consider.
The
appellant
is
one
of
a
group,
to
whom
I
shall
refer
as
the
vendors,
and
who
had
a
licence
from
the
Sterling
Pacific
Oil
Company
(to
which
I
shall
refer
as
the
licensors)
who,
in
turn,
were
lessees,
under
a
lease
from
the
Calgary
and
Edmonton
Corporation,
of
the
petroleum
and
natural
gas
in
a
tract
of
land,
a
part
of
the
Calgary
and
Edmonton
Railway
Company’s
land
grant.
This
last
mentioned
lease
will
be
referred
to
as
the
Head
lease
and
the
lessors
as
the
Head
lessors.
This
lease
is
dated
June
30,
1928,
and
the
licence
to
the
vendors
June
1,
1933.
The
royalty
payable
under
the
Head
lease
is
one-eighth,
or
1212%,
of
the
gross
production
of
petroleum
and
natural
gas
and,
under
the
licence,
in
the
events
that
have
occurred,
the
same.
On
June
1,
1933,
the
vendors
assigned
to
the
Sterling
Royalties,
Ltd.
(which
will
be
referred
to
as
the
Company),
its
licence
and
its
rights
under
the
agreement
with
the
licensors
and
the
Company
agreed
to
assume
all
the
liabilities
of
the
vendors
under
their
agreement
with
the
licensors.
The
vendors
received,
in
part
consideration
of
the
transfer,
3,490
fully
paid
up
shares
of
the
capital
stock
of
the
Company.
The
agreement
contains
two
important
provisions
which
are
in
these
words:
"
5
.
It
is
understood
that
the
Party
of
the
Second
Part
(that
is
to
say,
the
Company)
will
proceed
forthwith
to
sell
sufficient
royalties
or
units
of
production
for
such
an
amount
and
in
such
manner
and
on
such
terms
and
conditions
as
will
secure
the
drilling
of
a
well
on
the
property
hereinbefore
mentioned,
according
to
the
terms
of
the
said
agreement.
It
being
agreed
between
the
parties
hereto
and
the
Parties
of
the
First
Part
as
between
themselves
hereby
agreeing,
that
after
the
sale
of
sufficient
royalties
or
units
or
production
as
aforesaid,
the
royalties
or
percentages
of
production
remaining
shall
be
divided
among
the
parties
of
the
First
Part
and
Fred
Elves
in
the
proportion
to
the
shares
held
by
each
in
the
company
as
hereinbefore
set
out;
said
royalties
to
be
considered
as
part
of
the
consideration
for
the
sale,
transfer
and
assignment
of
the
said
contract
as
hereinbefore
set
out.
The
Company
holding
the
lease,
drilling
the
well
and
operating
the
same
for
such
consideration
as
may
be
agreed
upon
between
the
Company
and
a
Trustee
for
the
unit
holders.
6.
It
is
further
understood
and
agreed
that
the
remaining
royalties
above
mentioned
and
hereby
agreed
to
be
transferred
to
the
Parties
of
the
First
Part
and
Fred
Elves,
or
the
proceeds
therefrom
shall
bear
certain
costs
and
charges
mutually
agreed
upon
between
the
Parties
of
the
First
Part
and
Fred
Elves
including
the
sum
of
Fifteen
thousand
($15,000.00)
dollars,
part
of
the
price
of
drilling
the
well
which
it
is
proposed
to
pay
to
Hilary
H.
Head,
drilling
contractor,
from
production
in
an
agreement
now
being
negotiated
with
him.’’
It
is
important
to
notice
that
the
stipulation
set
forth
in
the
last
paragraph
(paragraph
6)
is
that
the
units
of
production
agreed
to
be
transferred
to
the
vendors
and
Fred
Elves,
which
will
hereafter
be
referred
to
as
vendors’
units,
or
the
proceeds
therefrom,
are
to
bear
the
costs
and
charges
mentioned
and
that
what
these
costs
and
charges
are
has
been
mutually
agreed
upon
by
the
vendors
and
Fred
Elves,
and
that
they
are
to
include
the
$15,000
mentioned.
The
important
point
is
that
there
is
no
stipulation
making
the
vendors
personally
responsible
for
the
payment
of
any
of
these
costs
and
charges.
Further,
this
may
be
a
convenient
place
at
which
to
observe
that,
nowhere
in
these
instruments
is
there
to
be
found
any
evidence
of
an
obligation
on
the
part
of
the
vendors
to
pay
moneys
agreed
to
be
paid
by
the
Company
to
Head
for
the
construction
of
the
well.
The
vendors
were
under
an
obligation
to
the
licensors
to
construct
the
well
and
work
it.
If
they
failed
to
perform
that
obligation
they
would
expose
themselves
to
an
action
for
damages;
but,
on
the
other
hand,
the
Company
agreed
with
the
vendors
to
perform
that
obligation
and
also,
as
we
shall
see,
covenanted
directly
with
the
licensors
to
perform
it.
Before
proceeding
further,
it
is,
perhaps,
well
to
call
attention
to
the
manner
in
which
the
terms
"‘unit
of
production”?
is
used
by
the
parties.
That
appears
from
the
agreement
between
the
Company
and
the
Trustee
contemplated
by
the
first
of
the
paragraphs
just
quoted,
which
is
dated
June
24,
1933,
some
three
weeks
after
the
transfer
of
the
licence
by
the
vendors.
That
agreement
recites
the
lease
from
the
Calgary
and
Edmonton
Corporation
to
the
licensors,
the
agreement
between
the
licensors
and
the
vendors
of
June
1,
1933,
the
transfer
of
this
agreement
by
the
vendors
to
the
Company,
and
a
further
agreement
between
the
Company
and
the
North
West
Company,
Ltd.,
by
which
the
Company
had
acquired
certain
necessary
equipment
of
the
value
of
$24,000
in
return
for
a
right
to
eight
per
cent
of
the
gross
production
of
petroleum
and
natural
gas
from
the
Company’s
land.
The
royalties
(1212%)
due
to
the
Calgary
and
Edmonton
Corporation,
and
to
the
licensors
respectively,
and
that
due
to
the
North
West
Company
(8%),
amounting
in
the
aggregate
to
33%
of
the
gross
production
of
petroleum
and
natural
gas,
the
residue
of
such
production
amounted
to
67%,
and
the
agreement
recites
that
the
Company
proposes
to
sell
all
or
part
of
that
"67%
in
the
form
of
67
units
of
production
on
a
net
basis
(viz.,
after
the
payment
of
the
costs
of
production)
for
the
purpose
of
financing
and
drilling
a
well’’
on
the
property.
This
agreement
also
recites
that
‘‘the
Company
has
let
the
contract
for
the
drilling
of
the
said
well
and
has
actually
commenced
drilling
operations.”
The
provisions
of
the
agreement
between
the
Company
and
the
Trustee
make
it
plain
that
the
rights
of
the
holders
of
the
units
of
production
are,
as
this
recital
declares,
rights
subject
to
the
payment
of
operating
expenses
including
the
cost
of
drilling
the
well.
