Roland O. Bartlett (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Walsh J.—Montreal, June 2;
Ottawa, June 11, 1971.
Income Tax—Sale of mining property by prospector—
Consideration on production—Amounts received, whether
royalties or similar payments—Whether exempt—Income
Tax Act, R.S.C. 1952, c. 148, s. 83(2), am. 1965, c. 18, s.
19(1).
In 1966 appellant sold the interest which he had acquired
in a mining property as a result of prospecting. The consid
eration for the sale was 30% of the average smelter returns
for each ton of ore extracted from the mine, which amount
ed to over $33,000 in 1967 and over $29,000 in 1968.
Held, these sums, although calculated on the basis of
production from property, were received by appellant as
instalments on the purchase price of a mining property and
therefore not as a "royalty or similar payment", and so
were exempt from tax by s. 83(2) of the Income Tax Act.
Spooner v. M.N.R. [1928-1934] C.T.C. 171, 184,
applied.
INCOME tax appeal.
Bruce Verchere, for appellant.
P. A. Boivin, for respondent.
WALSH J.—The facts in this case are not in
dispute. On February 1, 1958, appellant
acquired, as a result of his efforts as a prospec
tor with one Hutchison, a mining property
known as the mining titles and interests in a
miner's certificate and development licence
number 135725, claim number Two (2), granted
by the Department of Natural Resources of the
Province of Quebec, for gold and silver only in
and on the Northwest half of lot number Five
(5), Range Six (6), Southwest, Stratford Town
ship, in the County of Wolfe, Province of
Quebec (hereinafter referred to as "the mining
property"). Appellant and Hutchison had
agreed that any consideration received on the
sale of the mining property was to be shared
between them on the basis of an 80/20 ratio
respectively. By an agreement dated October 6,
1966, Hutchison, acting on behalf of appellant
and himself, entered into an agreement with
Cupra Mines Limited by virtue of which the
mining property was sold to it in consideration
of thirty per cent of the average net smelter
returns per ton for gold and silver for each ton
of ore extracted from the claim, the term "net
smelter returns" being defined in the agree
ment. As a result of this, appellant received the
sums of $33,266.27 and $29,249.06 in 1967 and
1968 respectively from Cupra as consideration
for the mining property which had been sold,
these amounts representing 80% of the sums
paid by Cupra in 1967 and 1968. Appellant did
not include these amounts in his 1967 and 1968
income for the reason that he regarded them as
being received by him as consideration for the
sale of his interest in the mining property and
therefore excluded from income by virtue of s.
83(2) of the Income Tax Act. Respondent re
assessed and included the amounts on the basis
that they were received as or on account of
royalties or similar payments depending upon
use of or production from property within the
meaning of s. 6(1)0) and s. 83(2) of the Income
Tax Act.
The only issue between the parties is the
interpretation of the agreement in the light of
these provisions of the Income Tax Act, which
read as follows:
6. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer 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;
* * *
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.
This is, as far as can be ascertained, the first
case which has arisen requiring an interpreta
tion of s. 83(2) of the Act since it was amended
in 1965 so as to add the concluding clause
"unless it is an amount received by him in the
year as or on account of a rent, royalty or
similar payment" 1965 (Can.), c. 18, s. 19(1).
All previous jurisprudence therefore, while of
some help in its discussion of the meaning of
"rent, royalty or similar payment", is not direct
ly in point. In order to appreciate the back
ground of this section, however, and its place in
the scheme of the Act and, in particular, its
relationship to s. 6(1)0), it is of interest to go
into the historical origin of these sections. The
Supreme Court case of Spooner v. M.N.R.
