Lor
Macmillan:—The
respondent,
Mrs.
Spooner,
in
the
year
1927
received
a
sum
of
$9,570.41
in
circumstances
set
out
in
an
agreed
statement
of
facts.
The
question
is
whether
this
sum
was
"‘income’’
of
the
respondent
within
the
meaning
of
the
Income
War
Tax
Act,
R.S.C.
1927,
c.
97.
It
appears
that
the
respondent,
who
was
the
owner
in
freehold
of
a
ranch
in
Alberta,
entered
into
an
agreement
on
April
15,
1925,
with
Vulcan
Oils
Ltd.,
a
company
incorporated
under
the
laws
of
the
Province
of
Alberta,
and
having
for
its
objects
"
"
drilling
for
and
procuring
the
production
and
vending
of
oil.
‘
‘
By
this
agreement
the
respondent
sold
to
the
company
all
her
right,
title
and
interest
in
and
to
20
acres
of
her
land,
‘‘subject
to
the
provisoes,
conditions
and
royalties
hereinafter
reserved.”
"In
consideration
of
the
said
sale’’
the
company
agreed
to
pay
to
the
respondent
the
sum
of
$5,000
in
cash
on
the
execution
of
the
agreement,
to
issue
to
her
25,000
fully-paid
shares
of
$1
each
in
the
company,
and
further
to
deliver
to
her
order
"‘the
royalty
hereby
reserved
.
.
.
namely,
10%
of
all
the
petroleum,
natural
gas
and
oil
produced
and
saved
from
the
said
lands
free
of
costs.”
The
company
undertook
to
deliver
this
percentage
at
least
once
in
every
30
days,
to
keep
and
make
available
to
the
respondent
proper
books
of
account
showing
the
quantity
of
petroleum,
natural
gas
and
oil
produced
from
the
lands,
and
to
permit
the
respondent
at
all
times
to
enter
upon
and
inspect
the
workings.
It
was
also
agreed
that
the
company
should
forthwith
acquire
the
necessary
plant
and
commence
drilling
as
expeditiously
as
possible,
and
upon
oil
or
petroleum
being
discovered
should
carry
on
the
operation
of
pumping
or
otherwise
procuring
those
products
from
the
lands.
‘‘In
the
event
of
oil
or
gas
being
discovered
in
commercial
quantities
on
the
said
lands’’
the
respondent,
"‘as
part
of
the
consideration
for
this
agreement’’
covenanted
to
transfer
to
the
company
in
fee
simple
the
20
acres
already
mentioned
and
also
20
additional
acres,
“reserving
always,
however,
to
the
vendor
the
said
royalty
of
10%
of
all
petroleum,
natural
gas
and
oil
in
respect
to
the”?
first-mentioned
20
acres.
The
company
duly
commenced
operations,
and
in
the
fall
of
1926
struck
oil
in
commercial
quantities.
In
the
year
1927
the
company
did
not
deliver
to
the
respondent
any
of
the
oil
produced,
but
sold
the
whole
of
it,
and
paid
over
$9,570.41,
being
10%
of
the
gross
proceeds,
to
the
appellant,
which
sum
she
accepted
in
satisfaction
of
the
‘‘royalties’’
reserved
to
her
under
the
agreement.
When
the
present
question
arose
the
respondent
had
not
yet
conveyed
the
lands
to
the
company
and
the
title
still
remained
in
her
own
name.
The
respondent
in
her
income
tax
return
for
the
year
1927
reported
no
income,
but
she
was
subsequently
assessed
to
tax
in
respect
of
this
sum
of
$9,570.41
which
she
had
received
from
the
oil
company,
the
amount
of
the
tax
being
$301.07.
The
Minister
of
National
Revenue,
the
present
appellant,
to
whom
the
respondent
appealed,
confirmed
the
assessment
subject
‘‘to
adjustment
as
to
depletion
in
accordance
with
s.
4
of
c.
12
of
1928
(Can.)
”.
