ANGERS, J.:—This is an appeal by Wain-Town Gas & Oil Company Limited, a body corporate having its office at Vermillion, in the Province of Alberta, against the decision of the Minister of National Revenue affirming an assessment for income and excess profits tax in respect of the taxation years ended December, 1944, and December 31, 1945.
Formal pleadings were ordered and filed.
In its statement of claim the appellant says, in brief, as follows: by a duly authorized franchise agreement, dated September 19, 1938, the Town of Vermillion granted the appellant a franchise to supply the town with natural gas for the period and subject to the terms and conditions contained in the said agreement ;
the said franchise agreement was in fact and in law a capital asset ;
by an agreement in writing dated January 6, 1940, as amended by a further agreement dated March 11, 1944, the appellant sold, assigned and transferred the said franchise to Franco Public Service Limited, a body corporate having its head office at the Town of Vermillion, the purchase price being the percentage of the actual gross sales of gas set out in the said agreements;
the respondent did assess the tax claimed by him to be payable by the appellant under the Income War Tax Act for the taxation years 1944 and 1945 and on January 15, 1949, did mail to the appellant written notices of such assessments, claiming tax as follows :
for the taxation year 1944—
income tax $ 60.81 excess profits tax 40.38 for the taxation year 1945— income tax 715.04 excess profits tax 431.74
in making the said assessments the respondent did wrongfully and without lawful authority treat as income all payments received by the appellant on account of the said sales and its franchise to Franco Public Service Limited, relying particularly on the ground that the payments in respect of the franchise were income within the meaning of paragraph (f) of subsection (1) of section 3 of the Income War Tax Act;
the said payments received by appellant from Franco Public Service Limited are in fact principal and capital axd are not rents, royalties, annuities or other like periodical receipts nor do they depend upon the production or use of any real or personal property ;
in the alternative the appellant alleges if the payments received from Franco Public Service Limited or any part thereof were assessable income of the appellant in the year in which they were received or at all, which is denied, the respondent failed to make such an allowance for depletion or the exhaustion as the respondent considered just and fair pursuant to the provisions of section 5, subsection (1) (a) of the Income War Tax Act.
In his statement of defence, in answer to the statement of claim, the respondent pleads in substance as follows:
he admits that the appellant is a body corporate having its said office at Vermillion, Province of Alberta;
he admits that the respondent assessed the tax claimed by him to be payable by the appellant under the Income War Tax Act for the taxation years 1944 and 1945 and that on January 15, 1949, he mailed to the appellant written notices of such assessments, but denies that the excess profits claimed for the taxation year 1945 is $431.74 and says that the tax so claimed was $455.10;
he ignores. or denies the other allegations.
À brief recapitulation of the evidence seems convenient.
James D. Adam, barrister and solicitor of Vermillion, heard as witness on behalf of appellant, testified that at various times in the past he acted in the capacity of solicitor for the company ;
He stated that he incorporated Franco Public Service Limited and that he has been its solicitor since the incorporation, nearly ten years ago.
Shown an agreement dated September 19, between the Town of Vermillion and the appellant, Adam recognized it as the deed by which the appellant acquired a franchise to supply natural gas to the Town of Vermillion and its inhabitants; the document was produced as exhibit 1. Adam declared that it was ratified by the Town Council following a plebiscite of the ratepayers held for that purpose and that it was later approved by the Board of Public Utility Commissioners for the Province of Alberta.
He acknowledged that subsequently there were negotiations between the appellant and the Franco Public Service Limited for the sale of that franchise. Exhibited a letter from Franco Oils Limited to J. L. Wilson, dated December 8, 1939 (exhibit 2), Adam said that it relates to negotiations which were then pending ; I deem it apposite to quote an extract of this letter:
"‘Confirming our conversation of this date we agree to accept assignment of your gas franchise for the Town of Vermillion and supply gas according to the terms thereof as expeditiously as possible, and for said assignment we agree to pay to your Company a royalty on gross sales in the following manner: for the first three years of the term of the franchise you will receive a royalty of 612 % ; for the remaining seven years of the term you will receive 8-1/3% royalty; providing the franchise is renewed for a second term of ten years, for that ten-year period you are to receive 1212% gross royalty. In the event that the Town purchase the utility at the end of the present existing franchise period you are to receive 25% of the net proceeds therefrom. In the event that a third franchise is obtained, that is a third ten-year period, then the gross royalty payable to you will remain at 1212%. In this event, no further liability exists respecting the proceeds of any subsequent sale.’’