It
is
necessary
to
understand
clearly
what
it
is
that
the
Trustee
gets
under
this
agreement.
The
Company
agrees
with
the
Trustee
‘‘to
pay
or
cause
to
be
paid
to
the
Trustee
for
the
holders
or
purchasers
of
.
.
units
of
production
.
.
.
a
royalty
in
cash
at
the
current
market
value
at
the
time
and
place
of
production
of
all
the
petroleum
and
natural
gas
.
.
.
recovered
from
the
well
now
being
drilled
on
the
following
land
(a
description
of
the
land
follows)
during
the
unexpired
residue
of
the
term
of
years
covered
by
the
lease
or
licence
hereinbefore
referred
to
and
every
renewal
thereof
‘‘
which
is
to
be
paid
to
the
Trustee.
But
this
royalty
in
cash,
ascertained
as
provided
for,
is
subject
to
the
payment,
first,
of
the
royalties
as
above
mentioned,
amounting
in
all
to
33%
of
the
gross
production;
and,
second,
"
"
all
costs
and
expenses
necessary
for
taking
care
of
the
production
obtained
from
the
said
well.’’
Then
follows
this
most
important
stipulation,
"Such
payment
to
represent
sixty-seven
(67%)
per
cent
of
production
after
deducting
expenses
and
costs
of
producing
the
well.’’
There
are
two
further
provisions
of
the
agreement
which
it
is
necessary
to
notice.
The
first
is
sub-paragraph
(c)
of
paragraph
1,
by
which
the
Company
covenants
with
the
Trustee
“that
it
will
regularly
and
duly
pay
from
production
all
expenses
and
costs
of
producing
the
well
and
.
.
.
with
the
said
well.’’
The
second
is
sub-paragraph
(h).
In
virtue
of
this
paragraph,
the
Company
covenants
with
the
Trustee:
"(h)
That
the
parties
entitled
to
the
Sixty-seven
(67%)
per
cent
or
Sixty-seven
(67)
units
of
net
production,
as
hereinbefore
mentioned
and
after
the
payment
of
Twelve
and
one-half
(12%2%)
per
cent
gross
royalty
to
The
Calgary
and
Edmonton
Land
Corporation
Limited:
Twelve
and
one-half
(1212%)
per
cent
gross
royalty
to
Sterling
Pacific
Oil
Company
Limited
and
Eight
(8%)
per
cent
gross
royalty
to
the
Northwest
Company
Limited,
and
all
expenses
and
costs
of
producing
the
said
well,
and
the
percentage
or
amount
of
net
production
or
units
on
a
net
production
basis,
to
which
they
are
entitled,
are
as
follows:
Royalty
or
Unit
|
Name
|
Address
|
of
Production
|
|
Fred
A.
Elves
|
118
7th
Ave.
West,
Calgary
|
y
Unit
|
|
Robert
Wilkinson
|
118
7th
Ave.
West,
Calgary
|
%
Unit
|
|
Clarence
Snyder
|
118
7th
Ave.
West,
Calgary
|
$
Unit
|
|
W.
S.
Applegate
|
118
7th
Ave.
West,
Calgary
|
%
Unit
|
|
William
Anderson
|
Calgary
Power
Co.,
Calgary
|
V
Unit
|
|
D.
Chas.
Jones
|
Druggist,
Vulcan,
Alta.
|
1,
Unit
|
|
Mary
Stack
|
c/o
L.
H.
Stack,
Vulcan,
Alta
|
1
Unit
|
|
Fred
A.
Elves
|
117
7th
Ave.
West,
Calgary
|
2
Units
|
|
(Issue
in
4
Certificates
of
4
Unit
o
15
Vo
|
|
|
of
production
each}
|
|
|
Reuben
L.
Elves
|
Vulcan,
Alberta
|
1
Unit
|
|
A.
C.
Hogarth
|
Stock
Exchange,
Calgary
-_-__
|
1
Unit
|
|
Herbert
Gillies
|
W.
R.
Hull
Ltd.,
Calgary
_.
|
1
Unit
|
|
Mrs.
W.
H.
Cawston
|
616
Elbow
Drive,
Calgary
|
1
Unit
|
|
P.
M.
Spence
|
Stock
Exchange,
Calgary
|
_.
1
Unit
|
|
Vulcan
Oils
Ltd
|
Vulcan,
Alberta
_.
13
Units
|
(Issue
in
13
Certificates
of
1
Unit
or
1%
production
each)
|
Sterling
Royalties
Ltd.,
Calgary,
Alberta
|
43
Units
|
It
will
be
observed
that
the
rights
to
which
the
holders
of
units
of
production
are
entitled
are
described
as
in
subparagraph
(h)
as
“units
of
net
production
as
hereinbefore
mentioned
and
after
the
payment
of’’
the
gross
royalties
to
the
Head
lessor,
to
the
licensors
and
to
the
North
West
Company
‘‘and
all
expenses
and
costs
of
producing
the
said
well’’;
and
as
"‘net
production
or
units
on
a
net
production
basis.’’
There
is
still
another
provision
to
be
noticed
and
that
is
subparagraph
(i)
of
paragraph
1
by
force
of
which
the
Company
covenants
that,
"‘(i)
Costs
and
expenses
to
be
deducted
from
the
Sixty-
seven
(67%)
per
cent
of
production
or
Sixty-seven
(67)
units
of
production
as
herein
set
out
shall
be
all
costs,
charges
and
disbursmements
in
connection
with
the
producing
of
the
well
and
obtaining
production
therefrom,
after
the
well
has
been
brought
into
production,
and
in
particular
shall
include
the
cost
or
price
of
production
equipment
such
as
storage
tanks,
separators,
pump
lines,
boilers,
pumps,
meters,
gauges,
and
all
other
appliances
incidental
to
profitable
production
of
the
said
well
and
installing,
setting
up
and
equipping
the
same,
also
insurance,
taxes,
rates,
assessments
nor/or
hereafter
levied,
labour,
and
a
reasonable
charge
for
management,
also
including
the
cost
of
marketing
in
the
event
of
the
Operator
being
unable
to
sell
the
production
wholesale.”
And
now
it
is
necessary
to
refer
to
the
form
of
the
Trust
certificate.
These
certificates
are
provided
for
in
paragraph
2
of
the
agreement
and,
by
that
paragraph,
they
are
to
be
substantially
in
the
form
attached.
That
form
is
as
follows:
of
The
Trusts
and
Guarantee
Company,
Limited,
as
being
of
all
petroleum,
natural
gas,
gasoline
gas,
naphtha
and/or
other
petroleum
products
produced
and
marketed
from
the
first
and
present
well
being
drilled
by
Sterling
Royalties,
Limited,
a
company
incorporated
under
Companies
Act,
1929,
of
the
Province
of
Alberta,
on
the
following
lands,
namely
:
|
"
This
certifies
that
|
of.
|
|
in
the
Province
of
|
is
registered
on
the
records
|
|
entitled
to
a
Royalty
of
|
per
centum
(
|
%)
|
Legal
Subdivision
One
(1),
of
Section
Thirty-three
(33),
in
Township
Highteen
(18),
Range
Two
(2),
West
of
the
Fifth
(5th)
Meridian,
in
the
Province
of
Alberta.
held
by
Sterling
Royalties,
Limited,
subject
to
all
the
provisions
and
conditions
of
the
Trust
Agreement
dated
the
24th
day
of
June,
A.D.