[1928-34] C.T.C. 171, dealt with the sale of
property and mines or mineral rights in it to an
oil company for a cash consideration upon exe
cution of the agreement; together with 25,000
shares of the capital stock of the purchaser, and
as further consideration 10 per cent of all
petroleum, natural gas and oil produced by the
property. This case had to decide whether these
royalty payments came within the meaning of
the term "income" as defined in s. 3(1) of the
Income War Tax Act, 1917, which section no
longer exists in the present Income Tax Act. In
rendering the judgment of the Court deciding
that these payments did not constitute income
within the meaning of s. 3(1), Newcombe J.
stated at pages 181-82:
It is by the agreement, for the lack of an apt definition,
tèrmed a "royalty"; but, whether or not it may appropriate
ly be named a royalty or an annuity, the statute does not, in
terms, charge either royalties or annuities, as such; and here
the appellant has converted the land, which is capital, into
money, shares and ten per cent of the stipulated minerals
which the company may win. What the appellant will real
ize, under the covenant, is, of course, uncertain; although it
may be ascertained in the event.
On the other hand, it may be assumed that if the project
prove unprofitable, the minerals will not be raised and that
circumstance, as well as the uncertainty of the extent of
minerals available, contributes to the speculative character
of the appellant's interest; but, nevertheless, the appellant's
receipts come from a potential source of capital. The taxa
ble commodity is "income", which means, by the definition,
annual profit or gain; and for the appellant, there is no
question of profit or gain, unless it be as to whether she has
made an advantageous sale of her property.
In the Privy Council judgment in the same case
[1928-34] C.T.C. 184 at 186 Lord Macmillan
said:
The question whether a particular sum received is of the
nature of an annual profit or gain or is of a capital nature
does not depend upon the language in which the parties
have chosen to describe it. It is necessary in each case to
examine the circumstances and see what the sum really is,
bearing in mind the presumption that "it cannot be taken
that the Legislature meant to impose a duty on that which is
not profit derived from property, but the price of it" (per
Hanworth, M. R., in Perrin v. Dickson [1930] 1 K.B. 107 at
p. 119, quoting previous authorities).
And again, at page 187:
But the share which the respondent became entitled to
receive of the oil from the land which she had sold to the
company was not a royalty in the sense of s. 27, , or in the
ordinary sense familiar in the case of mining leases where
the lessor stipulates for payment by his lessee of a fixed
rate per ton of the mineral won. Here there is no relation of
lessor and lessee. The transaction was one of sale and
purchase. It may have taken the form which it did because
of the uncertainty whether oil would be found by the
purchaser or not; as the value of the land depended on this
contingency the price, not unnaturally, was made to depend
in part on the event.
As a result of this judgment, s. 3(1)(f) of the
Income War Tax Act was enacted by S. of C.
1934, c. 55, s. 1, to read as follows:
3. (1) For the purposes of this Act, "income" . .. shall
include ...
(j) 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.
The wording of this section is not identical to
that of s. 6(1)() in the current Income Tax Act
(supra) but is analogous to it and serves the
same purpose.
The interpretation to be given to s. 3(1)(f) was
dealt with at length by Cameron J. in the case of
Ross v. M.N.R. [1950] C.T.C. 169. That case
dealt with a lease agreement for mineral rights
including oil and gas with the option to buy for
a fixed sum plus a further amount of $60,000
payable out of ten per cent of the production of
oil and gas, the said payments in respect of
production being referred to in the lease as
"royalties". The learned trial judge carefully
considered the meaning to be given to the word
"royalty" which is not defined in the Act after
first stating, at page 174:
I take it to be well settled that the name given to a
transaction by the parties concerned does not necessarily
decide the nature of the transaction O.R.C. v. Wesleyan
Assurance Society, [1948] 1 All E.R. 555 and 557.)
The dictionary definitions referred to by him, as
well as some of the previous jurisprudence and
his conclusions, appear on pages 175-76 of his
judgment as follows:
In the Shorter Oxford English Dictionary, Third Edition,
"royalty" is defined in various ways. Excluding those which
have reference to the Sovereign, these definitions include
the following: "denoting chiefly rights over minerals"; "A
payment made to the landowner by the lessee of a mine in
return for the privilege of working it"; "A sum paid to the
proprietor of a patented invention for the use of it"; "A
payment made to an author, editor, or composer for each
copy of a book, piece of music, etc., sold by the publisher,
or for the representation of a play."
