MACLEAN,
J.:—This
is
an
appeal
from
a
decision
of
the
Minister
of
National
Revenue
in
which
he
declared
the
net
taxable
income
of
the
appellant,
hereinafter
to
be
called
"‘the
company,’’
to
be
$52,762.02,
for
the
fiscal
year
ending
November
30,
1958.
The
question
for
determination
is
the
amount
received
by
the
Company
as
net
profit
or
gain,
during
the
taxation
period
in
question,
from
the
sale
of
petroleum
and
natural
gas
recovered
from
a
well
drilled
by
the
Company
on
certain
lands
in
the
Province
of
Alberta,
pursuant
to
the
terms
of
a
lease
assigned
to
the
Company,
the
particulars
of
which
will
appear
later.
The
case
is
one
of
considerable
interest
and
importance
and
is
not
without
its
difficulties,
and
consequently
it
will
be
desirable
to
review
at
some
length
the
main
facts
leading
to
the
issue
to
be
determined.
The
controversy
here
emerges
from
a
method
sometimes
resorted
to
by
lessees
of
oil
lands
in
the
Province
of
Alberta,
for
securing,
wholly
or
partially,
the
capital
required
for
proving,
drilling
and
bringing
into
production,
oil
wells
in
the
oil
bearing
areas
of
that
Province.
This
method
involves
the
sale
to
investors
of
what
are
referred
to
variously
as
‘‘royalty
interests,’’
"‘net
royalties,’’
‘‘units
of
production,’’
"percent-
ages
of
production,’’
or
‘‘fractional
interests
in
production,”
that
is
to
say,
a
specified
percentage,
share
or
interest,
in
the
production
or
in
the
net
proceeds
of
production
of
a
certain
oil
well,
or
certain
oil
wells,
or
from
a
certain
tract
of
land,
as
the
case
may
be.
The
royalty
interests
so
sold
are
usually
evidenced
by
written
certificates
issued
to
the
investor.
A
lease
of
oil
lands
ordinarily
stipulates
the
duration
of
the
same,
the
terms
of
its
renewal,
the
period
within
which
drilling
must
be
commenced
by
the
lessee,
and
the
percentage
of
production,
called
a
"‘gross
royalty,’’
to
be
received
by
the
original
landowner
or
lessor,
when
and
after
production
begins.
The
anticipated
production
of
an
oil
well
is
divided
by
the
lessee
into
one
hundred
units,
each
unit
being
one
per
cent
of
the
production
or
yield,
and,
after
making
provision
for
any
"
gross
royalties,’’
these
units
of
production,
or
some
of
them,
are
sold
to
the
public,
and
are
usually
referred
to
as
royalties,
”
or
""net
royalties.’’
The
term
‘‘royalty,’’
I
think,
more
properly
applies
to
the
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,
and
such
interest
is
not
subject
to
deductions
for
operation,
maintenance
and
management
charges,
by
the
lessee,
and
it
is
for
that
reason
that
such
an
interest
is
usually
referred
to
as
"‘a
gross
royalty.
‘‘
The
remaining
interests
in
production
which
are
sold
to
the
publie
in
order
to
obtain
capital,
only
participate
in
production
after
operating
and
management
expenses,
and
other
charges,
are
deducted
and
hence
are
usually
referred
to
as
‘‘net
royalties.’’
It
will
be
convenient,
however,
to
continue
the
use
of
the
terms
‘‘net
royalties,’’
or
‘‘royalty
interests,’’
in
the
sense
they
were
used
by
the
Company
in
this
case.
In
the
working
out
of
this
method
of
financing
the
drilling
of
an
oil
well,
and
before
net
royalties
or
royalty
interests
in
production
are
sold
to
the
public
by
the
lessee
of
oil
lands,
it
1s,
in
some
cases
at
least,
the
practice
for
the
lessee
to
select
a
trustee,
and
to
enter
into
an
agreement
with
such
trustee,
on
behalf
of
the
lessee
and
of
all
those
who
may
become
interested
as
purchasers
of
net
royalties,
in
the
general
terms
which
I
am
about
to
state.
To
the
trustee
there
is
then
assigned
all,
or
a
certain
percentage,
of
the
oil
recovered
from
the
leased
lands,
or
from
a
defined
portion
of
such
lands;
or,
it
may
be
a
percentage
of
the
oil
to
be
recovered
from
one
designated
well,
located
on
the
leased
lands.
In
the
case
under
discussion
a
trustee
was
selected
by
the
lessee,
and
an
assignment
of
that
character
was
made
to
the
trustee
by
the
lessee,
the
particulars
of
which
I
shall
describe
presently.