1933,
made
between
Sterling
Royalties,
Limited,
as
Operator,
of
the
First
Part,
and
The
Trusts
and
Guarantee
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
Trusts
and
Guarantee
Company,
Limited,
at
Calgary,
Alberta?
‘
It
will
be
observed
that
the
"‘royalty’’
is
a
percentage
of
the
natural
gas
and
petroleum
produced
and
marketed
from
the
first
and
present
well
being
drilled
by
Sterling
Royalties,
Ltd.,
and
the
holder’s
right
is
declared
to
be
subject
to
all
the
provisions
and
conditions
of
the
Trust
agreement.
There
are
still
two
other
agreements
at
which
we
must
look:
first,
that
of
June
2,
1933,
to
which
the
vendors,
the
licensors
and
the
Company
are
all
parties.
The
licensors
consent
to
the
assignment
of
the
licence
from
the
vendors
to
the
Company,
but
the
two
stipulations
which
should
be
carefully
noticed
are
contained
in.
paragraphs
2
and
3
which
are
in
these
words:
‘2.
The
Licensees
jointly
and
severally
and
the
Assignee
hereby
agree
that
they,
and
each
of
them,
will
observe,
carry
out
and
perform
all
the
obligations
contained
in
the
agreement
made
between
the
Licensor
and
the
Licensees
dated
June
1st,
1933.
3.
The
Assignee
hereby
covenants
and
agrees
with
the
Licensor
that
the
Licensor
shall
have
as
against
the
Assignee
all
the
rights
and
remedies
granted
by
the
original
agreement
dated
June
1st,
1933.”
As
already
mentioned,
one
of
the
undertakings
for
which
the
vendors
made
themselves
responsible
to
the
licensors
under
their
agreement
was
that
the
vendors
should,
within
five
weeks
from
the
date
of
the
agreement,
that
is,
June
1,
1933,
commence
the
work
of
drilling
a
well
and
carry
on
the
operation
of
drilling
continuously
to
a
depth
of
6,000
feet
or
a
depth
of
400
feet
into
the
limestone
(whichever
should
be
the
lesser
depth)
unless
oil
or
gas
should
be
found
in
the
limestone
in
commercial
quantities
as
a
lesser
depth.
By
paragraph
5,
the
vendors
agree
to
use
and
work
the
well
in
a
skilful
and
proper
manner.
Obviously,
the
effect
of
article
2
of
the
agreement
between
the
Company
and
the
licensors
was
to
make
the
Company
directly
responsible
to
the
licensors
for
the
performance
of
these
stipulations;
that
is
to
say,
the
Company
agreed
to
observe,
carry
out
and
perform
the
obligation
of
the
vendors,
to
commence
the
work
of
drilling
a
well
within
five
weeks
of
the
1st
of
June,
and
to
earry
on
such
drilling
operations
continuously
and
diligently
as
just
mentioned.
Pursuant
to
this
obligation
of
the
Company
to
the
licensors
and
its
obligation
to
the
vendors,
the
Company
entered
into
an
agreement
with
one
Head,
the
agreement
referred
to
in
article
6
of
the
agreement
of
June
1,
1933,
between
the
vendors
and
the
Company
and
in
the
recitals
of
the
Trust
agreement
of
the
24th
of
June.
Head’s
agreement
is
dated
the
7th
of
June
and
he
was
to
proceed
to
drill
a
well
and
the
consideration
he
was
to
receive
by
article
21
of
the
agreement
was
$15,000
in
cash
and
a
further
sum
of
$15,000
in
respect
of
which
the
article
provides
as
follows:
"
"
The
remaining
balance,
namely,
Fifteen
thousand
($15,000.00)
Dollars
is
to
be
paid
out
of
the
sale
of
production
at
the
rate
of
Two
Thousand
(2,000.00)
Dollars
per
month,
but
not
to
exceed
forty
per
cent
(40%)
of
the
net
production
coming
to
the
Owner
after
the
payment
of
all
royalties
in
connection
with
the
said
wells.’’
The
situation
then,
after
execution
of
the
agreement
of
the
24th
of
June,
which
I
shall
refer
to
as
the
Trust
agreement,
was
that
the
Company
had
entered
into
an
agreement
with
the
licensors
to
execute
all
the
obligations
of
the
vendors
under
the
agreement
between
the
vendors
and
the
licensors
by
which
the
vendors
had
acquired
the
licence;
that
they
had
covenanted
with
the
vendors
to
perform
all
the
vendors’
obligations
under
the
last-mentioned
agreement
and,
being,
therefore,
under
contractual
obligations
with
the
licensors,
as
well
as
the
vendors,
to
construct
and
to
work
the
well,
they
had
pursuant
to
these
obligations
entered
into
an
agreement
with
Head
by
which
Head
had
agreed
to
construct
the
well,
and
by
which
$15,000
of
the
$30,000
was
to
be
paid
by
the
Company
out
of
production.
The
Company
had
also
agreed
with
the
vendors
to
sell
sufficient
units
of
production
as
to
secure
the
drilling
of
the
well
on—
the
property.
The
Company
was
to
hold
the
lease,
drill
the
well
and
operate
the
same
for
such
consideration
as
should
be
agreed
upon
between
the
Company
and
the
Trustee
for
the
unit
holders;
and,
further,
the
units
of
production
remaining
after
the
drilling
of
the
well
had
been
provided
for
were
to
be
the
property
of
the
vendors
and
one,
Fred
Elves.
The
Company,
by
the
Trust
agreement,
had
agreed
to
pay
the
cost
of
constructing
the
well
and
all
operating
expenses,
and
to
pay
to
the
Trustee
a
royalty
in
cash
amounting
to
the
current
market
value
of
all
petroleum
and
natural
gas
recovered
from
the
well
then
being
drilled,
subject
to
deductions
of
overriding
gross
royalties
amounting
to
33%
of
all
costs
and
necessary
expenses
for
taking
care
of
the
production
including
the
cost
of
producing
the
well.’’
The
Company
in
the
Trust
agreement
declared
its
intention
of
selling
this
67%
of
production
in
the
form
of
units
of
production
on
a
net
basis
for
the
purpose
of
financing
and
drilling
the
well.
The
agreement
declared
that
the
parties
are
entitled
to
these
67
units
of
production
at
the
date
of
the
agreement
were
those
named,
43
of
these
units
being
the
property
of
the
Company,
and
24
of
them
being
held
by
others.
