Lackie v. The Queen, 79 DTC 5309, [1979] CTC 389 (FCA)

Urie, J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s appeal from assessments for income tax for the taxation years 1969,1970,1971 and 1972 in which there was attributed to the appellant’s income for those years sums received by his wife for the sale of gravel removed from property owned by her.

Very briefly the material facts are these. On April 8, 1963 the appellant purchased a farm in the Regional Municipality of Waterloo in the Province of Ontario upon which he took up residence with his family. The following year gravel was discovered on the property, some of which was sold, from time to time, from then until 1969. By deed dated September 27, 1966 and registered November 9,1966 the appellant conveyed the property to his wife Laura Lillian Lackie for $80,000.

On October 1, 1969 Mrs Lackie entered into an agreement with Blacktop Construction Limited, paragraphs 1, 2 and 3 of which read as follows:—

1. The Owner hereby grants to the company the sole and exclusive right and licence to enter upon the Owner’s premises and to dig for, acquire, crush, process and remove all the gravel products therefrom, or to stockpile the said gravel products on the said premises and remove it at a later date provided this Agreement is still in force and effect at such later date, and hereby sells to the Company all the said gravel products as and when removed from the Owner’s premises for the price and amount of $.20 per ton of gravel products removed from the leased premises.

2. The right and licence hereby granted shall be for a period of five years and three months, commencing on the 1st day of October, 1969 and ending on the 31st day of December, 1974.

3. The Company shall remove from the Owner’s premises the minimum quantity of 50,000 tons of gravel products during the period from October 1, 1969 until December 31, 1970 and each year thereafter during the balance of this Lease and if the Company does not remove from the Owner’s premises such quantities of gravel products, the Company shall pay the Owner the difference in value between the quantity actually removed and the quantity stipulated to be removed so that during the first period from October 1, 1969 until December 31, 1970 the Company shall pay the Owner the minimum sum of $10,000 and a further minimum sum of $10,000 each year for the balance of this Lease; provided that the cumulative value of the quantity of gravel products actually removed at the rate of $.20 per ton during the entire term of this Lease shall be set off and applied against the total of $50,000 minimum payments required to be paid during the entire term of this Lease.

The amounts paid by Blacktop to Mrs Lackie during the period October 1, 1969 to December 31, 1972 pursuant to the terms of the agreement were:—

The Minister of National Revenue reassessed and confirmed his reassessments of the appellant’s tax for the years 1969 to 1972 inclusive on the basis that the aforementioned amounts paid to Mrs Lackie were properly included in the appellant’s income under paragraph 6(1)(j) and subsection 21(1) of the Income Tax Act as it applied to the appellant’s 1969, 1970 and 1971 taxation years (the old Act) and under paragraph 12(1)(g) and subsection 74(1) of the new Act for the 1972 taxation years. The present appeal is from these reassessments.

The sole argument advanced by counsel for the appellant on the appeal was that the trial judge erred in not finding that the amounts received by Mrs Lackie were income from a busines and not from a property. If, in counsel’s view, the learned trial judge had correctly characterized the sums so received, they would not be attributed to the husband as his income and subject to tax as part of his income.

The relevant sections of the new Act read as follows:—

12(1)(g) Payments based on production or use—any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph);

74(1) Where a person has, on or after August 1,1917, transferred property either directly or indirectly, by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, the income for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income of the transferor and not of the transferee.

248(1) In this Act,

“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and includes an adventure or concern in the nature of trade but does not include an office or employment;

“property” means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action, and

(b) unless a contrary intention is evident, money:

Those provisions are applicable to the appellant’s 1972 taxation year. Paragraph 6(1 )(j), subsection 21(1) and paragraph 139(1 )(e) are applicable to the three preceding years. While not identical to the above sections of the 1972 Act, they are sufficiently similar to make the reasoning hereunder applicable to all the taxation years in question.

The essence of the decision of the trial judge is contained in the following excerpt from his reasons for judgment which counsel for the respondent supported.

Several useful guidelines emerge from the decisions above referred to. Where property is sold for a set sum to be paid in fixed instalments, those payments are not income. If it is sold for a share of the profits, the payments then bear the character of income, and so would annuities and royalties. If property is sold for a sum certain, plus annual sums dependent on the volume of business, those annual sums would be income. But, if what is sold relates to the use of land, including excavation for gravel, that is a profit à prendre, thus taxable income, whether or not the sale is considered to be a “business” (under the provisions of the old paragraph 139(1 )(e) or the new subsection 248(1)). Profit à prendre implies a continuing licence, or continuous right to use land; a single final transaction transferring all the property (ie gravel) would not be a profit à prendre.