As
I
understand
it,
the
oil,
as
and
when
produced,
is
usually
sold
by
the
lessee
to
some
oil
purchasing
agency,
evidenced
by
a
contract
in
writing,
with
or
without
consent
of
the
trustee
according
to
the
terms
of
the
trust
agreement,
and,
unless
otherwise
provided,
the
proceeds
of
such
sale
would
be
payable
to
the
lessee
and
by
him,
subject
to
certain
deductions,
to
the
trustee,
as
provided
by
the
trust
instrument,
or,
if
so
provided
by
the
contract
of
sale,
or
the
trust
instrument,
the
proceeds
might
be
paid
directly
to
the
trustee
by
the
purchaser,
and
the
trustee
would
then
account
for
the
same
to
the
lessee
and
those
interested
in
the
net
royalties.
Such
trust
agreements
would,
of
course,
vary
in
their
terms,
but
the
above
describes
broadly
the
method
resorted
to
by
the
Company
in
this
case,
in
financing
its
operations.
I
may
now
turn
to
the
particular
facts
of
this
case
as
they
developed
from
time
to
time.
In
1917,
the
Crown
represented
by
the
Minister
of
Interior
of
Canada,
leased
to
one
Robert
Williamson
Brown
certain
deseribed
lands,
situate
in
the
Pro-
vince
of
Alberta,
for
the
sole
and
only
purpose
of
mining
and
operating
for
petroleum
and
natural
gas,
and
of
laying
pipe
lines
and
of
building
tanks,
stations
and
structures
thereon
necessary
and
convenient
to
take
care
of
the
said
products.
When
the
natural
resources
were
conveyed
to
the
Western
Provinces,
in
1929,
the
title
to
the
lands
described
in
that
lease
passed
to
the
Crown
in
the
right
of
the
Province
of
Alberta,
at
least
I
am
assuming
that
to
be
so.
The
lease
was
for
the
term
of
twenty-one
years,
subject
to
the
rents,
royalties,
conditions
and
covenants
therein
set
forth;
while
it
would
appear
that
the
lands
so
leased
were
the
subject
of
two
separate
leases
they
may
be
regarded
here
as
one
lease,
hereafter
to
be
referred
to
as
the
‘“Head
Lease’’
and
the
grantor
as
the
‘Head
Lessor.’’
The
lessee
covenanted
to
pay
to
the
Head
Lessor
a
royalty
on
all
natural
gas
and
petroleum
products
taken
out
of
the
said
lands,
at
such
rate
as
might
from
time
to
time
be
specified
by
Order
in
Council;
and
this
it
is
agreed
was
a
gross
royalty
of
ten
per
cent,
in
kind
or
in
money
at
the
option
of
the
Head
Lessor,
of
all
commercial
production
recovered
from
the
said
lands,
and
free
from
all
manner
of
deductions
whatsoever.
On
July
4,
1936,
the
said
Robert
Williamson
Brown,
by
indenture,
sublet
to
one
Robert
Arthur
Brown
a
portion
of
the
lands
covered
by
the
Head
Lease
for
the
balance
of
its
term,
subject
to
all
the
terms
and
conditions
therein
expressed.
The
consideration
was
$10,000
in
cash,
the
assumption
and
payment
of
the
rents
and
royalties
payable
to
the
Crown
under
the
Head
Lease,
and
the
payment
to
the
said
Robert
Williamson
Brown
of
a
gross
royalty
of
ten
per
cent
of
all
commercial
production
taken
from
the
said
lands
pursuant
to
the
Head
Lease,
and
recovered,
saved
and
marketed
therefrom,
which
said
royalty
was
to
be
considered
as
royalty
by
way
of
rent
reserved.
On
July
6,
1986,
the
said
Robert
Arthur
Brown
assigned
and
transferred
to
the
Company,
B
&
B
Royalties
Ld.,
all
his
right,
title
and
interest
in
the
Sub-Lease
just
above
mentioned,
for
the
following
considerations,
$10,000
in
cash,
$19,998
by
the
allotment
and
issuance
of
19,998
fully
paid
up
shares
of
the
capital
stock
of
the
Company,
the
assumption
and
payment
of
all
rents
and
royalties
payable
under
the
Head
Lease
and
the
Sub-Lease,
and
the
payment
in
cash
to
the
said
Robert
Arthur
Brown
of
a
net
royalty
of
10
per
cent
of
the
current
market
value,
at
the
time
and
place
of
production,
of
all
production
of
petroleum
or
natural
gas
recovered
and
sold
from
the
lands
described
in
the
Sub-Lease.
By
an
agreement
(hereinafter
referred
to
as
‘‘the
Trust
Agreement”)
dated
July
8,
1936,
and
made
between
the
Company,
therein
called
the
"
‘
Operator,
‘
‘
and
The
Security
Trust
Co.
Ld.,
therein
called
the
"Trustee,’’
the
Company
assigned
and
set
over
to
the
Trustee,
subject
to
certain
deductions,
80
per
cent
of
the
whole
of
the
petroleum
and
petroleum
products
"‘pro-
duced,
taken,
saved
and
sold’’
from
the
lands
described
in
the
Trust
Agreement,
and
which
comprised
a
portion
only
of
the
lands
described
in
the
Sub-Lease.