The
annual
remuneration
of
the
Trustee
is
provided
for,
as
well
as
compensation
to
the
Company
for
its
services;
and
the
Trustee
agrees
"
"
that
in
the
event
of
production
being
obtained
in
commercial
quantities,
it
will,
upon
receipt
of
the
royalty
from
the
Company,
distribute
among
the
persons,
firms
and
corporations
entitled
at
the
time
of
such
distribution,
as
appears
from
its
records,
and
in
proportion
to
the
interest
or
interests
of
each,
all
moneys
so
received,
less
only
its
charges
as
herein
provided.”
It
is
evident
from
what
has
been
said
that
the
parties
intended,
as
the
Trust
agreement
and
the
agreement
with
Head
in
the
most
explicit
way
provide,
that
all
the
costs
of
drilling
and
operating
the
well
were
to
be
paid
by
the
Company
out
of
gross
production.
These
costs
stood
in
precisely
the
same
position
as
all
other
charges
which
were
to
be
deducted
from
the
gross
value
of
the
petroleum
and
natural
gas
produced
for
the
purpose
of
ascertaining
the
royalty
to
be
paid
to
the
Trustee,
such,
for
example,
as
the
Head
royalties.
As
between
the
Company
and
the
vendors,
the
sum
of
$15,000
now
in
question
was,
by
force
of
the
original
vendors’
agreement
with
the
Company,
to
be
charged
on
the
vendors’
unit.
The
right
of
the
Company
and
the
holders
of
other
than
vendors’
units
to
have
this
charge
deducted
in
such
a
manner
that
its
incidence
should
fall
exclusively
upon
the
vendors’
units
might
have
been
worked
out
in
various
ways.
It
is
not
mentioned
in
the
Trust
agreement
for
the
reason,
possibly,
that
at
that
date
43
units
out
of
the
67
allotted,
were
in
the
hands
of
the
Company
who
were,
therefore,
in
control
of
the
situation.
One
obvious
method
of
working
out
this
right
of
the
Company
and
of
the
holders
of
units
other
than
the
vendors’
would
be
by
a
declaration
by
the
Company
and
the
holders
of
vendors’
units
that
this
sum
was
a
charge
on
these
units
and
a
direction
by
them
to
the
Trustee
to
pay
it
out
of
the
share
of
the
royalty
which
otherwise
the
Trustee
would
pay
in
its
entirety
to
the
holders
of
these
units.
This,
in
effect,
was
what
was
accomplished
by
the
agreement
of
February.
The
agreement
is
not
conspicuously
characterized
by
precision
and
the
Crown
naturally
relies
on
the
4th
recital.
That
recital
says
nothing
whatever
of
relevancy
to
the
question
before
us.
It
declares
that
it
was
agreed
between
the
party
of
the
first
part,
that
is
among
the
vendors
and
Elves,
that
certain
costs
and
charges
should
be
borne
by
the
parties
of
the
first
part.
It
says
nothing
as
to
an
agreement
between
the
parties
of
the
first
part
and
the
Company,
or
an
agreement
between
them
and
the
holders
of
the
units.
As
I
have
already
said,
there
is
not
a
suggestion
in
the
vendors’
agreement
with
the
Company
of
the
1st
of
June
that
the
vendors
are
to
be
under
any
personal
liability
in
respect
of
the
moneys
due
to
Head
by
the
Company.
The
agreement
of
February
is
simply
a
mode
of
giving
effect
to
the
agreement
between
the
vendors
and
the
Company
that
this
particular
sum
and
the
other
charges
amounting
in
all
to
$20,000
should,
as
between
the
units
of
production
sold
to
the
public
and
the
units
of
production
transferred
to
the
vendors
and
Elves,
fall
upon
and
be
paid
out
of
the
latter.
This
was
a
right
declared
in
the
fundamental
agreement
by
which
the
Company
acquired
from
the
vendors
the
licence,
agreed
to
sell
units
of
production
for
the
purpose
of
drilling
and
financing
a
well,
agreed
to
perform
the
obligations
of
the
vendors,
to
operate
the
well,
and
to
do
so
pursuant
to
the
terms
of
an
agreement
to
be
entered
into
with
the
Trustee
for
the
unit
holders.
From
the.
very
beginning,
the
arrangement
that
this
payment,
as
part
of
the
costs
of
production
was
to
be
charged
exclusively
upon
the
vendors’
units
and
not
spread
over
the
units
as
a
whole
was
a
settled
part
of
the
plan
and
at
no
time
had
the
vendors
either
a
legal
or
a
moral
right
to
receive
or
to
control
the
disposition
of
this
sum.
The
Company
into
whose
hands
came
the
proceeds
of
the
sale
of
products
of
the
well
received
this
sum
under
a
duty
created
by
its
agreement
with
Head
to
pay
$15,000
to
Head
out
of
these
proceeds.
It
received
it
under
a
duty
created
by
the
Trust
agreement
to
pay
out
of
the
gross
proceeds
all
costs
and
expenses
including
the
"‘cost
of
producing
the
well.’’
It
did
not
receive
these
moneys
as
trustee
or
agent
for
or
in
any
manner
on
behalf
of
the
vendors.
As
to
the
Trustee,
the
royalty
distributable
by
the
Trustee
amongst
unit
holders
was
a
royalty
ascertained
by
deducting
the
cost
of
the
well
as
well
as
other
expenses
and,
apart
altogether
from
the
agreement
of
February,
it
was
the
duty
of
the
Company
to
see
to
it
that
the
charge
upon
the
vendors’
units
was
made
effective.
The
purpose
of
an
arrangement
made
between
the
vendors
and
the
Company
acting
for
the
protection
of
the
unit
holders
generally
would
have
been
defeated
if
these
moneys
devoted
from
the
beginning
for
the
payment
of
this
particular
obligation
had
been
allowed
to
come
into
the
possession
or
under
the
control
of
the
vendors.
The
purpose
and
effect
of
the
agreement
of
February
was
to
protest
the
rights
of
the
Company
and
the
unit
holders
as
everybody
recognized
them.
From
all
this
it
results,
in
my
opinion,
that
the
sum
in
question
was
never,
directly
or
indirectly,
received
by
the
appellant
and
his
associates
within
the
meaning
of
the
statute.
The
appeal
will
be
allowed
with
costs
throughout.
The
judgment
of
Rinfret
and
Davis,
JJ.,
was
delivered
by
Davis,
J.:—This
is
a
Dominion
Income
Tax
case
arising
out
of
the
somewhat
peculiar
method
(adopted,
we
are
told,
from
an
American
practice)
of
dealing
with
speculative
oil
or
gas
production
ventures
which
have
in
recent
years
become
somewhat
common
in
the
western
provinces.
The
method
adopted
is
for
the
promoters
to
acquire,
by
lease
or
sublease
or
otherwise,
the
right
to
drill
for
and
to
take
the
oil
or
gas
from
certain
defined
lands
upon
the
basis
of
giving
to
the
land
owner,
and
to
the
sublessor
in
case
of
a
sublease,
a
certain
proportion
of
the
oil
or
gas
that
may
be
produced
or
its
money
worth.