Adam pointed out that the last paragraph of the letter says all this is preliminary to the final agreement, adding that the letter was varied in certain respects.
He declared that, as solicitor for both parties, he drew the agreement between Wain-Town Gas & Oil Company Limited and Franco Public Service Limited and the Town of Vermillion dated January 6, 1940, filed as exhibit 3, in virtue of which the appellant assigned its natural gas franchise to Franco Public Service Limited. Clause 4 of this agreement stipulates that, in consideration of the assignment by the appellant of its franchise to Franco Public Service Limited, the latter doth hereby covenant and agree with Wain-Town Gas & Oil Company Limited to pay to the latter by way of royalty, from the proceeds of sales of natural gas under the said franchise, the following percentages of the actual gross sales of gas at consumers’ prices less consumers’ discounts:
(a) during the first three years six and one quarter per cent;
(b) during the next seven years eight and one third per cent;
(c) thereafter during the currency of this agreement and of the said franchise twelve and a half per cent.
To the question as to whether at the time the agreement was executed, namely January 6, 1940, the appellant owned wells producing natural gas Adam answered negatively, explaining that the appellant had drilled a well to get gas, that this well was completed after the grant of the franchise to the appellant had been ratified and that the well was not successful.
Adam estimated that the amount which the appellant spent in acquiring its franchise and seeking a supply of natural gas would be between $20,000.00 and $25,000.00.
He asserted that the appellant does not own any natural gas wells and that it has not owned any since the agreement exhibit
3. He added that the natural gas distributed by Franco Public Service Limited comes from wells (originally one) belonging to associate companies of Franco Oils Limited, the parent company of Franco Public Service Limited, in which the appellant has no interest.
Dealing with the reason why the appellant had sold its franchise, Adam stated that it had expended all its available funds, including those it could raise by sale of more shares in the drilling of its first and, in fact, its only well or, in other words, that it had run out of money and had no prospect of raising more funds for further drilling. Adam said that Franco Public Service Limited had, through its associate companies, and on its own operations, between 1938 and the end of 1939, developed gas, in at least one well, in large quantities, while in the course of searching for oil. He summed up his explanation thus (p. 9) : “But since Wain-Town Gas and Oil Company Limited had the franchise and no gas and Franco and its associated has the gas but no franchise it was deemed advisable on both sides to get together.”
He declared that Franco Public Service Limited was prepared to buy the franchise of Wain-Town Gas and Oil Company Limited, but that, since the latter was run-down financially, the former was not prepared to pay very much cash. He said, on the other hand, that the good will of the franchise was worth a considerable amount but pointed out that, if Franco Publie Service Limited were able to get a new franchise from the Town, it might take a long time. He added that Wilson, in his capacity of Managing Director of Wain-Town Gas & Oil Company, with the concurrence of the other directors, felt that it was proper to hold out for a substantial sum of money. He concluded that it was agreed that, when Franco Public Service Limited started to operate under the franchise and makes sales of gas, the company would give Wain-Town Gas & Oil Company Limited a percentage. Further on Adam observed that he was perhaps as much responsible as any other person for the use of the word ‘‘royalty’’ in the agreement because he was looking for some word that would identify the percentage payment and he hit on the word ‘‘royalty’’. Asked if he would use the word ordinarily in an agreement of this kind, Adam answered (p. 11) :
“After this case I will not use it in a case of this kind, but it is only fair to the parties to say that the word ‘royalty’, I was the draftsman of the agreement and the word ‘royalty’ just occurred to me as a means of expressing shortly what was intended. ‘ ‘
He asserted that, at the time Wain-Town Gas and Oil Company Limited sold its franchise, it was not distributing gas in the Town of Vermillion; he specified that the stage at which the company was then considered in that they had drilled a well in an effort to obtain gas, that it did not get it and that it had no money to drill another well. According to him, it was not until January, 1941, that gas was available in the town.