The
Trust
Agreement
in
part
recites
:
AND
WHEREAS
the
Operator
is
desirous
of
selling
or
disposing
of
certain
part
or
parts
of
the
said
rights
acquired
as
aforesaid,
but
only
in
respect
of
the
petroleum
and
natural
gas
production
taken,
saved
and
sold
from
that
part
of
the
lands
hereinbefore
referred
to
which
comprise
the
West
Half
of
the
South
Half
of
Legal
Subdivision
Eleven
(11)
and
the
East
Half
of
the
South
Half
of
Legal
Subdivision
Twelve
of
Section
Twenty-eight
in
the
Township
Eighteen
(18),
Range
Two
(2)
West
of
the
Fifth
Meridian,
containing
Twenty
(20)
acres
more
or
less
(hereinafter
called
the
“royalty
lands”)
by
the
creation
of
royalty
interests
therein.
AND
WHEREAS
the
Operator
and
the
said
Robert
Williamson
Brown
have
deposited
the
said
Head
Leases
and
a
copy
of
the
said
Sub-Lease
with
The
Trusts
&
Guarantee
Company
Limited
at
Calgary,
Alberta,
under
the
terms
of
an
Agreement
in
writing
under
seal
dated
the
4th
day
of
July,
A.D.
1936,
and
the
Operator
has
deposited
a
copy
of
the
said
Sub-Lease
and
a
copy
of
the
said
Assignment
of
the
said
Sub-Lease
dated
the
6th
day
of
July,
A.D.
1936,
with
the
Trustee.
AND
WHEREAS
the
Operator
proposes
to
sell
by
way
of
royalty
interests
a
certain
part
of
any
production
that
may
be
taken,
saved
and
sold
by
it
from
the
said
royalty
lands
pursuant
to
the
terms
of
the
said
Sub-Lease.
AND
WHEREAS
the
Operator
has
requested
the
Trustee
to
act
as
Trustee
on
behalf
of
its
and
on
behalf
of
all
persons,
firms
and
corporations
interested
in
such
production
under
the
terms
of
this
Agreement
and
the
Trustee
has
consented
to
so
act
subject
to
all
the
terms,
conditions,
stipulations,
covenants
and
agreements
hereinbefore
set
forth
and
contained.
NOW
THEREFORE
THIS
AGREEMENT
WITNESSETH
that
in
consideration
of
the
premises
and
of
the
mutual
covenants
of
the
parties
hereto,
it
is
agreed
by
and
between
the
parties
as
follows:
1.
This
Agreement
shall
be
known
as
the
“B
&
B
Royalties
Number
One
Trust
Agreement,”
and
the
royalty
trust
certificates
hereinafter
referred
to
shall
mean
and
include
any
certificates
issued
by
the
Trustee
under
the
terms
of
this
Agreement
and
such
certificates
shall
be
styled
and
described
as
“B
&
B
Royalties
Number
One
Trust
Certificate”
and
shall
be
in
the
form
and
style
described
in
the
draft
certificate
attached
hereto.
2.
The
Operator
hereby
assigns,
transfers,
conveys
and
sets
over
unto
the
Trustee
Eighty
(80%)
per
centum
of
the
whole
of
the
said
petroleum,
oil,
naphtha,
gasoline,
and/or
natural
gas
produced,
taken,
saved
and
sold
from
the
said
royalty
lands
by
the
Operator,
its
successors
or
assigns
pursuant
to
the
terms
of
the
said
Sub-Lease
without
any
deduction
or
abatement
therefrom
whatsoever,
except
the
full
actual
cost
of
caring
for,
delivering
and
marketing
of
the
said
products
from
and
after
the
time
of
production
from
the
well
to
be
drilled
thereon;
of
the
machinery
and
equipment
used
in
connection
with
any
well
from
which
production
is
taken
including
the
necessary
separators,
tanks,
fittings,
pipes,
valves
and
appliances
and
the
installation
and
maintenance
thereof;
of
separating,
treating,
caring
for,
extracting
and
marketing
of
said
production;
of
surface
rights
and
rights
of
way;
of
administration
expenses
of
not
more
than
Two
Hundred
Dollars
($200)
per
month;
of
all
government
Municipal
or
School
Taxes
or
assessments
imposed
or
levied
in
respect
of
the
said
production
and
equipment
and
in
respect
of
the
lands
whereon
such
well
is
situated;
and
of
all
insurance
premiums;
it
being
the
intention
of
the
parties
hereto
that
the
said
Eighty
(80%)
per
centum
of
the
said
production
as
aforesaid
shall
belong
to
and
be
the
property
of
the
Trustee
for
the
purposes
of
this
Agreement,
less
the
said
deductions
and
if
by
reason
of
the
sale
of
the
said
production
through
any
pipe
line
or
to
any
refinery
or
other
consumer,
the
proceeds
of
such
sale
is
made
direct
to
the
Trustee
or
if
production
is
taken
in
kind
hereunder
by
the
Trustee,
the
Trustee
shall
repay
to
the
Operator
therefrom
all
the
said
deductions.