Other definitions of the word as used in reference to oil,
gas and minerals are found in Words and Phrases, Perma
nent Edition, Vol. 37, at p. 811, including the following:
(a) "As relates to mining, 'royalty' is a share of the
product or profits reserved by the owner for permitting
another to use the property."
(b) "`Royalty' in connection with gas and oil leases is a
certain percentage of the oil after it is found or so much
per gas well developed."
Again, in Webster's New International Dictionary, Second
Edition, it is described as "a share of the product or profit
(as of a mine, forest, etc.) reserved by the owner for
permitting another to use the property."
Some of these definitions would appear to give some
support to appellant's argument that a royalty can only be
created where there is something reserved out of a demise
or grant and payable to an owner. I have, however, been
unable to find any decision which says that such is the case,
and in one of the definitions which I have given above the
meaning is given as a percentage of the oil or gas after it is
found, without any reference to any reservation by an
owner.
In Mercer v. Attorney General for Ontario, (1882), 5
S.C.R. 538, Henry, J., at p. 66 said: "`Royalties' is of very
general import and very comprehensive ... `Royalties' as to
mines is well understood in England to be the sums paid to
the Sovereign for the right to work the Royal mines of gold
and silver; and to the owner of private lands for the right to
work mines of the inferior metals, coal, etc." Assuming,
however, (but without deciding) and for the purposes of this
case only, that to constitute a royalty there must have been
some reservation of that royalty in the grant or demise, and
assuming also that in this case there was not in form any
such reservation (although I am of the opinion that in both
form and substance there was such a reservation in the
documents read as a whole), that does not conclude the
matter. It is sufficient to bring the receipts into tax if they
are "like" rents, royalties or annuities, provided, of course,
they fulfil the other requirements of the subsection. Royal
ties, in reference to mines or wells in all the definitions, are
periodical payments either in kind or money which depend
upon and vary in amount according to the production or use
of the mine or well, and are payable for the right to explore
for, bring into production and dispose of the oils or minerals
yielded up. All these conditions exist in the present case.
Another matter which may not exist is the reservation of
rights at the time of the grant and the consequent payment
to the appellant as owner of such reserved rights. But even
assuming that to be the case it is not sufficient, in my
opinion, to prevent the "receipts" here being like or similar
to royalties, all other essential requirements being fulfilled.
It may well be that the concluding words of the subsection
"notwithstanding that the same are payable on account of
the use or sale of such property" are sufficient in them
selves to do away with any requirement that the receipts
must be paid to an owner. At least the appellant was a
former owner.
I find, therefore, that the receipts here were like royalties,
if not royalties themselves, and therefore they come within
the meaning of that part of the subsection.
Dealing with the question that a fixed price was
specified in the agreement, following which the
payments would cease, he states, at page 179:
It is submitted that as payments to her were limited to the
sum of $60,000.00, that by itself establishes that her
receipts were part of the purchase price and therefore
capital in her hands. That fact might have been of some
importance prior to the enactment of subsection (f). But
having found that the receipts were either royalties or like
royalties, I am unable to find that they ceased to be such
merely because they stopped when an agreed maximum
amount had been paid.
It must be noted, however, that in this judgment
he does not actually make a finding that the
payments were royalties despite the fact that
this was the term used but rests his judgment
finding the payments taxable on the fact that
they were, in any event, "like royalties".
This question was again considered in the
Supreme Court in M.N.R. v. Wain-Town Gas
and Oil Co. [1952] C.T.C. 147. That case dealt
with the sale of a franchise to supply gas to a
municipality, the sale price agreed on being a
percentage of the gross sales of gas by the
purchaser set out in the agreement, such pay
ments to be made "by way of royalty". It was
held, reversing the judgment of the Exchequer
Court, with Mr. Justice Locke dissenting, that
the payments received were royalties or like
periodical receipts depending upon the use of
the property within the meaning of s. 3(1)(f).
