly, the appeal will be allowed with costs and the assessments made upon the respondent for each year will be restored.