3.
The
Operator
hereby
covenants,
promises
and
agrees
with
the
Trustee,
unless
the
production
deliverable
under
this
Agreement
is
taken
in
kind
as
hereinafter
provided,
to
pay
in
cash
to
the
Trustee
the
full
Eighty
(80)
per
centum
of
the
gross
proceeds
of
the
sale
or
marketing
of
the
said
production,
less
only
the
deductions
above
referred
to,
on
the
25th
day
of
the
month
next
following
the
month
in
which
production
deliverable
or
payable
hereunder
shall
have
been
recovered,
at
the
office
of
the
Trustee
at
Calgary,
Alberta.
********
4.
The
Operator
further
acknowledges
and
agrees
that
pursuant
to
the
terms
of
the
said
Assignment
dated
the
6th
day
of
July,
A.D.
1936,
of
the
said
Sub-Lease,
Robert
Arthur
Brown
is
entitled
to
royalties
totalling
Ten
(10%)
per
centum
as
set
forth
in
the
said
Assignment
and
that
the
said
royalties
of
Ten
(10%)
per
centum
are
included
in
the
royalties
of
Eighty
(80%)
per
centum
hereby
assigned
and
conveyed
to
the
Trustee
and
hereby
authorizes
and
directs
the
Trustee
to
issue
Royalty
Trust
Certificates
to
the
said
Robert
Arthur
Brown
or
his
nominees
under
the
provisions
of
this
Agreement
for
the
said
Ten
(10%)
per
centum.
Paragraph
14
of
the
Trust
Agreement
may
have
some
importance,
and
it
may
be
recited
in
full.
It
reads:
14.
The
Operator
covenants
and
agrees
with
the
Trustee
that
the
proceeds
of
the
sale
or
sales
of
royalty
interests
or
units
hereunder
shall
be
deposited
by
it
in
its
name
in
The
Royal
Bank
of
Canada,
Calgary,
Alberta,
until
the
sum
of
not
less
than
Twenty
Thousand
Dollars
($20,000)
has
been
so
deposited
and
shall
be
considered
as
a
trust
fund
and
in
the
event
that
the
said
sum
is
not
so
deposited
as
the
proceeds
of
the
said
sale
or
sales
within
ninety
days
from
the
date
hereof,
the
Operator
shall
immediately
thereafter
refund
or
repay
to
the
respective
purchasers
of
the
said
royalty
interests
or
units
in
the
sums
respectively
subscribed,
the
full
amount
so
paid
to
the
Operator
and
deposited
in
the
said
bank
as
aforesaid.
Unless
and
until
the
said
sum
of
Twenty
Thousand
Dollars
is
subscribed
and
deposited
as
aforesaid
no
withdrawals
from
the
said
account
shall
be
made
by
the
Operator
except
for
the
purpose
of
the
said
repayment
or
refund.
Other
terms
of
the
Trust
Agreement
were
:
that
the
Company
would
work
the
well
drilled
on
the
leased
lands
so
long
as
the
same
should
be
shown
to
yield
oil
in
paying
quantities
and
a
profitable
market
for
the
same
was
available;
that
the
Company
should
permit
any
person
authorized
by
the
Trustee
to
enter
upon
the
lands
and
examine
any
well
drilled
or
being
drilled;
that
the
Company
would
keep
true
and
correct
books
and
records
showing
the
quantity
of
petroleum
products
recovered
and
sold
and
make
such
books
and
records
available
for
the
inspection
of
any
person
named
by
the
Trustee,
and
furnish
verified
returns
monthly
showing
the
quantity
of
petroleum
products
recovered
and
saved
;
that
the
Trustee
should
keep
proper
records
of
the
persons
entitled
to
share
in
the
net
royalties,
the
amount
and
percentage
held
by
each,
and
as
authorized
by
the
Company,
issue
to
such
persons
Royalty
Trust
Certificates,
showing
therein
the
interest
of
such
persons
in
the
net
royalties;
that
in
the
event
of
production
being
obtained
in
paying
quantities
the
Trustee
would,
within
five
days
of
the
receipt
of
the
proceeds
thereof,
distribute
the
same,
less
the
enumerated
expenses
and
deductions,
among
those
entitled
thereto
at
the
time
of
such
distributions;
that
all
moneys
realized
from
the
sale
of
any
royalty
interest
or
units,
less
any
commission
paid
on
the
sale
thereof,
should
be
devoted
and
used
exclusively
by
the
Company
for
the
purpose
of
the
payment
of
the
actual
and
proper
expenses
or
costs
of
drilling
a
well
or
wells
on
the
leased
lands;
and
that
the
Trustee
might,
at
the
request
of
the
appellant,
and
with
the
consent
of
at
least
fifty
per
cent
in
interest
of
the
royalty
certificate
holders,
approve
and
confirm
any
contract
made
by
the
appellant
for
the
sale
of
any
production,
and
that
thereupon
the
terms
and
conditions
of
the
sale
would
become
binding
upon
all
the
holders
of
royalty
certificates,
and
their
assigns.