Rand J. in his judgment, after stating that it
seemed to be beyond serious doubt that the
payments came within the expression "royalties
or other like periodical receipts" within the
meaning of s. 3(1)W of the Act and that they
depended upon the production or use of the
property, concluded at pages 154-55:
Are the payments, then, constituting as they do part of
the consideration for the sale of the franchise, to be exclud
ed from tax as being capital in their nature? In Wilder v. The
Minister, a decision of this Court, as yet reported only in
[1952] 1 D.L.R. 401; [1951] C.T.C. 304, it was held that an
annuity of $1,000.00 a month for the life of the annuitant,
which was part of the price for the transfer of a business
from an individual to a company, was of a capital nature
and not within the definition of "income" in Section 3(1)(b);
but under paragraph (f) of the section that ground seems to
be expressly met by the language "notwithstanding that the
same are payable on account of the use or sale of any such
property". Now, the property is the franchise; the royalty is
payable on account of the sale of it; and the payment
depends upon its exercise. The paragraph seems to me to be
satisfied completely by the terms of the transaction, and I
must hold the respondent to come within it.
It must be noted that s. 3(1)W and subsequently
s. 6(1)(j) both refer to property generally, and,
at the time the above-quoted judgments were
rendered, s. 83(2) was not part of the Act. This
section, which first appeared in the Income Tax
Act in 1952, R.S.C. 1952, c. 148, made an
exception for an amount that would otherwise
have been included if it was the consideration
for a mining property or interest therein
acquired by the taxpayer as a result of his
efforts as a prospector. The section did not at
this time have the concluding clause "unless it
is an amount received by him in the year as or
on account of a rent, royalty or similar pay
ment" and without this concluding clause it is
clear that for mining property it was intended
to, and did, create an exception to the general
rule of s. 6(1)0). This section, as it originally
read, was dealt with by the Tax Appeal Board
in the case of Bolduc v. M.N.R. (1963) 30 Tax
A.B.C. 392. In that case the taxpayer entered
into an agreement giving an option on his
mining property in return for $5,000 on execu
tion of the agreement, $5,000 every six months
until $40,000 had been paid at which time he
would transfer the title, and a royalty of 50
cents per pound on ore extracted when the
property was brought into production. In ren
dering judgment, rejecting the Minister's con
tention that it was s. 6(1)0) that applied, the
Chairman, Cecil L. Snyder, Q.C., stated at page
396:
Since the Parliament of Canada saw fit to include Section
83(2) in the Income Tax Act it would seem, particularly
from a study of the wording of that section, that payments,
received by persons engaged in prospecting for minerals
who are successful in staking claims to properties which
yield marketable volumes of ore, are not to be included as
taxable income to those persons. The section states
"amounts that would otherwise be included in computing
the income of an individual shall not be included ...". Had
these provisions not been inserted in the Act the argument
advanced on behalf of the Minister would no doubt prevail.
However, since Section 83(2) specifically exempts from
taxation an amount which is the consideration for a taxpay
er's interest in a mining property it should be found that the
payments received in 1957 and 1958 in consideration of the
interest which the appellant retained in the mineral claims
are not subject to income tax.
This decision was not appealed and I would
agree with it and readily make the same finding
in the present case were it not for the subse
quent addition to s. 83(2) in 1965 of the con
cluding clause "unless it is an amount received
by him in the year as or on account of a rent,
royalty or similar payment". It would appear
that this amendment was made as a result of the
Bolduc decision.
If s. 83(2) is an exception to s. 6(1)0) for the
benefit of mining property, the question which
must now be decided is whether this concluding
clause accomplishes the purpose which appar
ently it was intended to, and itself constitutes
an exception to s. 83(2) when the amounts paid
as consideration are received as or on account
of a rent, royalty or similar payment, so as to
bring such payments back within the provisions
of the taxing section 6(1)0).