The
promoters
then
sell
and
transfer,
as
vendors,
the
rights
so
acquired
to
a
joint
stock
company
which
they
cause
to
be
incorporated
and
organized,
taking
in
part
consideration
for
the
transfer
fully
paid
shares
of
the
capital
stock
of
the
company.
In
this
way
the
vendors
become
the
shareholders
of
the
com-
pany.
But
instead
of
the
company
acquiring
whatever
capital
may
be
necessary
for
the
drilling
of
wells
and
other
incidental
expenses
to
the
point
of
production
by
the
sale
of
further
shares
of
its
capital
stock,
the
agreement
with
the
new
company
provides,
by
way
of
further
consideration
for
the
transfer
of
the
rights,
that
the
company
shall
dispose
of
all
its
prospective
profits
(which,
under
the
ordinary
commercial
practice
of
trading
companies
would
ultimately
be
distributable
among
the
shareholders
pro
rata)
by
the
creation
of
fractions
or
interests
(called
“royalties”
or
‘‘units
of
production’’)
in
the
prospective
profits
of
the
company;
sufficient
of
these
to
be
sold
to
the
public
to
raise
the
necessary
money
and
the
balance
to
become
the
property
of
the
vendors
to
the
company.
It
is
plain
then
that
when
these
‘‘units
of
production”
thus
created
are
sold
or
disposed
of
to
such
an
extent
that
they
absorb
one
hundred
per
cent
of
the
profits
of
the
company,
the
holders
thereof
will
become
entitled
to
all
the
profits
of
the
company
which
may
arise
from
the
production
of
oil
or
gas
from
the
company’s
properties.
The
rights
of
the
shareholders
of
the
company
will
in
consequence
be
confined
to
the
capital
of
the
company
and
they
will
not
as
shareholders
be
entitled
to
any
distribution
of
the
profits
of
the
company
which
may
result
from
the
production
of
the
wells.
That
being
so,
the
vendors
of
the
new
company
not
only
arrange
that
they
shall
become
shareholders
of
the
company
but
that
they
shall
become
entitled
to
some
of
the
units
of
production
in
order
to
participate
in
profits
if
the
venture
proves
successful.
In
the
case
before
us
the
vendors
received
3,450
shares
of
the
capital
stock
of
the
company,
Sterling
Royalties,
Limited.
These
were
divided
and
held
as
follows:
|
“Robert
Wilkinson
|
1,300
shares
|
|
Clarence
E.
Snyder
(the
appellant)
|
800
shares
|
|
William
8S.
Applegate
|
800
shares
|
|
Fred
Elves
|
2090
shares”
|
So
far
as
appears,
those
are
the
only
shares
of
the
capital
stock
of
the
company
issued
and
outstanding.
But
the
agreement
between
the
vendors
and
Sterling
Royalties,
Limited,
provided
not
only
for
the
issue
of
these
shares
of
the
capital
stock
of
the
company
to
the
vendors
as
part
consideration
for
the
transfer
of
their
rights,
but
Sterling
Royalties,
Limited,
undertook
to
proceed
forthwith
to
sell
sufficient
royalties
or
units
of
production
for
such
an
amount
and
in
such
manner
and
on
such
terms
and
conditions
as
will
secure
the
drilling
of
a
well
on
the
property
hereinbefore
mentioned,
according
to
the
terms
of
the
said
agreement.
It
being
agreed
between
the
parties
hereto
and
the
Parties
of
the
First
Part
(the
vendors)
as
between
themselves
hereby
agreeing,
that
after
the
sale
of
sufficient
royalties
or
units
of
production
as
aforesaid,
the
royalties
or
percentages
of
production
remaining
shall
be
divided
among
the
Parties
of
the
First
Part
and
Fred
Elves
(a
partner
or
associate
of
the
three
named
parties
of
the
first
part)
in
the
proportion
to
the
shares
held
by
each
in
the
company
as
hereinbefore
set
out;
said
royalties
to
be
considered
as
part
of
the
consideration
for
the
sale,
transfer
and
assignment
of
the
said
contract
as
hereinbefore
set
out.
The
Company
holding
the
lease,
drilling
the
well
and
operating
the
same
for
such
consideration
as
may
be
agreed
upon
between
the
Company
and
a
Trustee
for
the
unit
holders.’’
By
virtue
of
that
clause
of
the
agreement
the
promoters
or
‘‘vendors,’’
besides
becoming
the
holders
of
the
shares
of
the
capital
stock
of
the
company,
became
entitled
to
all
the
units
of
production
which
would
remain
after
the
company
had
sold
sufficient
units
of
production
to
secure
the
drilling
of
a
well
on
the
property.
What
actually
happened
was
this:
the
vendors
had
become
under
obligation
to
the
head
lessor
and
to
the
sublessor
of
the
property
for
a
total
of
25%
of
whatever
petroleum
or
natural
gas
might
be
produced.
These
obligations
were
assumed
by
Sterling
Royalties,
Limited.
Another
87%
of
production
was
accepted
by
the
Northwest
Company
Limited
from
Sterling
Royalties
Limited
for
the
supply
of
the
drilling
equipment.
These
were
percentages
of
gross
production
and
aggregated
33%.
Then
Sterling
Royalties
Limited
created
67
units
of
production
to
cover
the
balance
of
production;
3612
were
sold
for
cash
to
the
public
by
the
company
and
the
remaining
3014
units,
subject
to
payment
thereout
of
certain
charges
and
expenses
of
the
company
amounting
to
$16,333.50,
became
the
property
of
the
vendors,
under
their
agreement
with
the
company,
in
the
proportions
of
the
shareholdings
of
each
of
them
in
the
company
as
hereinbefore
set
out.
The
drilling
of
the
well
for
Sterling
Royalties,
Limited,
was
given
by
contract
to
one
Head,
who
undertook
to
drill
the
well
for
$30,000,
payable
as
follow
:
$15,000
in
cash
by
monthly
instalments
of
$2,000
each,
the
first
of
these
instalments
to
be
due
and
payable
within
thirty
days
after
the
actual
commencement
of
drilling
operations,
the
second
instalment
within
thirty
days
thereafter
and
so
on
from
month
to
month
until
the
well
was
completed.
(There
is
an
acceleration
clause
with
which
we
are
not
concerned.)
The
balance
of
the
contract
price,
that
is,
a
further
sum
of
$15,000,
was
to
be
paid
"‘out
of
the
sale
of
production’’
at
the
rate
of
$2,000
per
month
but
not
in
excess
of
40%
of
the
net
production
coming
to
the
company
after
the
payment
of
all
royalties
in
connection
with
the
said
well.