There
were
certain
provisions
providing
for
the
event
of
default
by
the
Company
in
performing
its
obligations
under
the
terms
of
the
Trust
Agreement
but
as
no
such
default
occurred
they
need
not
be
mentioned.
The
form
of
the
royalty
trust
certificates
prescribed
by
the
Trust
Agreement
was
as
follows
:
B
&
B
ROYALTIES
No.
1
TRUST
CERTIFICATE
This
Certifies
that
of
the
of
in
the
Province
of
as
being
entitled
to
a
net
royalty
of
per
centum
(..
%)
of
all
petroleum
natural
gas,
gasoline
gas,
naphtha
and
other
petroleum
products
produced
from
the
first
and
present
well
being
drilled
by
B
&
B
ROYALTIES
LIMITED
on
the
following
lands,
namely:
subject
to
all
the
terms,
provisions
and
conditions
of
the
Trust
Agreement
dated
the
8th
day
of
July,
A.D.
1936,
and
subject
in
particular
to
the
prior
charges
against
the
interest
of
the
Royalty
Holders
hereunder
as
appears
by
the
said
Trust
Agreement,
such
charges
being
generally
all
production
and
marketing
costs,
including
equipment
therefor,
together
with
the
cost
of
surface
rights
and
the
amount
of
taxes,
insurance
and
administration
expenses,
and
made
between
B
&
B
Royalties
Limited
as
the
Operator
of
the
First
Part,
and
The
Security
Trust
Company
Limited
as
the
Trustee
of
the
Second
Part,
which
said
Agreement
may
be
inspected
during
office
hours
at
the
office
of
the
said
The
Security
Trust
Company
Limited
at
Calgary,
Alberta.
The
said
royalty
is
transferable
or
assignable
on
the
books
of
the
said
The
Security
Trust
Company
Limited
upon
surrender
of
this
certificate
and
upon
the
execution
by
the
owner
thereof
of
the
transfer
or
assignment
in
the
form
endorsed
hereon
or
such
other
form
of
transfer
or
assignment
as
may
be
acceptable
to
the
said
The
Security
Trust
Company
Limited,
and
upon
the
same
being
properly
executed
by
both
the
transferor
and
the
transferee
and
delivered
to
The
Security
Trust
Company
Limited,
together
with
payment
of
its
proper
transfer
fees.
Two
further
agreements
must
be
referred
to.
On
August
1,
1936,
two
agreements
were
entered
into
between
the
Company
and
the
British
American
Oil
Co.
Ld.,
one
relating
to
the
sale
and
purchase
of
crude
oil,
and
the
other
to
natural
gas,
but
a
brief
reference
to
the
former
will
suffice.
By
this
agreement
the
Company
agreed
to
sell,
and
the
British
American
Oil
Company
agreed
to
purchase
all
the
oil
produced
by
the
Company
from
the
leased
lands,
so
long
as
any
oil
was
produced
in
paying
quantities
therefrom,
at
the
prevailing
field
prices
for
a
like
product,
at
the
time
and
place
of
delivery.
A
condition
was
attached
to
the
obligation
of
the
British
American
Oil
Company
to
purchase
all
of
the
Company’s
oil
production,
but
that
need
not
be
mentioned.
It
was
also
provided
that
the
appellant
should
furnish
to
the
British
American
Oil
Company
divisional
orders
showing
"what
share
of
such
oil
is
payable
to
any
party
entitled
to
royalty
oil
or
other
share
of
production
and
the
purchaser
may
account
directly
to
such
parties
for
same.
’
‘
The
purpose
of
furnishing
divisional
orders
was
not
explained
to
me
but
I
assume
it
was
primarily
a
precaution
suggested
by
experience
to
avoid
any
conflict
in
interests
in
oil
sold
to
pipe
line
companies
or
refineries
when
there
must
take
place
a
commingling
of
oil
produced
by
or
acquired
from
different
vendors.
These
orders
authorized
the
British
American
Oil
Company
to
pay
directly
to
the
holders
of
royalty
certificates
the
share
or
percentage
of
the
proceeds
to
which
they
were
severally
entitled.
In
point
of
fact,
I
think,
payments
on
account
of
the
sales
of
production
were
made
by
the
British
American
Oil
Company
directly
to
the
Trustee,
and
the
Trustee
accounted
to
the
royalty
certificate
holders
and
the
Company.
I
might
add
that
the
two
agreements
above
mentioned,
for
the
sale
and
purchase
of
the
Company’s
production,
were
made
with
the
approval
of
the
Trustee,
and
with
the
consent
in
writing
of
fifty
per
cent
in
interest
of
the
royalty
certificate
holders,
as
provided
for
in
paragraph
17
of
the
Trust
Agreement.