I should think that if plaintiff’s spouse had sold all the gravel, whether the amount agreed upon had been paid in one lump sum, or by instalments, that would be described as a transaction in the nature of capital (It is common ground that she was not in the business of selling gravel). But we are faced here with the sale of some gravel over a continuous period, the use of land and a profit à prendre over more than five years. The agreement does provide a minimum of $50,000, but no maximum. Neither can it really be said that the agreement and the benefits derived therefrom are not dependent upon the volume of business: to recall the words Rowlatt, J, in Jones v Commissioners of Inland Revenue (supra), the vendor “took something which rose or fell with the chances of the business”. True, the amounts could not fall below a certain floor, but above that, they could rise and fall, and in fact did rise and fall during the first part of the schedule.

It is common ground that if the sums received are regarded as income from a business the attribution rules under subsection 74(1) of the new Act and subsection 21(1) under the old Act do not apply. Thus the problem falls squarely on the interpretation to be given to the phrase in paragraph 12(1 )(g) “any amount received by the taxpayer in the year that was dependent upon the use of or production from property . . Was the removal of the gravel from the property in question dependent on the use of or production from property or rather was Mrs Lackie in the business of deriving income from the business of selling gravel?

In my opinion the learned trial judge correctly found that the amounts received were amounts that were dependent on the use of property, including real property. In a lengthy judgment of the Court of Appeal in England in Smethurst (H M Inspector of Taxes) v Davy, 37 TC 593 the meaning of the phrase “use of land” was discussed. In that case the taxpayer was the occupier of land upon which were gravel pits. She gave permission for gravel to be excavated from the pits and received payments based on the amount of gravel taken. At page 602 Lord Evershed, MR said:

The main point in the case as presented to us by Mr Bucher was to this effect, that assuming against his contention that the rights granted to Fosters were of the nature of a profit à prendre, nevertheless they did not fall within the terms of Section 31(1)(d) at all; and that contention was based on two distinct grounds, though to a large extent I think they were interconnected. In the first place, it was contended that a profit à prendre, or at any rate a profit à prendre of this nature, was not a “use of land’’ at all within the meaning of the paragraph. Second, it was said that, whatever uses were comprehended by the paragraph, they were to be confined, be they profits à prendre or not, to uses properly referable to an occupier as distinct from an owner. Of the two grounds, as I hope I have fairly and accurately stated them, the second has, I think, been the most important, and it has raised the question of the possibility, or perhaps certainty in some cases, of what is called double taxation, a matter upon which I shall have something to say later. But it was also said that the second ground, or at least one aspect of it, formed the alternative view in favour of the taxpayer of the Special Commissioners—alternative, that is, to the conclusion that the nature of the transaction was a sale simpliciter of gravel. It was said by way of criticism of the learned judge’s judgment that he did not anywhere in his judgment notice the point.

I turn first to what I have called the first point, namely, that this right is not a use of land as that phrase is used in the paragraph. It is quite true that the phrase “use of land” might with advantage have been expanded. It might for example, have been interpreted by a definition paragraph such as is found in Section 21 of the Finance Act of 1934. But in my judgment it is clear that a profit of this kind is a use of land as that phrase would be understood to anyone having knowledge of real property law, and I think that the phrase in the paragraph must be taken at least to be addressed to such a person. I think that that view follows inevitably from the speeches, particularly three of the speeches, in the House of Lords in Scott v Russell, 30 TC 394; [1948] AC 422. In the course of judgment Wynn-Parry, J, said:

That the latter activity constitutes ‘using land’ is established by the decison of the House of Lords in Russell v Scott, [1948] AC 422. In the course of his speech Viscount Simon said, at page 432: ‘The digging and carrying away of sand or of gravel have been, I apprehend, one of the normal uses of suitable areas of land from the earliest times’. Lord Simonds said, at page 434: ‘I need go no further into the history of this catalogue than to say that with some additions it goes back for nearly one hundred and fifty years. During the whole of that time there can have been no more familiar feature of the landscape than pits of sand or gravel or clay and I cannot doubt but that during that time and before it the owners of such pits have been accustomed in greater or less degree to exploit them not only for their own use but by profitable sales.’ Finally, at page 438, Lord Oaksey said: ‘Now, the digging of sand, gravel, clay or peat are and have been from time immemorial ordinary and well-known uses of land’.

