Minister of National Revenue (Appellant)
v.
Roland O. Bartlett (Respondent)
Court of Appeal, Jackett C.J., Cameron and
Sheppard D.JJ.—Ottawa, June 26 and 27, 1972.
Income tax—Sale of mining property by prospector—
Consideration based on production—Whether barred from
exemption as rent, royalty or similar payment—Income Tax
Act, R.S.C. 1952, c. 148, section 83(2); am. 1965, c. 18,
section 19(1).
In 1966 respondent sold the interest he had acquired in a
mining property as a result of prospecting. The considera
tion for the sale was 30% of the average net smelter returns
for each ton of ore extracted from the property, which
amounted to over $33,000 in 1967 and over $29,000 in
1968.
Held, reversing Walsh J., these sums were received by
respondent "as or on account of a rent, royalty or similar
payment" within the meaning of section 83(2).
Ross v. M.N.R. [1950] Ex.C.R. 411, and M.N.R. v.
Wain-Town Gas and Oil Co. [1952] 2 S.C.R. 377,
applied. Spooner v. M.N.R. [1928-34] C.T.C. 184,
considered.
APPEAL from Walsh J. [1971] F.C. 53.
G. W. Ainslie, Q.C. and P. Boivin, Q.C. for
appellant.
Bruce Verchere for respondent.
The judgment of the Court was delivered by
CAMERON D.J.—This is an appeal from a
judgment of the Trial Division [1971] F.C. 53,
delivered on June 11, 1971, allowing an appeal
from the respondent's assessments under Part I
of the Income Tax Act for the 1967 and 1968
taxation years.
The appeal concerns the respondent's claim
for exemption under section 83(2) of the
Income Tax Act, which reads as follows:
83. (2) An amount that would otherwise be included in
computing the income of an individual for a taxation year
shall not be included in computing his income for the year if
it is the consideration for
(a) a mining property or interest therein acquired by him
as a result of his efforts as a prospector either alone or
with others, or
(b) shares of the capital stock of a corporation received
by him in consideration for property described in para
graph (a) that he has disposed of to the corporation,
unless it is an amount received by him in the year as or on
account of a rent, royalty or similar payment.
The relevant facts are that the respondent
had an interest in a mining property, which was
sold under an agreement whereby the "consid-
eration" for the sale was payment by the pur
chaser of "thirty per cent (30%) of the average
net smelter returns per ton for gold and silver
for each ton of ore extracted from the Vendor's
claim" and that, pursuant to that agreement, the
respondent received $33,266.27 in 1967 and
$29,249.06 in 1968.
It is common ground that the amounts
received under the sale agreement are part of
the "consideration" for "a mining property or
interest therein" acquired by the respondent "as
a result of his efforts as a prospector either
alone or with others" within the meaning of
those words in section 83(2) and that section
83(2) operates to require that they not be
included in computing the respondent's incomes
under Part I of the Income Tax Act for the
years in question unless each of those amounts
is an "amount" received by him "as or on
account of a rent, royalty or similar payment".
The appellant contends that each amount is
such an amount and is therefore taken out of
the exemption in section 83(2) by the conclud
ing words of the subsection and the respondent
contends that the amounts do not fall within the
concluding words of section 83(2). The learned
trial judge adopted the respondent's contention.
The historical background necessary for a
consideration of the problem may be summa
rized as follows:
1. It was established by Spooner v. M.N.R.
[1928-34] C.T.C. 184 that an annual payment
based on production paid pursuant to an
agreement for sale as consideration for the
property sold was consideration for the sale
of the property and therefore of a capital
nature and was not income from the property.
It was there said that it was immaterial
whether the amounts were a royalty because
a royalty was not taxable as such.
2. Following the Spooner case, Parliament
added a provision to the Income War Tax Act
which read as follows:
3. (1) For the purposes of this Act, "income" ... shall
include...
O rents, royalties, annuities or other like periodical
receipts which depend upon the production or use of any
real or personal property, notwithstanding that the same
are payable on account of the use or sale of any such
property;
and which has been reproduced, in effect, in the
Income Tax Act in section 6(1)(j), which reads
as follows:
6. (1) Without restricting the generality of section 3,
there shall be included in computing the income of a taxpay
er for a taxation year
(j) amounts received by the taxpayer in the year that
were dependent upon use of or production from property
whether or not they were instalments of the sale price of
the property, but instalments of the sale price of agricul
tural land shall not be included by virtue of this
paragraph;
3. Section 3(1)() of the Income War Tax
Act has been applied in such cases as Ross v.
M.N.R. [1950] Ex.C.R. 411 and M.N.R. v.
Wain-Town Gas and Oil Co. [1952] 2 S.C.R.
377 with the result that periodic payments
based on production have been brought into
the computation of income for purposes of
federal income tax even though they were, in
fact, instalments of the sale price of a capital
asset.
4. By chapter 18 of the Statutes of
Canada, 1965, there was added to the then
section 83(2), which until then had ended
with paragraph (b), the words "unless it is an
amount received by him in the year as or on
account of a rent, royalty or similar pay
ment". These added words I shall hereinafter
refer to as "the proviso" to section 83(2).
The learned trial judge in allowing the taxpay
er's appeals expressed his conclusion, in part,
as follows:
In my view, while the concluding clause of s. 83(2) takes
out of this exception amounts paid which are received as
royalties or similar payments, it does not go so far as to
bring back into full application s. 6(1)(j) since it does not
make such amounts taxable "whether or not they were
instalments of the sale price of the property". We are thus,
for this particular type of sale, put back in the position
which existed before s. 6(1)(j) and its predecessor 3(1)(f)
were passed and the Spooner case (supra) would apply.