The
Company
sold
to
the
public
fifty-six
and
one-half
(5612)
units
of
production,
realizing
therefrom
in
cash
a
sum
in
excess
of
$100,000,
and
royalty
certificates
were
issued
therefor
to
the
purchasers
by
the
Trustee;
another
ten
(10)
units
were
allotted
to
Robert
Arthur.
Brown
pursuant
to
the
assignment
of
July
6,
1936,
and
thirteen
and
one-half
(1312)
units
were
allotted
to
or
retained
by
the
Company.
All
of
those
mentioned
units
would
represent
80
per
cent
of
all
the
production,
the
net
proceeds
of
which
would
be
distributable
among
the
unit
holders,
in
proportion
to
their
several
interests.
The
remaining
20
per
cent
of
production
had
been
already
reserved
to
the
Crown
under
the
Head
Lease,
and
to
Robert
Williamson
Brown
under
the
Sub-Lease.
Coming
now
to
the
amount
and
disposition
of
the
proceeds
of
the
80
per
cent
of
oil
produced
and
sold
by
the
Company
during
the
taxation
period
in
question.
This
is
succinctly
told
in
a
statement
of
receipts
and
disbursements
issued
by
the
Trustee
and
made
an
Exhibit
in
the
cause.
I
cannot
do
better
than
to
repeat
it.
That
statement
is
as
follows:
Receipts—
|
Oil
Sales
|
|
$136,377.51
|
|
Tail
Gas
Revenue
|
_.
|
1,462.13
|
|
$137,839.64
|
|
Less
Gross
Royalties
paid
Province
of
|
|
|
Alberta
|
$
13,637.76
|
|
|
Other
|
13,783.93
|
27,421.69
|
|
Balance—Total
Trustees’
Receipts
|
|
$110,417.95
|
|
Disbursements—
|
|
|
To
net
Royalty
Holders
other
than
B
&
B
Royalties
|
|
|
Ld.
|
|
79,099.96
|
|
Operating
expenses,
General
|
|
13,650.08
|
|
Royalty
on
Tail
Gas
and
Line
Losses
|
|
900.03
|
|
Trustees’
Fees
and
Expenses
|
|
708.30
|
|
Net
Royalty
paid
to
B
&
B
Royalties
Ld.
|
16,059.56
|
|
Total
Trustees’
Disbursements
|
|
$110,417.95
|
From
the
above
statement
it
will
be
seen
that
the
Company
received
from
the
Trustee
as
net
royalty,
on
account
of
its
13144
units,
the
sum
of
$16,059.56,
which
amount
the
Company
showed
as
an
item
of
income
in
its
return
for
the
taxation
period
in
question,
but
this
complete
return
showed
a
net
loss
of
$7,350.12,
and
consequently
it
was
claimed
that
there
was
no
taxable
income.
The
amount
shown
to
be
distributed
to
net
royalty
holders,
other
than
the
Company,
was
$79,099.96,
which
amount
the
Minister
contends
was
income
in
the
hands
of
the
appellant
before
the
distribution
thereof
and,
which
it
is
claimed,
should
have
been
returned
as
income
received
by
the
Company
along
with
the
$16,059.56.
That
is
the
genesis
of
the
dispute
here.
The
net
taxable
income
of
the
Company
was
assessed
at
$52,762.02
by
the
Commissioner
of
Income
Tax,
but
this
amount
was
reached
by
including
as
income
of
the
-Company
the
sum
of
$79,099.96
paid
to
other
royalty
certificate
holders,
leaving
as
net
taxable
income
in
the
hands
of
the
Company
the
said
sum
of
$52,720.02,
after
certain
deductions
made
on
account
of
management
expenses,
depreciation
and
depletion,
and
which
I
understand
are
not
appealed
from.
It
was
this
assessment
of
net
taxable
income
that
was
sustained
by
the
decision
of
the
Minister,
and
from
which
decision
this
appeal
was
asserted.
The
Company
claims
that
it
is
only
the
sum
of
$16,059.56
that
should
enter
into
the
computation
of
its
taxable
income,
and
that
there
should
not
be
included
therein
any
of
the
sums
received
as
net
royalties
by
the
other
holders
of
royalty
certificates,
which
sums,
it
is
claimed,
were
never
received,
directly
or
indirectly,
as
net
profit
or
gain
by
the
Company.
The
Minister,
in
his
decision
affirming
the
assessment
of
the
Commissioner,
claimed,
as
he
also
did
on
this
appeal,
that
all
the
net
proceeds
derived
from
the
sale
of
production
were
received
by
the
Company,
directly
or
indirectly,
as
the
owner
thereof,
prior
to
any
payment
over
to
the
Trustee
for
distribution
among
certificate
holders
pursuant
to
the
terms
of
the
Trust
Agreement,
and
that
the
same
were
therefore
to
be
treated
as
income
received
by
the
Company
and
consequently
liable
to
the
corporation
income
tax
imposed
by
the
Income
War
Tax
Act.