Adam said that a by-law was adopted by the Council on January 6, 1940, approving the assignment by Wain-Town Gas and Oil Company Limited to Franco Public Service Limited of the franchise ; a copy of this by-law, bearing number 140, was filed as exhibit 4. He added that on January 24, 1941, the assignment was approved by the Board of Publie Utility Commissioners for the Province of Alberta; a copy of this approval was filed as exhibit 5.
He related that at the time of the assignment of the franchise it was anticipated by both parties that "‘the bulk of the sales of gas in the Town of Vermillion would be for ordinary domestic and commercial purposes.’’ He declared, however, that it happened that the Provincial School of Agriculture decided to become a purchaser of gas from Franco Public Service Limited in Vermillion. Going into details of the matter, Adam made the following comments (p. 13) :
“A large mill which had burned down, re-opened and converted to gas fuel. There was at that time a municipally owned central steam heating system which used coal for fuel, but which the Council afterwards decided should use gas fuel, and the increase in sales of gas when the Town municipally owned steam heating plant, electric light and steam heating plant converted to gas was a very substantial part of the whole sales. More lately there has been a large municipal plant, a large electric power and light plant established at Vermillion which uses larger quantities yet, but the sale of gas under this franchise, I can say with confidence, far exceeded the expectations of anyone who had a part in the original development and organization.”
I do not think that the litigation between Wain-Town Gas and Oil Company Limited and Franco Publie Service Limited as to whether or not the former’s percentages would extend to instances outside the limits of Vermillion, raised by counsel for appellant, is material.
To counsel for respondent’s question as to what portion of the $20,000.00 or $25,000.00 was expended on acquiring the franchise, Adam estimated it at about $1,500. He added that the balance of the $20,000.00 or $25,000.00 was spent on drilling a well and on management and administration expenses. He deemed it very hard to say how much was allotted to management and administration. To the intimation by respondent’s counsel that the amount paid for management and administration was not at that stage very large, Adam retorted (p. 15) :
"‘This company was originally a company from Wainwright, a town forty miles south of Vermillion, and those who were managing the business, Mr. Wilson particularly, who is the Managing Director, they—he had to go and live in Vermillion and I know the charge to the company as his expenses, it ran to something like $250. a month, and that continued for probably eighteen months.”
He said that, when he mentioned $20,000.00 to $25,000.00, he had in mind that there might be $20,000.00 spent in the drilling and $5,000.00 in other items. He specified that the sum of $20,000.00 expended in the drilling of the well included "‘quite a lot of money that the company had to find or provide, up to, I would think, five thousand dollars, raising the money by selling the shares in small lots. ’ ’
Regarding his expression "‘good will’’ of the franchise, Adam declared that what he meant was that, as long as Wain-Town Gas and Oil Company Limited held the franchise and inasmuch as it was granted by the Council to a company in which a number of the local citizens were interested, it would be difficult for anyone else to get a franchise in the Town of Vermillion.
To the question by counsel for respondent as to whether the franchise included the right to sell natural gas to the Town of Vermillion, Adam, as might be expected, replied in the affirmative, adding that the company which held this franchise, which was exclusive, "‘were the only persons and still are the only persons that can sell gas in the Town of Vermillion and even in the environs of the Town of Vermillion.’’
No evidence was adduced on behalf of the respondent.
The question arising for determination is governed by paragraph (f) of subsection (1) of section 3 of the Income War Tax Act. The material part of section 3 reads thus:
"‘3(1) For the purpose of this Act, ‘income’ means the annual
net profit or gain or gratuity, whether ascertained and capable of computation as being wages, salary, or other fixed amount, or unascertained as being fees or emoluments, or as being profits from a trade or commercial or financial or other business or calling, directly or indirectly received by a person from any office or employment, or from any profession or calling, or from any trade, manufacture or business, as the ease or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment and whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source including . . .
(f) 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” DELLE
The facts are simple and undisputed. They may be summarized briefly. .he .7 *.
agreement dated September 19, 1938, . . / T,. /• ..
By an agreement dated September 19, 1938, Wain-Town Gas and Oil Limited got from the Town of Vermillion an exclusive franchise to supply natural gas to the town and its inhabitants. The term of the franchise was for ten years, as set forth in clause 2, the company having the option of renewing it for a further period of ten years and a similar option, at the expiry of each succeeding ten-year period for which the franchise may be renewed. The clause contains a proviso which is not material herein.