This would seem to be a more reasonable interpretation
of s. 83(2) than it would be to conclude that because the
amounts of the annual payments were based on production
from the property they must be considered as a "royalty or
similar payment" even though the taxpayer had divested
himself of all proprietary interests in the property. It also
avoids what would otherwise be an apparent injustice to the
prospector whom s. 83(2) is intended to favour in that if he
sold his property on the basis that he would receive annual
payments of a fixed amount (even though the purchaser
might well have estimated the amount of these annual
payments on the basis of what he anticipated the annual
production of the property would be) he would be exempt
from taxation on such payments, whereas, on the other
hand, if, instead of the annual payments being in fixed
amounts they were based on a percentage of the actual
production of the property, which is a reasonable way of
making such an agreement as was pointed out by Lord
Macmillan in the passage cited from page 187 of the case of
M.N.R. v. Spooner (supra), the prospector would be obliged
to pay tax on the sum so received. I find, therefore, that,
while the amounts received by the taxpayer in the present
case may have been in the nature of "royalties or similar
payments" they were not received by him as such, but
rather as instalments on account of the purchase price of
the property, though calculated on the basis of production
from the property, and that the concluding clause of s. 83(2)
does not take him out of the exemption provided in that
section of the Act or have the result of making him taxable
under s. 6(1)(j) since the amounts were received as consid
eration for the sale of mining property acquired by him as a
result of his efforts as a prospector, and not as royalties or
similar payments for the use of same.
While much could perhaps be said in support
of the view taken by the learned trial judge, we
have reached the conclusion that the amounts in
question for both years fall within the words of
the proviso, namely, "royalties or similar pay
ment", with the result that on the facts of this
case the exemptions provided in paragraphs (a)
and (b) of section 83(2) are nullified by the
terms of the proviso.
Reference may be made to the case of Ross
v. M.N.R. [1950] Ex.C.R. 411, in which I had to
consider the provisions of section 3(1)0 of the
Income War Tax Act (supra), various defini
tions of the word "royalty", and particularly the
words "rents, royalties, annuities or other like
periodical receipts ...". The facts are summa
rized in the headnote at p. 411:
As executrix of the will of her late mother, Annie McDou-
gall, who owned certain lands in the province of Alberta,
appellant transferred all hydro carbons (oil and gas) except
coal in said lands and the right to work the same to a
company in consideration of a sum in cash and the execu
tion of an incumbrance to secure to and for her benefit a
further sum of $60,000 payable out of 10 per cent of oil
produced from the land with the option, however, to the
company to pay her the cash market value of such produc
tion. The company made certain payments in the years 1944
and 1945 which appellant did not include in the estate
returns for those years.
In that case, I held that the payments received
by the appellant were like royalties, if not royal
ties themselves, and that they came within that
part of paragraph ().
In M.N.R. v. Wain-Town Gas and Oil Co.
[1952] 2 S.C.R. 377, section 3(1)(f) of the
Income War Tax Act was again under consider
ation. The finding of the majority of the Court
is summarized in the headnote at p. 377 as
follows:
Held: In a business sense in Canada, the word "royalty"
covers the payments made here and was so looked upon by
the respondent when making its tax returns. Even if they
were not received as royalties, they fall within the expres
sion "other like periodical receipts". They depend upon the
use of the franchise (which is property). It is not the
production of natural gas upon which depend the payments
as it is only under the powers conferred by the franchise
that natural gas may be supplied and conducted to the
consumers thereof. Finally, receipts, so dependent, are
income by virtue of s. 3(1)(f), even though they are payable
on account either of the use or sale of the franchise.
Rand J., in a separate opinion, agreed with the
conclusion of the majority of the Court in
allowing the appeal. He said, in part, at pp.
3 85-6:
The word "royalty" in the agreement is not, of course,
controlling, but it does bear upon the propriety of the use of
the word, in the minds of business men, to describe the type
of payment involved. The statutory language, dealing with
the results of accounting processes determining economic
gain in business, must, in large degree, use the vocabulary
employed in them; and the meaning of the word as it
appears in the statute must have regard to its general
acceptation in the course of property and business
transactions.
Now a rent is, primarily, something reserved, in some
form or other, and in a conceptual sense, from property or
prôperty interest transferred from one person to another.
The word "royalties" is best known, perhaps, as a term to
express an interest in the nature generally of future pay
ments upon a grant or lease of mines, such as gold, coal,
petroleum or gas rights; and it makes no real difference in
substance or as to the nature of the payments whether they
arise through a "reservation", strictly so-called, or a
covenant.
The language of para. (D seems to be directly related to
that signification of the term, and I should take it to be
beyond serious doubt that prima facie the payments here
come within the expression "royalties . .. or other like
periodical receipts". The query then is whether they "de-
pend upon the production or use" of any property. Purists
in language might object to the word "use" in relation to
carrying on a franchise; the franchise is perhaps more
properly said to be "exercised" than "used". But the words
"production or use" are intended to cover a great many
particulars of a general class of dealings with property, and
to "use" a franchise would not at all be beyond the range of
common parlance. I should say, then, that the word "use" is
appropriate to the exercise of such a franchise; and that a
franchise is personal property was not challenged.
We are all of the opinion that we are bound
by the decision of the Supreme Court of
Canada in the Wain-Town case.
Accordingly, the appeal will be allowed with
costs and the assessments made upon the
respondent for each year will be restored.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.