It
will
be
seen
therefore
that
the
question
to
be
determined
is
one
of
principle
and
not
of
figures,
and
that
is
whether
or
not
the
net
proceeds
received
by
the
holders
of
net
royalty
certificates
other
than
the
Company,
constituted
taxable
income
in
the
hands
of
the
Company
before
distribution
of
the
same
was
made
to
such
holders.
If
the
appellant’s
view
be
the
correct
one
it
must
succeed
in
its
appeal,
and
if
not
the
assessment
appealed
from
must
stand.
Such
are
the
principal
facts
of
the
ease.
The
nature
of
the
Trust
Agreement
is
one
calculated
to
raise
debatable
and
difficult
questions,
and
to
create
situations
probably
never
contemplated
by
the
framers
of
the
Income
War
Tax
Act.
The
general
plan
of
financing
disclosed
here,
by
the
sale
of
percentage
interests
in
production,
has
long
been
known
in
many
of
the
oil
producing
areas
of
the
United
States,
with
many
variations,
and
many
interesting
questions
have
there
arisen
in
connection
with
income
tax
cases,
but
for
one
reason
or
other
I
have
been
unable
to
derive
any
assistance
therefrom
in
determining
the
issue
here
before
me.
One
question
which
has
arisen
frequently
in
the
United
States
is
whether
the
proceeds
received
from
the
sale
of
royalty
interests
constitute
income
to
the
lessee.
It
would
seem
to
be
fairly
well
settled
there
that
where
amounts
derived
from
the
sale
of
royalty
interests
were
consumed
in
drilling
the
particular
well
mentioned
in
the
royalty
certificates,
or
in
some
other
document,
such
amounts
did
not
constitute
income
to
the
owner
of
the
lease,
but
any
excess
of
such
moneys
paid
to
the
owner
of
the
lease
above
the
cost
of
the
drilling
of
the
well
in
question
constituted
income
to
the
lessee.
It
has
been
held
in
several
cases
that
where
the
taxpayer
has
been
assessed
on
any
moneys
received
from
the
sale
of
royalty
interests,
the
burden
was
upon
him
of
showing
what
part,
if
any,
of
moneys
so
received
was
expended
in
drilling
the
specified
well
or
area,
and
lessees
of
oil
lands
have
been
held
liable
for
the
income
tax
on
the
total
consideration
received
from
the
sale
of
royalty
interests
where
they
have
failed
to
show
that
the
same
was
consumed
in
drilling
the
well
or
area
designated.
That
question
however
was
not
raised
in
this
ease
and
I
assume
the
taxing
authorities
had
been
satisfied
that
the
moneys
received
from
the
sale
of
royalty
interest
had
been
expended
in
drilling
the
well
referred
to
in
the
Trust
Agreement.
I
mention
this
point
only
for
the
purpose
of
illustrating
one
of
the
many
difficulties
that
may
arise
in
income
tax
cases,
under
this
plan
of
financing
the
drilling
of
oil
lands.
One
question
raised
here
was
whether
the
assessment
should
not
have
been
levied
against
the
Company
and
the
royalty
certificate
holders,
as
an
"‘association,’’
instead
of
against
the
Company
alone.
An
"‘association,’’
under
the
Income
War
Tax
Act,
is
included
in
the
definition
of
"‘person.
‘‘
It
was
submitted
by
Mr.
Ford
that
if
I
were
of
the
opinion
that
the
Company
and
the
owners
of
royalty
interests
should
be
assessed
as
an
‘‘association’’
that
I
should
refer
the
assessment
back
to
the
Minister
for
further
consideration
and
for
formal
amendment.
Apparently,
the
assessment
of
the
income
in
question,
upon
this
basis
was
considered
by
the
taxing
authorities.
I
was
told
that
if
the
assessment
had
thus
been
levied
the
total
income
tax
recoverable
would
have
been
much
higher
than
if
levied
against
the
Company
alone,
and
in
fact
it
was
said
that
the
tax,
in
that
event
would
be
quite
onerous,
and
possibly
that
influenced
the
taxing
authorities
in
refraining
from
making
the
assessment
on
that
basis.
I
realize
that
very
much
can
be
said
for
the
assessment
being
made
against
the
Company
and
the
owners
of
royalty
interests,
as
an
‘‘association.’’
However,
it
appears
to
me
that
the
arrangement
here
lacks
some
of
the
usual
and
important
characteristics
of
an
‘‘association.’’
I
have
not
been
satisfied
that
the
assessment
should
have
been
made
against
the
Company
and
the
owners
of
royalty
interests,
as
an
"‘associa-
tion
‘
‘
;
at
least
I
presently
entertain
serious
doubts
as
to
whether
this
could
be
done
successfully.