Wynn-Parry, J, went on as follows:

The problem which the House had to consider in that case was quite different from the one before me, but the observations which I have quoted appear to me to be quite clearly intended to be statements of general application, and not uttered for the limited purpose of resolving the particular question before the House, namely, whether the activity of a farmer in permitting contractors to dig and carry off sand from his farm constituted a concern of the like nature to those enumerated in Rule 3 of No III of Schedule A or whether his whole farm ought to be assessed under No I. /t follows that if the occupier permits another to do any of the acts referred to above, including the extraction of gravel, that other is using the land. Here, then, Fosters were using the land, paying a consideration which gave them the right to do so. (the emphasis is added)

While care must be taken in using the interpretation given to words found in one statute by using the same interpretation in another, I believe that the meaning given the words ‘’use of land” by the Master of the Rolls is equally valid in respect of the words “use of property” in the Canadian statute. For this reason, I have concluded that the sums received by Mrs Lackie were dependent on the use of property and therefore, fall within the scope of paragraph 12(1 )(g) of the new Act and paragraph 6(1 )(j) of the old Act respectively.

Counsel for the appellant on the other hand argued that this case is governed by the decision of the Supreme Court of Canada in Orlando v MNR, [1962] SCR 261; [1962] CTC 108; 62 DTC 1064. The facts as disclosed in the head-note show that in 1944 the appellant, who was a shareholder in a company operating a mushroom farm in Toronto, and of which her husband was president, purchased a 97-acre farm as an investment and as an alternative site for the company in the event that it had to move due to the growth of the city. The farming operations carried on were minimal. However, in each year during that period, with the exception of 1949, she sold topsoil from a 37-acre portion of her farm to the mushroom company. In 1953, she sold the 37-acre parcel to a highway contractor for $120,000. The contract of sale required the purchaser to remove the topsoil and spread it on the remaining portion of the appellant’s property. The appellant then sold all the topsoil to the mushroom company for $18,500.

The majority of the Supreme Court upheld the decision of the Exchequer Court that the amount received for the topsoil was the proceeds from a scheme of profit making or an adventure or concern in the nature of a trade so that the profits derived therefrom were income and subject to tax. Abbot, J, speaking for the majority held that the sales had no relation to any farming operations since, if the disposal of topsoil was taken to its ultimate conclusion, farming operations would have been rendered impossible.

Cartwright, J, as he then was, dissented, and said at page 271 of the report:

In my opinion the payments of $2 per cubic yard of topsoil paid over the years by the Maple Leaf Mushroom Farm Limited to the appellant were payments for the granting to the company of a licence, analgous to a profit à prendre, permitting it to enter the lands of the appellant and take therefrom for its use a portion of the soil subject to payment therefor at the price agreed; from this it follows that the amounts so paid constituted taxable income of the appellant as being amounts received by her from the use of her property but not as profits from a business.

He further found that this reasoning did not apply to the receipt of $18,500 which he concluded was a capital receipt and not a receipt for a licence analogous to a profit à prendre.

The key to the reasoning of the majority in the Supreme Court seems to me to lie in the fact that the sale of topsoil would have rendered any minimal farming operations by the appellant ultimately impossible and thus it was a scheme for profit making. Such does not appear to hold in the case at bar since the evidence discloses that the appellant, his wife and family continued to reside on the farm and presumably to have farmed it. Certainly, paragraph 8(a) of the license agreement seems to indicate that some portion of the farm was to continue as such since it required Blacktop

to use such methods in its operations as will do as little damage as reasonably possible to the unworked portion of the owners premises.

From this it can be inferred, I think, that unlike the situation in the Orlando case, the removal of the gravel would not have the effect of ultimately making impossible the use of the farm for purposes of farming or residence. It thus seems to me that the Orlando case can and must be distinguished on its facts and that the reasoning in the line of cases typified by the Smethurst case, supra, that the removal of gravel or other substances from property pursuant to agreements similar in form to that in issue here, constitutes a license analagous to a profit à prendre, is applicable to the facts here.

I think further, that from a reading of the licensing agreement, it cannot accurately be said that Mrs Lackie was in the business of selling gravel. Rather, as can be seen from the terms of the agreement quoted above, she gave Blacktop the right to enter upon a portion of her land and to remove gravel therefrom using appropriate machinery and care in such removal. Clearly it was a license to work a gravel pit and the amounts received by her were amounts dependent on the use of the property.

In my view, therefore, as the learned trial judge held, such receipts fall squarely within the ambit of subsection 74(1) of the new Act and of subsection 21(1) of the old Act and are deemed to be the income of the appellant who transferred the property to her.

I would, accordingly, dismiss the appeal with costs.