The
respondent
having
appealed
to
the
Exchequer
Court
of
Canada
her
appeal
was
dismissed
by
Audette,
J.,
ante,
page
171.
On
a
further
appeal
to
the
Supreme
Court
of
Canada
the
respondent
obtained
a
unanimous
judgment
in
her
favour,
setting
aside
the
assessment.
From
this
judgment,
ante,
the
Minister
of
National
Revenue
has
now
appealed
to
His
Majesty
in
Council.
The
Income
War
Tax
Act
contains
the
following
definition
of
income
:—
“3.—(1)
For
the
purposes
of
this
Act
"income’
means
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;
.
.
.
.”
The
Minister
in
this
appeal
maintains
that
the
sum
in
ques-,
tion
comes
within
the
words
‘‘annual
profit
or
gain
from
any
other
source.”
The
question
whether
-a
particular
sum
received
is
of
the
nature
of
an
annual
profit
or
gain
or
is
of
a
capital
nature
does
not
depend
upon
the
language
in
which
the
parties
have
chosen
to
describe
it.
It
is
necessary
in
each
case
to
examine
the
circumstances
and
see
what
the
sum
really
is,
bearing
in
mind
the
presumption
that
‘‘it
cannot
be
taken
that
the
Legislature
meant
to
impose
a
duty
on
that
which
is
not
profit
derived
from
property,
but
the
price
of
it’’
(per
Hanworth,
M.R.,
in
Perrin
v.
Dickson
[1930]
1
K.B.
107
at
p.
119,
quoting
previous
authorities).
It
may
be
that
ordinary
mineral
royalties,
though
not
expressly
mentioned
in
the
definition
section,
are
taxable
income
in
Canada,
subject
to
an
allowance
for
exhaustion.
The
term
4
"royalty”
occurs
in
s.
27
of
the
Act,
which
provides
that
any
non-resident
person
who
receives
a
royalty
4
for
anything
used
or
sold
in
Canada
shall
be
deemed
to
be
carrying
on
business
in
Canada
and
to
earn
a
proportionate
part
of
the
income
derived
therefrom
in
Canada.’’
This
section
may
have
been
enacted
to
obviate
the
argument
that
the
mere
receipt
of
royalties
is
not
a
carrying
on
of
business,
as
was
decided
in
the
excess
profits
duty
cases,
Comm’rs
of
Inland
Revenue
v.
Marine
Steam
Turbine
Co.
[1920]
1
K.B.
193,
and
Comm
9
rs
of
Inland
Revenue
v.
Korean
Syndicate
Ltd.
[1920]
1
K.B.
598.
It
seems,
however,
to
indicate
that
some
44
royalties”
at
any
rate
may
be
taxable
income
under
the
Act.
But
the
share
which
the
respondent
became
entitled
to
receive
of
the
oil
from
the
land
which
she
had
sold
to
the
company
was
not
a
royalty
in
the
sense
of
s.
27,
or
in
the
ordinary
sense
familiar
in
the
case
of
mining
leases
where
the
lessor
stipulates
for
payment
by
his
lessee
of
a
fixed
rate
per
ton
of
the
mineral
won.
Here
there
is
no
relation
of
lessor
and
lessee.
The
transaction
was
one
of
sale
and
purchase.
It
may
have
taken
the
form
which
it
did
because
of
the
uncertainty
whether
oil
would
be
found
by
the
purchaser
or
not;
as
the
value
of
the
land
depended
on
this
contingency
the
price,
not
unnaturally,
was
made
to
depend
in
part
on
the
event.
The
appellant,
founding
on
a
passage
in
the
judgment
of
Audette,
J.,
ante,
at
page
176,
where
that
learned
Judge
said:—
44
This
royalty
mentioned
in
the
agreement
is
a
reservation
operating
as
an
exception
out
of
the
demise
.
.
.