An
interesting
discussion
as
to
what
constitutes
an
"‘association,’’
for
Income
tax
purposes,
is
to
be
found
in
the
American
case
of
Monrovia
Oil
Co.
v.
The
Commissioner
(1).
The
important
and
difficult
question
here
is
the
construction
to
be
given
the
Trust
Agreement.
Did
this
agreement
operate
to
divest
the
Company
of
its
beneficial
interest
in
the
percentage
of
production
therein
mentioned,
or
in
the
proceeds
of
that
production,
or,
is
the
agreement
in
substance
but
a
contractual
obligation
assumed
by
the
Company
to
pay
to
those
who
purchased
royalty
interests
a
certain
proportion
of
the
net
income
realized
from
the
sale
of
oil
recovered
from
a
specified
oil
well?
The
former
result
would
be
an
illustration
of
the
alienation
of
production
or
its
proceeds,
and
the
latter
an
illustration
of
the
mere
application
of
income,
and
there
is
a
distinction
to
be
made
between
the
two.
The
mere
application
of
income
in
pursuance
of
an
obligation
under
a
contract
does
not
affect
the
ownership
of
that
income.
If
the
agreement
operated
to
divest
the
Company
of
its
interest
in
80
per
cent
of
the
production,
then
it
was
alienated,
and
the
proceeds
derived
therefrom
would
not,
I
think,
be
income
in
the
hands
of
the
Company.
In
any
event,
as
between
the
parties,
there
was
an
enforceable
contract,
that
is
to
say,
the
Trustee
could,
I
think,
compel
performance
of
the
contract
by
the
Company.
The
substance
of
the
transaction
was,
I
think,
the
irrevocable
alienation,
for
a
consideration
paid,
of
a
stated
percentage
of
any
production
recovered,
or
the
proceeds
of
that
production
when
sold,
less
certain
deductions.
I
think
the
agreement
sought
to
put
the
ownership
of
a
percentage
of
the
oil
produced
in
the
Trustee
on
behalf
of
the
purchasers
of
royalty
interests,
and
the
moment
the
oil
was
pumped
to
the
surface
the
legal
interest
therein
passed
to
the
Trustee;
prior
to
that
the
title
to
the
oil
in
the
ground
would
probably
be
in
the
Head
Lessor.
That
was
the
construction
given
the
agreement
by
the
parties
thereto,
and
in
that
way
the
agreement
was
worked
out
and
implemented.
The
agreement
was
not
attacked
by
the
revenue
authorities
nor
was
it
alleged
to
be
a
mere
device
to
escape
taxation.
I
think
the
agreement
must
be
construed
as
meaning
that
the
Company
alienated
its
interest
in
that
proportion
of
the
production
in
question,
and
in
the
proceeds
of
such
production.
If
that
results
in
giving
an
advantage
in
taxation
to
the
Company
over
another
corporation
which
secures
its
working
(1)
(1936)
83
Fed.
R.
(2d)
417.
capital
by
the
sale
of
its
capital
stock
or
its
securities
that
would
be
a
matter
which
concerns
the
legislature
rather
than
the
Courts.
The
Income
War
Tax
Act
enacts
that
‘‘for
the
purposes
of
this
Act,
‘income’
means
the
annual
net
profits
or
gains
..
.
.
directly
or
indirectly
received
by
a
person
.
.
.
from
any
trade,
manufacture
or
business
.
.
.”
Can
it
be
said
that
the
Company
received
any
‘‘net
profits
or
gains’’
from
the
percentage
of
production
that
was
sold
to
others,
the
proceeds
of
which
in
point
of
fact
it
never
received?
I
do
not
think
one
can
so
hold.
The
production
in
question
may
have
been
under
the
direction
of
the
Company
as
operator
of
the
undertaking,
on
behalf
of
all
those
holding
royalty
interests,
but
not
as
owner.
The
Company
could
not,
I
think,
successfully
assert
that
the
proceeds
derived
from
the
sale
of
the
production
in
question
belonged
to
it,
or
that
it
was
a
profit
or
gain
to
which
it
was
entitled.
I
do
not
see
how
it
can
be
said
that
the
net
proceeds
of
production
paid
to
holders
of
royalty
interests
was
a
net
profit
or
gain
to
the
Company,
in
the
period
in
question.
I
am
unable
to
satisfy
myself
that
any
other
conclusion
can
be
reached
than
that
the
appeal
of
the
Company
should
be
allowed,
and
with
costs.
I
perhaps
should
add
a
few
words
further.
The
Trust
Agreement
refers
to
certain
taxes
as
being
deductible
items
in
calculating
the
net
proceeds
of
production
distributable
among
holders
of
royalty
interests.
I
think
this
refers
to
provincial
and
municipal
taxes,
and
it
was
not
suggested
by
counsel
for
the
Minister
that
this
was
intended
to
include
the
corporation.
income
tax
here
in
question.
Judgment
accordingly.
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