Clause 16 stipulates that in view of the large expenditure incurred by the company the Town covenants and agrees that the franchise and all other rights, powers and privileges granted to the company are and shall be granted to it exclusively for a period of ten years, subject to renewal as set forth in clause 12, and that during the said period or renewal thereof the Town will not itself supply natural gas to any of its inhabitants or allow any other person, firm or corporation using the streets, lanes, highways, thoroughfares and other publie places for the purpose of laying gas pipes along, through or under the same.
By an agreement dated December 8, 1939, Wain-Town Gas and Oil Company Limited sold the franchise aforesaid, absolutely, with no reversion, to Franco Public Service Limited. The only thing sold under that agreement was the franchise ; no gas wells, pipes or conduits were included in the assignment.
By the agreement (exhibit 3), i.e., the assignment by appellant to Franco Public Service Limited, the value of the franchise was estimated on the basis of a percentage of the natural gas distributed by Franco Public Service Limited.
It was submitted on behalf of the appellant that the franchise sold was capital. It is idle to say that the purpose of the Income War Tax Act is to tax income, not capital. If the respondent be correct in his assessment, the whole of the appellant’s capital sum will be taxed as income. I do not think that this is the intention of the Act.
Taxing acts must be construed strictly and a taxpayer must not be bound liable to tax unless the tax be imposed expressly and clearly: re Micklethwait (1885), 11 Ex. 456; Partington v. Attorney-General (1869), L.R. 4 H.L. 109, 122; Cox v. Rabbits (1878), 3 App. Cas. 473, 478; Foley v. Fletcher et al. (1859), L.J. Ex. 100; Moore & Company v. Inland Revenue [1914-15] S.C. 91; Robert Addie & Sons’ Collieries, Limited v. Commissioners of Inland Revenue [1924] S.C. 251 ; British Insulated and Helsby Cables Limited v. Atherton [1926] A.C. 205; Minister of National Revenue v. Spooner [1933] A.C., 684; [1928- 341 C.T.C. 184; Capital Trust Corporation Limited v. Minister of National Revenue [1935] C.T.C. 258; Van Den Berghs, Limited v .Clark [1935] A.C. 431, 440; Inland Revenue Commissioners v. Ramsay (1936), 154 L.T.R. 141; Minister of National Revenue v. Dominion Natural Gas Company Limited [1941] S.C.R. 19 ; [1940-41] C.T.C. 155 ;O f Connor v. Minister of National Revenue [1943] Ex. C.R. 168; [1943] C.T.C. 255; Mahaffy v. Minister of National Revenue [1945] C.T.C. 408, 415.
In re Tenant v. Smith, at p. 154, we find the following observations of Halsbury, L.C.:
"My Lords, to put this case very simply, the question depends upon what is Mr. Tenant’s income. This is an Income Tax Act, and what is intended to be taxed is income. And when I say ‘what is intended to be taxed’, I mean what is the intention of the Act as expressed in its provisions, because in a taxing Act it is impossible, I believe, to assume any intention, any governing purpose in the Act, to do more than take such tax as the statute imposes. In various cases the principles of construction of a taxing Act have been referred to in various forms, but I believe they may be all reduced to this, that inasmuch as you have no right to assume that there is any governing object which a taxing Act is intended to attain other than what which it has expressed by making such objects the intended subject for taxation, you must see whether a tax is expressly imposed.
Cases, therefore, under the taxing Acts always resolve themselves into a question whether or not the words of the Act have reached the alleged subject of taxation. Lord Wensleydale said, in In re Micklethwait, 11 Ex. at p. 456, " It is a well- established rule, that the subject is not to be taxed without clear words for that purpose; and also that every act of Parliament must be read according to the natural construction of its words. ‘ ‘
Reference may also be had beneficially to Maxwell, Interpretation of Statutes, 9th ed., 291; Craies, Treatise on Statute Law, 4th ed. 107; Beal, Cardinal Rules of Interpretation, 3rd ed. 492.