Sufficient
cash
appears
to
have
been
raised
by
the
sale
to
the
public
of
361
units
of
production
to
meet
the
first
$15,000
cash
instalments
that
were
to
be
paid
to
the
contractor
Head,
but
the
second
$15,000
that
was
only
to
be
paid
to
Head
‘‘out
of
the
sale
of
production”
(i.e.,
if
the
well
came
into
production)
was
part
of
the
charges
and
expenses
of
the
company
amounting
to
$16,333.50
which,
by
the
agreement
between
the
vendors
and
Sterling
Royalties,
Limited,
were
to
be
borne
by
and
charged
against
the
3014
units
of
production
to
which
the
vendors
were
entitled
as
part
of
the
consideration
for
the
transfer
of
their
rights
to
the
company.
A
trust
agreement
was
made
between
Sterling
Royalties,
Limited,
and
The
Trusts
and
Guarantee
Company
Limited
for
delivery
to
the
trust
company
of
the
net
proceeds
of
production
of
the
well
in
question
(i.e.,
after
providing
for
the
33%
of
the
gross
production
to
the
head
lessor,
the
sublessor
and
the
Northwest
Company
Limited
which
supplied
the
drilling
equipment)
and
for
the
distribution
of
the
same,
after
payment
thereout
of
operating
expenses,
among
the
holders
of
the
units
of
production.
A
form
of
trust
certificate
was
adopted
to
evidence
the
title
of
the
holders
of
the
units
of
production.
The
well
came
into
production
and
the
last-mentioned
$15,000
paid
to
Head
under
his
contract
and
the
other
costs
and
charges
amounting
to
$1,333.50,
all
of
which
had
been
agreed
upon
between
the
vendors
and
the
company
to
be
charged
against
the
“remaining”
units
of
production
(i.e.,
the
vendors’
3014
units)
were
paid.
The
Minister
of
National
Revenue
sought
to
charge
the
appellant
Snyder,
who
was
one
of
the
vendors,
with
his
portion
of
$16,333.50
and
Snyder
challenged
this
claim
upon
the
ground
that
no
part
of
the
$16,333.50
was
income
or
profits
to
the
individual
holders
of
the
3014
units.
The
Minister
took
the
position
that
the
vendors
had
acquired
a
3014%
interest
in
the
production
of
the
well
and
that
they
had
in
effect
paid
$16,333.50
to
acquire
that
interest;
that
instead
of
paying
that
sum
direct
to
the
company
as
a
capital
expenditure
on
their
part
in
order
to
acquire
the
30%%
units,
they
adopted
this
method
of
dealing
with
the
sum
in
question
whereby
they
charged
their
3012
units
of
production
with
the
payment
of
the
$16,333.50,
taking
their
profits
to
the
extent
of
$16,333.50
to
acquire
as
many
as
301
units
for
themselves.
But
no
part
of
this
total
sum
of
$16,333.50
ever
reached
the
vendors;
in
fact
they
were
not
entitled
to
any
of
it.
The
agreement
was
that
they
were
to
get
whatever
units
of
production
were
not
sold
to
the
public
but
that
these
“remaining”
units
were
to
be
charged
with
the
payment
of
this
$16,333.50.
The
share
or
interest
of
the
vendors
in
the
profits
of
the
company
from
the
production
of
the
well
was
in
fact
301%
less
$16,333.50.
If
the
speculation
had
not
proved
the
success
it
apparently
did,
and
30%2%
of
the
sales
of
the
production
of
its
well
had
never
amounted
to
more
than
$16,333.50,
these
vendors
would
never
have
become
entitled
to
any
profits
at
all.
This
statement
is
not
exactly
accurate,
in
that
the
33
units
set
aside
for
the
head
lessor
and
the
sublessor
and
the
equipment
company
were
gross
production
units,
but
that
is
not
for
our
present
purpose
of
any
real
consequence.
Suppose
Snyder
and
his
associates
had
never
transferred
their
rights
to
Sterling
Royalties
Limited
but
had
proceeded
with
the
venture
themselves
as
a
partnership
undertaking
and
had
made
the
same
arrangement
with
the
drilling
equipment
company
to
take
8%
of
the
production
instead
of
cash
and
had
made
the
same
arrangement
with
Head
to
drill
the
well
as
Sterling
Royalties
Limited
made—what
would
have
been
the
result?
Snyder
and
his
associates
in
that
event
would
have
been
entitled
to
67%
of
the
production;
that
is,
the
total
production
less
25%
to
which
the
head
lessor
and
the
sublessor
were
entitled
and
less
8%
to
which
the
equipment
company
was
entitled.
But
Snyder
and
his
associates
would
have
had
to
pay
the
$30,000
to
Head.
The
result
of
their
transaction
with
Sterling
Royalties
Limited,
however,
was
that
they
turned
over,
for
better
or
for
worse,
their
rights
to
that
company,
in
consideration
of
certain
shares
and
units
of
production,
and
that
company
by
the
sale
to
the
public
of
certain
units
of
production
raised
sufficient
money
to
pay
Head
the
first
$15,000
on
his
contract
and
whatever
other
or
incidental
outlay
was
involved
in
the
company
bringing
its
well
to
the
point
of
production.
Snyder
and
his
associates,
in
consequence
of
their
arrangement
wisely
or
unwisely
made
by
them
with
Sterling
Royalties
Limited,
have
now
only
3012%
of
the
profits
of
the
venture
less
the
sum
of
$16,333.50
agreed
between.
them
and
the
company
to
be
paid
out
of
and
charged
against
the
first
proceeds
of
this
30%
%.
We
are
dealing
with
income
tax
and
it
is
perfectly
plain
that
the
appellant
Snyder
never
received
any
part
of
the
$16,333.50
nor
was
he
ever
entitled
to
receive
any
part
of
it.
Lord
Macmillan
in
the
Privy
Council
in
the
Tata
Hydro-
Electric
case
(Bombay),
[1937]
A.C.
685,
said
at
p.
694:
"‘Before
their
Lordships
counsel
for
the
Crown
did
not
seek
to
support
the
judgment
of
the
High
Court
in
the
present
case
on
the
ground
that
it
was
ruled
by
the
decision
in
the
Pondicherry
case
(1931),
L.R.
58
L.A.
239,
and
in
their
Lordships’
view
he
was
well
advised
in
recognizing
the
clear
distinction
between
that
case
and
the
present
case.
In
the
Pondicherry
case
the
assessees
were
under
obligation
to
make
over
a
share
of
their
profits
to
the
French
Government.
Profits
had
first
to
be
earned
and
ascertained
before
any
sharing
took
place.
Here
the
obligation
of
the
appellants
to
pay
a
quarter
of
the
commission
which
they
receive
from
the
Tata
Power
Co.,
Ld.,
to
F.
EK.
Dinshaw,
Ld.
and
Richard
Tilden
Smith’s
administrator
is
quite
independent
of
whether
the
appellant
made
any
profit
or
not.
Indeed,
if
on
their
year’s
operations
as
a
whole
they
were
to
make
a
loss
and
ineur
no
liability
to
income-tax
they
would
nevertheless
have
to
pay
away
a
quarter
of
the
commission
in
question
to
the
parties
named.
