Mrs. Catherine Spooner v. The Minister of National Revenue, [1928-34] CTC 178, [1920-1940] DTC 211

NEWCOMBE, J.:—This is a tax appeal, depending upon the meaning and application of the Income War Tax Act, c. 28 of 1917, as amended.

The case came before Audette, J., of the Exchequer Court of. Canada, ante, page 171, upon appeal from the decision of the Minister of National Revenue, and was heard upon admissions.

By agreement under seal of 15th April, 1925, the appellant, therein called the vendor, of the first part, who was then the owner in fee simple of the lands to which the agreement relates, agreed with Vulcan Oils, Limited, therein called the company, of the second part, upon the recital that the appellant has agreed to sell to the company the land described as follows, that

“The Vendor hereby sells, assigns, transfers and sets over unto the Company, its successors and assigns, all her right, title and interest, in and to the following property; namely, the South twenty acres of the North West quarter of Section Thirteen (13) Township Twenty (20) Range Three

(3) West of the Fifth Meridian, which ineludes all mines and minerals, on, in or under the said lands. Subject to the provisos, conditions and royalties hereinafter reserved.

The company, in consideration of the sale, agreed to pay to the vendor the sum of $5,000 in cash, upon the execution of the agreement by the company, and to issue to the vendor, or her nominee, 25,000 shares of the company’s capital stock of the par value of $1 each, full paid up.

And, by clause 3, it is stipulated that

‘‘The Company hereby further agrees in consideration of the said sale to deliver to the order of the said Vendor the royalty hereby reserved to the Vendor, namely: ten per cent of all’the petroleum, natural gas, and oil, produced and saved from the said lands free of costs to the said vendor on the said premises. And the said petroleum, natural gas and oil shall be delivered under the instructions and upon the method decided by the Vendor, and the Company further covenants and agrees that it will deliver to the said Vendor the beforementioned percentage of petroleum, natural gas and oil saved on the said land at least once in every thirty days and will not sell or remove any petroleum, natural gas or oil from the said premises until the said percentage or share thereof belonging to the Vendor shall have been delivered as aforesaid.”

By clause 5, the company covenanted to proceed forthwith to obtain standard drilling machinery, fully equipped; to commence

drilling operations upon the lands as expeditiously as possible, ‘‘and to continue such drilling operations without interruption, except as may be unavoidable, until oil and/or gas in commercial quantities is struck or to a minimum depth of 4,500 feet.’’

By clause 6, the company covenanted, upon oil or petroleum being discovered, to instal and maintain the necessary machinery for pumping or procuring and delivering the oil or petroleum in pipes, reservoirs or tanks, and to carry on the operations.

Clause 7 reads as follows :

“In the event of oil or gas being: discovered in commercial quantities on the said lands the Vendor as part of the consideration for this Agreement, covenants to transfer to the said Company by good and sufficient transfer in fee simple the said twenty-acres of land freed and discharged from all encumbrances and also shall transfer to the said Company by good and sufficient transfer in fee simple freed and discharged from all encumbrances the South twenty acres of the North West Quarter of Section twenty-four (24) Township twenty (20) Range three (3) West of the 5th Meridian and i

such transters shall be completed and delivered forthwith after oil or gas is discovered in commercial quantities by the said Company, reserving always however to the Vendor the said royalty of ten per cent of all petroleum, natural gas and oil in respect to the said South twenty acres of the N.W. 14 of Section 13, Township 20, Range 3, West of the 5th Meridian and also free access où and over all said lands described in this paragraph to an extent not exceeding three trails and the location of the said trails shall be selected by the Vendor.”

It will be observed that clause 3, quoted above, by which, as well as by clause 7, the royalty is said to be reserved, introduces a covenant, on the part of the company, by way of further consideration for the sale; and that the company thereby agrees to deliver to the vendor, on the premises, ten per cent of the petroleum, natural gas and oil produced and saved from the lands sold, free of cost to the vendor; the delivery to be made at least once in every thirty days; arid this suggests a question as to whether the consideration or so-called royalty, which consists of ten per cent of the minerals recovered, is validly reserved; for, it is said in Sheppard’s Touchstone (80), para. 10:

"‘If a man grant land, yielding or paying money or some such like thing [as a rose, a pound of cummin, etc.] yearly, [or at any other period] this is a good reservation. But if the grantee covenant to pay such a sum of money, or to do such a thing yearly, this is no good reservation, but a covenant to pay a sum of money in gross, and not as a rent, [but whether a clause shall amount to a reservation, or to a covenant, is frequently a question of construction I.’