.
of
the
profits
derived
from
the
working
and
development
of
this
land,’’
argued
that
there
was
really
no
sale
to
the
company
of
the
oil
in
the
land,
but
only
a
sale
of
the
right
to
search
for
oil
and
reduce
it
into
possession
on
the
terms
that
a
percentage
of
whatever
oil
was
found
should
remain
the
property
of
the
respondent.
But
this
is
not
really
so.
The
agreement
provides
for
a
sale
to
the
company
of
all
the
respondent’s
right,
title
and
interest
in
the
land,
which
includes
the
right
to
any
oil
which
it
may
contain.
The
respondent
was
not
in
any
sense
a
joint
adventurer
with
the
company
in
the
business
of
oil
prospecting
or
oil
production.
While
their
Lordships,
of
course,
recognize
that
a
profit
or
gain
may
be
received
in
kind
as
well
as
in
money
it
is
not
without
some
significance
that
the
respondent
bargained
to
receive
her
share
in
oil.
'.
What
she
has
a
right
to
is
so
much
oil,
and
the
fact
that
she
has
accepted
a
sum
of
money
in
the
year
in
question
in
lieu
of
her
share
of
oil
does
not
affect
the
true
position,
though
no
doubt
if
she
had
taken
her
share
in
oil
she
would
have
been
at
the
expense
of
marketing
it
and
might
not
have
received
anything
like
the
sum
actually
paid
to
her
by
the
company.
Their
Lordships
have
to
deal
with
the
transaction
as
they
find
it,
namely,
with
a
sale
of
land
in
consideration
of
waich
the
purchaser
agrees
to
give
the
vendor,
inter
alia,
a
percentage
share
of
the
oil
to
be
obtained
from
the
land
sold.
Capital
may,
no
doubt,
be
expended
in
the
acquisition
of
an
income
which,
in
the
recipient’s
hands,
becomes
a
proper
subject
of
income
tax,
as
was
pointed
out
in
the
passage
quoted
by
Newcombe,
J.,
from
the
judgment
of
Rowlatt,
J.,
in
Jones
v.
Comm’rs
of
Inland
Revenue
[1920]
1
K.B.
711
at
pp.
714-5.
But
in
the
same
volume,
in
a
case
where
the
liquidators
of
a
company
had
sold
its
assets,
including
certain
patent
rights,
to
a
new
company
for
a
sum
in
cash,
a
block
of
shares
and
a
royalty
on
every
machine
sold,
the
same
learned
Judge
had
characterised
the
royalties
as
being
"‘in
effect
payment
by
instalments
of
part
of
the
price
of
the
property
which
the
respondent
company
had
finally
disposed
of
to
the
new
company”
(per
Rowlatt,
J.,
in
Com’rs
of
Inland
Revenue
v.
Marine
Steam
Turbine
Co.,
cit.
sup.,
at
p.
203).
Into
which
category,
then,
does
the
present
case
fall?
Their
Lordships
agree
with
Newcombe,
J.,
that
"‘the
case
is
not
without
its
difficulties’’,
as
all
cases
must
be
which
turn
upon
such
fine
distinctions,
but
they
are
not
prepared
to
differ
from
the
view
of
the
transaction
which
that
eminent
Judge
took,
and
with
which
all
his
colleagues
agreed,
namely,
that
"‘the
respondent
had
converted
the
land,
which
is
capital,
into
money,
shares
and
10%
of
the
stipulated
minerals
which
the
company
may
win
.
.
.
there
is
no
question
of
profit
or
gain,
-
unless
it
be
as
to
whether
she
has
made
an
advantageous
sale
of
her
property.”
It
was
for
the
Minister
to
displace
this.
view
as
being
manifestly
wrong.
In
their
Lordships’
opinion
he
has
failed
to
do
so.
Their
Lordships
will
therefore
humbly
advise
His
Majesty
that
the
appeal
should
be
dismissed
and
the
judgment
of
the
Supreme
Court
affirmed.
The
respondent
will
have
her
costs
of
the
appeal
as
between
solicitor
and
client.
Appeal
dismissed.
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