The
commission
in
truth
is
not
profit
or
gain;
it
is
only
an
item
or
factor
in
the
computation
of
the
appellants’
profits
or
gains.
Their
Lordships
regard
this
as
a
fundamental
distinction.
’
’
I
would
refer
to
the
language
of
Sir
Wilfrid
Greene,
the
Master
of
the
Rolls,
in
the
recent
case
of
British
Sugar
Manufacturers,
Limited
v.
Harris
(Inspector
of
Taxes),
[1938]
2
K.B.
220,
at
235,
236,
287:
4
‘Various
authorities
have
been
referred
to.
Speaking
for
myself,
I
find
the
greatest
assistance
from
two
passages,
one
of
them
is
a
passage
in
the
judgment
of
Romer,
L.J.,
in
this
Court
in
the
case
of
Union
Cold
Storage
Co.
v.
Adamson
(1930),
16
Tax
Cas.,
293.
What
Romer,
L.J.,
says
there
(at
p.
328)
is
that
in
order
to
succeed
in
that
ease
the
Crown
would
have
had
to
establish
the
following
proposition
:
‘That
where
a
company,
for
the
purpose
of
enabling
it
to
carry
on
its
trade
and
earn
profits
in
the
trade,
places
itself
under
an
obligation
to
make
money
payments,
the
amount
of
which
is
dependent
upon
the
profits
earned,
or
the
payment
of
which
is
contingent
upon
certain
profits
being
earned,
payments
made
in
discharge
of
that
obligation
are
payments
made
out
of
the
profits
or
gains
of
the
company,
within
the
meaning
of
Rule
3(1).
In
my
opinion,
for
that
proposition
there
is
no
foundation
at
all
in
principle
or
on
authority.
‘
The
case
that
was
being
dealt
with
there
was
a
case
where
the
obligation
to
make
the
payment
was
dependent
upon
the
profits
earned,
but
it
seems
to
me
that
the
reasoning
and
the
expressions
of
Romer,
L.J.,
equally
apply
to
the
case
where
the
payment
to
be
made
is
a
commission
or
a
percentage
of
profits
earned.
“The
other
passage
is
a
passage
in
the
judgment
of
the
Privy
Council
delivered
by
Lord
Maugham
in
the
case
of
Indian
Radio
and
Cable
Communications
Co.
v.
Income
Tax
Commissioner,
Bombay
Presidency
and
Aden,
[1937]
3
All
E.R.
709.
That
was
a
case
into
the
facts
of
which
I
need
not
go,
but
it
is
important
as
containing
a
reference
to
the
particular
phrase
in
an
earlier
case
which
affected
the
mind
of
Finlay,
J.,
in
the
present
case.
That
case
having
been
brought
to
the
attention
of
the
Board
in
the
Indian
Radio
case,
Lord
Maugham
said
this
(at
p.
713)
:
‘
It
may
be
admitted
that,
as
Mr.
Latter
contended,
it
is
not
universally
true
to
say
that
a
payment,
the
making
of
which
is
conditional
on
profits
being
earned,
cannot
properly
be
described
as
an
expenditure
incurred
for
the
purpose
of
earning
such
profits.
The
typical
exception
is
that
of
a
payment
to
a
director
or
a
manager
of
a
commission
on
the
profits
of
a
company.
It
may,
however,
be
worth
pointing
out
that
an
apparent
difficulty
here
is
really
caused
by
using
the
word
"‘profits’’
in
more
than
one
sense.
If
a
company,
having
made
an
apparent
net
profit
of
£10,000,
has'then
to
pay
£1,000
to
directors
or
managers
as
the
contractual
recompense
for
their
services
during
the
year,
it
is
plain
that
the
real
net
profit
is
only
£9,000.
A
contract
to
pay
a
commission
at
ten
per
cent
on
the
net
profits
of
the
year
must
necessarily
be
held
to
mean
on
the
net
profits
before
the
deduction
of
the
commission,
that
1s,
in
the
case
supposed,
a
commission
on
the
£10,000.’
That
passage,
in
my
opinion,
contains
sufficient
to
dispose
of
this
case,
and
if
I
may
link
it
up,
as
I
understand
it,
with
what
I
said
a
moment
ago
about
the
two
accounts,
the
two
accounts
are
I
think
what
may
be
called
the
accountancy
aspect
of
the
two
different
senses
in
which
the
word
‘profits’
is
used
in
these
eases,
as
explained
by
Lord
Maugham.
Once
you
realize
that
as
a
matter
of
construction
the
word
‘profits’
may
be
used
in
one
sense
for
one
purpose
and
in
another
sense
for
another
purpose,
I
think
you
have
the
real
solution
of
the
difficulties
that
have
arisen
in
this
case.’’
The
learned
President
of
the
Exchequer
Court
held
that
Snyder
was
liable
to
pay
income
tax
in
respect
of
his
portion
of
the
$16,333.50
charged
against
the
3014
units,
but
with
great
respect
I
do
not
think
for
the
reasons
above
given
it
can
properly
be
treated
as
taxable
income.
I
would
therefore
allow
the
appeal
and
set
aside
the
judgment
appealed
from,
and
the
assessment
and
decision
of
the
Minister
in
so
far
as
the
item
of
$16,333.50
is
concerned.
The
appellant
is
entitled
to
his
costs
throughout.
As
a
result
of
this
conclusion
it
becomes
unnecessary
to
consider
the
cross-appeal
of
the
Minister
on
the
question
of
costs.
The
cross-appeal
should
be
dismissed,
but
without
costs.
Hupson,
J.
(dissenting)
:—The
facts
have
been
set
forth
at
length
by
the
learned
President
in
the
court
below
and
I
shall
refer
only
to
those
which
I
think
sufficient
to
dispose
of
the
matter.
Snyder
and
his
associates
were
the
licensees
of
oil
and
gas
rights
and,
under
agreement
granting
them
the
licence,
they
covenanted
to
drill
a
well
and
their
obligation
to
do
this
remained
throughout
until
the
well
had
been
drilled
and
completed.
The
next
step
was
the
agreement
made
with
Sterling
Royalties
Limited
and
it
must
be
borne
in
mind
that
Snyder
and
his
associates
were
the
sole
shareholders
and
directors
of
this
company.
The
plan
adopted
for
financing
the
operation
was
to
sell
what
were
called
units
of
production
or
percentages,
and
under
clause
5
of
this
agreement
it
was
contemplated
that
sufficient
units
should
be
sold
to
pay
for
the
cost
of
drilling
the
well
and
that
Snyder
and
his
associates
should
get
the
remaining
units
up
to
the
total
number
to
be
issued,
but
the
agreement
also
contemplated
the
possibility
of
sufficient
units
not
being
sold
to
provide
for
the
total
cost
of
drilling,
and
to
cover
this,
provision
was
made
and
incorporated
in
clause
6
as
follows:
"6.