One is concerned to know whether the appellant has acquired that which is taxable as income; and, for the purposes of the Act, "‘income’’, as defined by the relevant provisions of section 3 (1), means

4 ‘The annual net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments, or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the case may be ; and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source, with the following exemptions and deductions :—

(a) such: reasonable allowance as may be allowed by the Minister for depreciation, or for any expenditure of a capital nature for renewals, or for the development of a business, and the Minister, when determining the income derived from mining and from oil and gas wells, shall make an allowance for the exhaustion of the mines and wells ;”

Now it is clear that one-tenth of the petroleum, gas and natural oil produced from the lands sold is not profit in the hands of the company, which is at the expense of producing it and is bound to give it to the appellant, and, so far as we know, the company did not otherwise make any profit or gain. Also, as the appellant has no reversion, and receives one-tenth of the specified minerals as part of the consideration of the sale of the inheritance, it is most unlikely that Parliament intended to include the appellant’s tenth as income, within the meaning of paragraph (a) of see. 3, above quoted. Why should a vendor have an allowance for the exhaustion of that which he has sold and been paid for? The definition clause must be interpreted in the light of sec. 36 of the general Interpretation Act, R.S.C., 1927, c. 1, which was in force long before the enactment of the Income War Tax Act, 1917, and it provides that

‘ " Definitions or rules of interpretation contained in any Act shall, unless the contrary intention appears, apply to the construction of the sections of the Act which contain those definitions or rules of interpretation, as well as to the other provisions of the Act.”

And thus, it follows that the word ‘‘income’’ in the first line of sec. 3 *(1) of the Income War Tax Act, 1917, and the same word in clause (a) of that subsection are controlled by the same statutory definition. The stipulated tenth is not rendered annually, but at least every thirty days after production, and that irrespective of whether the operation results in profit or loss. It is by the agreement, for the lack of an apt definition, termed a " " royalty ’ ’ ; but, whether or not it may appropriately be named a royalty or an annuity, the statute does not, in terms, charge either royalties or annuities, as such; and here the appellant has converted the land, which is capital, into’ money, shares and ten per cent of the stipulated minerals which the company may win. What the appellant will realize, under the covenant, is, of course, uncertain; although it may be ascertained in the event.

On the other hand, it may be assumed that if the project prove unprofitable, the minerals will not be raised and that circumstance, as well as the uncertainty of the extent of minerals available, contributes to the speculative character of the appellant’s interest; but, nevertheless, the appellant’s receipts come from a potential source of capital. The taxable commodity is "‘income'', which means, by the definition, annual profit or gain; and for the appellant, there is no question of profit or gain, unless it be as to whether she has made an advantageous sale of her property.

In Jones v. Commissioners of Inland Revenue [1920] 1 K.B. 711, a case upon which the Crown relies, the appellant sold his interest in certain patents for a. sum in money and percentage, called a royalty, payable- for ten years, upon the sale of all machines constructed under the patent; and it was held that the sums received by the appellant in respect of the royalty were income and properly so computed for the purpose of the supertax. Rowlatt, J., who pronounced the judgment, said at pp. 714-715, as to the contention that the ten per cent. upon sales was part of the consideration for the transfer :

‘ " 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 (1858) 3 H. & N. 769. Or a man may sell his property for an annuity. In that case the Income Tax Act applies. Again, a man may sell his property for what looked like an annuity, but which can be seen to be not a transmutation of a principal sum into an annuity but is in fact a principal sum payment of which is being spread over a period and is being paid with interest calculated in a way familiar to actuaries— in such a case income tax is not payable on what is really capital: Secretary of State for India v. Scoble [1903] A.C. 299. 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. Chadwick v. Pearl Life Assurance Co. [1905] 2 K.B. 507, 514, was a case of that kind. In such a case the man bargains to have, not a capital sum but an income secured to him, namely, an income corresponding to the rent which he had before. I think therefore that what I have to do is to see what the sum payable in this case really is. The ascertainment of an antecedent debt is not the only thing that governs, although in many cases it is a very valuable guide. 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 ease.’’

These observations of the learned judge have their application to the statutes which were under consideration in that case; but the question here is, does a man take an income within the meaning of the Canadian Act when he sells his land in consideration of a part of the oil and gas to be extracted from it by the purchase, if, as is stated in the present admissions, "‘the appellant was not and is not a dealer in or in the business of buying and selling oil lands or leases ‘ ‘ ; and, when there is no provision for taxing the property delivered by the purchaser to the appellant, either as annuity or royalty; neither of these words having been used in the statute to describe any right such as that which the vendor acquired under the agreement.

It is the duty of the court to ascertain the real nature of the transaction. It was argued for the respondent that the appellant sold her land and joined with the purchaser in the business of recovering the minerals, but she clearly was not engaged in the business; that suggestion is excluded by the facts and admissions. .

The case is not without its difficulties, but I am not satisfied that the Crown has made out its claim. And, ‘‘inasmuch as it is the duty of those who assert and not of those who deny, to establish the proposition sought to be established, I think the Crown must fail.” Secretary of State in Council of India v. Scoble [1903] A.C. 299.

Appeal allowed with costs.