Hamilton, K.C., for the appellant.
D. Donaghy, for the respondent.
Macdonald, C.J.A.—The appellant company claims that the assessor erred in not allowing certain sums of mining expenses by way of deductions from gross income.
The first, second and fourth grounds of appeal are those which were most strongly urged, and comprise the principal complaints.
I shall, however, first deal with the other grounds of appeal. The third ground complains that mineral production tax was not allowed as a deduction. Under the Act the mineral production tax, or alternatively, the income tax, whichever shall be the greater in amount, is that which the taxpayer must pay. Both these taxes cannot be demanded and if this is an appeal against the exaction of both, it ought to be allowed, but I do not so understand it. If it means something else, then I think the claim was properly denied (see sec. 6, subsec. 9 of ch. 79, of the statutes of 1919).
By the fifth ground of appeal a deduction is claimed for mine depletion. This is answered by said sec. 6, subsec. (13).
The seventh ground was not argued.
The eighth ground is not material, since there is no claim of the right to tax capital under pretence of taxing income.
The ninth ground is also immaterial.
Returning then to the three grounds first mentioned, the appellant claims that ‘‘royalties and rents’’ paid to the owner of the property held by the appellant under options to purchase, should be allowed as proper deductions from gross income. By sec. 75 of the Taxation Act, ch. 22, of the Revised Statutes, 1911, as amended by said sec. 6, the assessor is directed, in ascertaining the taxable income, to allow as deductions from gross income, "‘all expenses incurred by that person in the production of the income,’’ subject to certain exceptions. Having then ascertained the amount of the gross income, as to which there is no dispute, the question arises, are the several sums. which appellant claims ought to have been deducted, such as fall within the language above quoted ? They are sums paid for the privilege of extracting ores from the mines under option and for rents paid for the use of reduction plant, and for plant additions to the Bosun mine.
Deductions were allowed in those cases in which the options had been abandoned, but were disallowed in those where the options were still subsisting. The true character of these “roy- alties’’ may be illustrated by a concrete case. An option is taken to purchase a mine; the vendor as incidental to the option, gives the privilege to the purchaser of marketing ores extracted by him, the purchaser agreeing to pay a percentage, called royalty, of the value thereof to the vendor, with the proviso that if the option be exercised, the moneys so paid as royalties shall be credited on the purchase- -price.
It will be of assistance to look at the documents. The facts as applicable to the first and second grounds of appeal are not very clearly stated in the case, or in the reasons for judgment of the Court of Revision. It is therefore necessary to deal rather broadly with the questions involved. Ex. 1 is an option to purchase the several properties therein described for the sum of $150,000, payable in instalments, with the proviso that should the option not be exercised all instalments of purchasemoney theretofore paid shall be forfeited to the vendor, but the purchaser is released from obligation to pay further instalments. This option contains a term entitling the purchaser to extract and market ores during the term of the option. He is to pay a percentage of the smelter returns to the vendor, but in ease of abandonment of the option, he is not released from liability to pay the royalties on ore already treated and not theretofore paid to the vendor. If the option be exercised these royalties are to be applied in reduction of the purchase- price, but they are not impressed with the character of purchase-money, and cannot be regarded as such unless and until the option has been exercised.
The next document (Ex. 6) [Ex. 5?] purports to be a lease for a term of years, with an option to the appellant to purchase the demised properties, which include a reduction plant or mill. This lease provides for rents and royalties. The lessee is given an option to purchase all the properties therein demised at any time during the term upon payment of $250,000. Unlike the option (Ex. 1) there are no instalments of purchase-money designated as such. Upon failure to exercise the option within the time specified, the purchaser’s rights are terminated. But should the purchaser exercise the option during the term, all moneys paid by way of rents and royalties are to be credited on the purchase-price.
The question, therefore, which we have to determine, 1s, whether the sums paid as rent and by way of royalty, in the circumstances above recited, under options to purchase which have not yet expired, can properly be considered as falling within the language hereinbefore quoted.
In my opinion, they are expenses which have been incurred by the appellants in the production of the income in question, namely, the income derived from the properties included in the options or leases, and ought to have been deducted from the gross Income.
I think there is a difference between instalments of purchase-money which were never by the parties regarded as any- thing else than purchase-money and were to be forfeited as above stated, and payments of rents and royalties for the privilege of extracting, treating and marketing ores, the income from which is part of the income taxed. These rents and royalties never became impressed with the character of purchase-money, they may never become so. It could be upon the happening of a future contingency only that they would be considered as part of the purchase-money. It must, I think, be conceded that rents paid under a lease which contains no option of purchase would be an expense incurred in the production of the income from demised premises, and if I am right in this, then I can see no difference in the principles to be applied under the Taxation Act to cases where an option to purchase is included in the lease. I think the royalties are in the same category as the rents—if indeed they are not in substance the same.
The fourth ground of appeal is founded on the claim that the costs of plant additions to the Bosun mine should have been deducted from gross income. On the evidence before me I cannot decide this question in the appellant’s favour. The character and purpose of the additions are not disclosed and the onus is on the appellants to show that these expenses were incurred in the production of the income which prima facie is not apparent. This has not been done and therefore the appeal on this ground cannot succeed.
The appeal should therefore be allowed to the extent above indicated.
Martin, J.A.—If the document of November 10, 1917, between Sellon and Kent is to be regarded as merely one form of the ordinary working bond on a mine (see Glossary, 1 M.M.C. 874, Appx. 3) as is, in effect, submitted by the appellant, then I think that the decision of the learned Judge of the Court of Revision could not be upheld. But in my opinion, after a careful examination of the document, the submission of respondent’s counsel, Mr. Donaghy, is the correct one, viz., that it is in reality the ordinary agreement for sale (accompanied by possession and development on certain terms) between "‘vendor'' and ^purchaser” (using those terms) with the proviso that if the purchaser later desires to escape from "‘com- pleting the purchase” he may do so on specified terms, and therefore the appeal should be dismissed.
GALLIHER, J.A.—The deductions claimed and not allowed by the Court of Revision, and which are the subject of appeal herein, are as follows:
(1) Royalties on properties under option:
These royalties under the agreements were paid and if the option or agreement was taken up and completed, they were to be applied in payment of purchase-moneys. I think until the option has been abandoned these payments must be treated as capital expenditure, and were properly disallowed.
(2) The same remarks apply.
(3) The sum of $17,512.08, being for plant additions on the
Bosun claim still under option :
The same remarks apply as to being capital expenditure, this is not a loss until the option is given up.
4, Depletion :
This, I think, is covered by sec. 75, subsec. 13, as added by the statutes of 1919, ch. 79, sec. 6.
I would dismiss the appeal.
EBERTS, J.A. concurred with Macdonald, C.J.A.
Appeal dismissed.