It should be noted that s. 6(1)(j) does not use
the terms "rents, royalties, annuities or other
like periodical receipts" used in s. 3(1)0) of the
Income War Tax Act but instead uses the single
word "amounts". Similarly, s. 83(2) uses the
words "an amount". However, the 1965 amend
ment in excepting from s. 83(2) "an amount"
received "as or on account of a rent, royalty or
similar payment" brings us back again to the
problem considered in the earlier jurisprudence
of whether an amount paid on account of the
purchase price of a property should neverthe
less be considered as "a rent, royalty or similar
payment" when the calculation and payment of
it is dependent on the use or production of the
property. It is conceded by respondent that in
the present case there is no question of the
payments made being in the nature of a rent, so
unless they are a "royalty or similar payment"
they would not fall within the exception in the
concluding clause of s. 83(2). In addition to the
definitions of "royalty" in the dictionaries and
jurisprudence quoted (supra) some considera
tion should be given to the manner in which it is
used in the Income Tax Act. Although it is not
defined therein, the word "royalty" is used in
several sections. Subsections (3) and (4) of s.
17, dealing with non-arm's length payments
between residents and non-residents, refer to
the payment of a "price, rental, royalty or other
payment for use or reproduction of any proper
ty". This section certainly implies that the prop
erty is retained by the person receiving the
payment, since the payment is made for the use
of or the reproduction of the property. Section
106(1)(d)(v) reads as follows:
106. (1) Every non-resident person shall pay an income
tax of 15% on every amount that a person resident in
Canada pays or credits, or is deemed by Part I to pay or
credit, to him as, on account or in lieu of payment of, or in
satisfaction of,
* * *
(d) rent, royalty or a similar payment, including, but not
so as to restrict the generality of the foregoing, any
payment
* * *
(v) that was dependent upon the use of or production
from property in Canada whether or not it was an
instalment on the sale price of the property, but not
including an instalment on the sale price of agricul
tural land.
This section, which makes taxable such income
in Canada of non-resident persons, clearly cor
responds to s. 6(1)0) and makes all such royalty
payments taxable whether or not they were
instalments on the sale price of the property. It
is evident that, in order to make an instalment
payment on the sale price of a property taxable
as income in the hands of the recipient, when
such payments would not normally be taxable,
special sections of the Act, such as 6(1)(j) or
106(1)(d)(v), are required.
An examination of the wording of s. 83(2)
discloses that it refers to "an amount" that is
"the consideration for" but it does not specify
whether the amount is the consideration for the
sale of, rental of, or simply use of the mining
property in question. Appellant contends that
when the payment is consideration for the sale
of the property then the concluding clause does
not apply since the amount is not received "as
or on account of a rent, royalty or similar
payment" but rather on account of instalments
of the purchase price. The fact that no specific
amount was fixed for the purchase price but
that annual payments will carry on indefinitely
and that they are based on the production of the
property does not alter this (see quotation from
judgment of Cameron J. in the Ross case
(supra) at page 179). He contends therefore that
the concluding clause applies only when the
amounts are received as a consideration for the
rental or use of property in which the taxpayer
still retains title, in which event the payments
are then "as or on account of a rent, royalty or
similar payment". In that event he remains the
owner of the property and the payments he is
receiving are clearly income and should be
taxed as such. However, in the event of the sale
of mining property acquired by the taxpayer as
a result of his efforts as a prospector either
alone or with others he would be exempt from
taxation on the payments, which for other types
of property would be taxed under s. 6(1)(j),
even if these payments were deemed to be
royalties or similar payments dependent upon
the use of or production from the property.
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 pay
ments, it does not go so far as to bring back into
full application s. 6(1)0) since it does not make
such amounts taxable "whether or not they
were instalments of the sale price of the proper
ty". 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 pay
ments on the basis of what he anticipated the
annual production of the property would be) he
would be exempt from taxation on such pay
ments, 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 reasona
ble 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 pay
ments" they were not received by him as such,
but rather as instalments on account of the
purchase price of the property, though calculat
ed 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)0) since the
amounts were received as consideration 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.
The appeal is therefore maintained with costs
and the re-assessments of appellant's income
with respect to his 1967 and 1968 taxation
years are referred back to the Minister for
re-assessment in order to delete therefrom the
sums of $33,266.27 and $29,249.06 added to
his income for those years respectively.
Section 27 provided that a non-resident receiving a
royalty for anything used or sold in Canada would be
deemed to be carrying on business in Canada and to earn a
proportionate part of the income derived therefrom.
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.