It
is
further
understood
and
agreed
that
the
remaining
royalties
above
mentioned
and
hereby
agreed
to
be
transferred
to
the
Parties
of
the
First
Part
and
Fred
Elves,
or
the
proceeds
therefrom
shall
bear
certain
costs
and
charges
mutually
agreed
upon
between
the
Parties
of
the
First
Part
and
Fred
Elves,
including
the
sum
of
Fifteen
thousand
($15,000.00)
Dollars,
part
of
the
price
of
drilling
the
well
which
it
is
proposed
to
pay
to
Hilary
H.
Head,
drilling
contractor,
from
production
in
an
agreement
now
being
negotiated
with
him.’’
It
should
be
observed
here
that
the
effect
of
this
agreement
was
to
provide
for
the
disposal
of
the
company’s
entire
net
income
from
the
production
of
the
well
under
consideration
not
to
the
shareholders
as
such
but
to
the
holders
of
units
of
production
or
royalties,
whichever
term
is
appropriate.
When
the
well
was
drilled
and
came
into
production
the
pooling
agreement
dated
February
6
was
made.
Prior
to
that
date
the
unsold
units
under
the
agreement
with
Sterling
Royalties
Limited
had
already
been
divided
between
Snyder
and
his
associates.
There
was,
of
course,
attached
to
these
units
the
obligation
provided
for
in
clause
6
of
the
agreement
with
Sterling
Royalties.
It
may
be
that
the
recitals
in
the
pooling
agreement
do
not
correspond
exactly
with
the
obligations
under
clause
6
above
mentioned,
but
the
pooling
agreement
provides
specifically
that
Snyder
and
his
associates
agree
to
pool
their
royalties
or
percentages
of
production
for
the
purpose
of
paying
all
costs,
charges
and
expenses
including
the
payment
to
Head
which
is
the
matter
of
controversy
in
this
litigation.
It
is
there
further
provided
that
the
proceeds
derived
from
the
said
royalties
be
paid
to
Sterling
Royalties
for
the
purpose
of
paying
the
costs
and
charges
including
the
amount
payable
to
Head,
and
there
is
a
further
provision
authorizing
the
trustees
of
the
money
to
pay
these
moneys
over
for
that
purpose.
This
pooling
agreement
clearly
recognizes
the
realities
of
the
situation.
The
appellant
was
examined
on
this
point
and
gave
his
evidence
as
follows:
"‘Q.
That
agreement
was
signed
by
the
four
of
you?—
A.
Yes.
Q.
You
were
the
four
shareholders
of
the
company
?—
A.
Yes.
Q.
Are
you
a
Director?—A.
Yes.
Q.
Was
Mr.
Wilkinson
a
Director?—A.
Yes.
Q.
And
Mr.
Elves?—A.
Yes.
Q.
And
Mr.
Applegate
said
he
was?—A.
Yes.
Q.
Now,
I
call
your
attention
to
clause
1
of
that
Agreement
Exhibit
No.
6.
That
clause
reads:
‘
(1)
The
Parties
of
the
First
Part
hereby
agree
to
pool
their
royalties
or
percentages
of
production
for
the
purpose
of
paying
all
costs,
charges
and
expenses
agreed
to
be
paid
by
them
and
amounting
to
approximately
Twenty
thousand
($20,000.00)
Dollars,
the
details
and
items
of
which
said
amount
are
well
known
to
each
of
the
Parties
of
the
First
Part,
and
include
the
bonus
of
Fifteen
thousand
($15,000.00)
Dollars’
(which
really
became
$16,333.50)
‘payable
to
Hilary
II.
Head
under
a
drilling
agreement
with
him
dated
7th
June,
1933.’
Now
how
do
you
explain
those
words
‘agreed
to
be
paid
by
them’?—A.
That
clause
means
exactly
what
it
says.
We
agreed
to
pay
it
out
of
royalties
that
we
owned.
Q.
This
agreement
goes
on
further
to
say
in
clause
2
that
the
parties
of
the
First
Part
further
agree
to
pool
the
pro-
ceeds
of
the
said
royalties
or
percentages;
now
when
you
speak
of
the
proceeds
of
said
royalties
or
percentages,
what
do
you
mean?—A.
What
was
received
for
the
oil
that
was
sold.
Q.
Under
your
Royalty
Trust
Agreement
you
had
the
right
to
take
oil
from
the
well
or
take
money,
have
the
oil
sold
by
the
Trustee
or
take
money?—A.
Yes.
Q.
So
that
it
is
really
the
income
from
the
well;
is
that
right?—A.
It
is
the
income
from
the
royalties
that
were
unsold
that
came
to
us;
what
I
mean
is
this,
that
it
was
the
money
paid
to
us
from
the
oil
sold
that
was
credited
to
royalties
that
belonged
to
that
pool.
Q.
And
your
share
of
that
was
what
per
cent?
A.
3012%
of
the
net
production.
Q.
And
by
that
vou
mean
after
the
Head
royalty
was
taken
off?—A.
Yes.
Q.
After
the
costs
of
operation?—A.
Yes.
Q.
And
out
of
whatever
was
left
you
got
301%?—
A.
That
is
right.
Q.
And
that
proportion
of
the
net
amount
in
each
vear
the
well
produced
came
to
the
four
of
you?—A.
Yes.
Q.
And
you
pooled
that
amount
and
gave
instructions
to
the
Trustee
to
pay
that
sum
to
Sterling
Royalties?—A.
That
is
right.’’
The
auditors’
statement
of
Sterling
Royalties
attached
to
the
appellant’s
income
tax
return
shows
the
money
in
question
as
‘‘applied
against
liability
of’’
Snyder.
This
confirms
the
view
that
Sterling
Royalties
were
simply
taking
eare
of
a
recognized
obligation
of
Snyder
out
of
the
proceeds
of
production,
and
under
section
1,
chapter
55,
of
the
Statutes
of
Canada,
1954,
all
royalties
or
other
periodical
receipts
dependent
upon
the
production
or
use
of
real
property,
notwithstanding
that
the
same
were
payable
on
account
of
the
use
of
such
property,
are
taxable.
It
seems
to
me
that
Sterling
Royalties
in
receiving
the
proceeds
of
production
allocated
to
the
units
of
Snyder
and
the
others
were
receiving
it
as
agents
for
them,
and
in
paying
Head
they
were
likewise
paying
it
as
agents
for
them.
If
this
be
so,
then
it
is
simply
a
case
of
paying
a
capital
expenditure
out
of
the
earnings
of
the
business.
T
think
that
in
all
respects
material
to
this
litigation
Sterling
Royalties
should
be
regarded
simply
as
agents
for
Snyder
and
his
associates
from
the
making
of
the
first
agreement
entered
into
with
that
company.
For
these
reasons,
I
think
the
appeal
should
be
dismissed
with
costs.
There
was
a
cross-appeal
by
the
respondent
in
respect
of
costs
in
the
court
below.
I
think,
however,
that
this
was
a
matter
within
the
discretion
of
the
learned
trial
judge
and
would
not
disturb
his
judgment
in
this
respect.
Appeal
allowed
with
costs.
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