It was argued by appellant’s counsel that the payments are not "‘royalties'', as such payments presuppose to continue in the recipient of title to the property or an interest therein, such as exists in the relationship between lessor and lessee or between licensor and licensee. The appellant is being paid by Franco Public Service Limited not for the use of appellant’s property nor for the production from it, but for the absolute loss of such property, forever assigned to Franco Public Service Limited. It was urged by counsel that the payments do not depend upon the production or the use of the franchise, but on the production or use of natural gas obtained by Franco Public Service Limited, which gas is in no means the property of appellant.
I do not think that the payments stipulated in the agreement (exhibit 3) are royalties, notwithstanding the words "‘by way of royalty” used erroneously in clause 4. These payments, in my opinion, are instalments on the purchase price. One must scrutinize the purpose of the clause in a deed in order to determine its meaning. A definite price [is] set once and for all, payable by yearly instalments calculated on the proceeds of gross sales of natural gas under the franchise reckoned at consumers’ prices, less consumers’ discounts, fixed at six and a quarter per cent during the first three years, at eight and one third per cent during the next seven years and at twelve and one half per cent thereafter during the currency of the agreement and franchise.
After carefully listening to the oral evidence and reading the transcript thereof, examining attentively the documents produced, perusing the verbal and written arguments of counsel and studying the doctrine and the precedents, I am satisfied that the payments made by Franco Public Service Limited to Wain-Town Gas and Oil Company Limited do not constitute a profit, gain or gratuity and are not rents, royalties or annuities or other like periodical receipts within the meaning of paragraph (f) of subsection (1) of section 3 of the Income War Tax Act, that they are not income but are instalments of the purchase price.
A brief review of the doctrine and decisions seems apposite.
In the case of Secretary of State for India v. Scoble et al. (1903- 04), 89 L.T.R. 1, the following observations of Halsbury, Lord Chancellor, much to the point, are very interesting (p. 3):
(6e Still, looking at the whole nature and substance of
the transactions (and it is agreed on all sides that we must look at the nature of the transaction and not be bound by the -. mere use of the words), I cannot doubt that in this contract—it cannot be denied that what was done and agreed to in one sense under a contract, though undoubtedly it is not a case of the purchase of an annuity, but it is a case in which “under powers reserved by a contract one of the parties agrees to buy from the other party that which is their property—I cannot doubt, I say, that what is called an ‘annuity’ in the contract between the parties, and in the statute, was a mode of making the payment for that which, by the hypothesis on which I am speaking, had become a debt to be paid by the Government. If it was a debt to be paid by the Government it introduces this consideration: Was it the intention of the Income Tax Acts ever to tax capital as if it was income? I think that it cannot be doubted, both upon the language of the Act itself and upon the whole purport and meaning of the Income Tax Acts, that it never was intended to tax capital, at all events as income’’.
In re Foley v. Fletcher and Rose, (1858) H. & N. 769, Pollock, C.B., expressed the following opinion (p. 778) :
"‘Mr. Phipson contended that they were profits, because when the value of money and the effect of such a protracted period of payment are considered, we could not assume that the value of the planitif’s moiety was more than some £23,000, and that the rest must be considered as profit, and that it was the fault of the plaintiff that she has so mixed up profits with capital that they cannot be distinguished; and that therefore the whole must be liable to income tax: But there is nothing on this record to shew that the property was not worth more than £99,000, nor is there anything to shew that the postponement of payment was not a mere indulgence on the part of the seller. But if we were at liberty to speculate on the matter, and could come to the conclusion that a part of the annual payments is the price of the convenience of getting the payments postponed, we could not say that the payments are within the Act because a part of them consists of profit. These instalments are payments of money due as capital: the Act has made no provision for such a case. It professes to charge profits only, and we cannot say that capital is liable to the income tax because found in company with profits. If payments such as those in the present case are subject to income tax, wherever any debt of any sort is to be repaid by annual payments, or by instalments at three or six months, it would be subject to income tax.’’
In re Inland Revenue Commissioners v. Ramsay (ubr supra) it was held by the Court of Appeal (Lord Wright, M.R., Romer and Greene, L.JJ.) that the question to be determined was whether, under the terms of the agreement in question, the consideration for the purchase of a dentist’s practice was a sum of money, though payable in instalments, or an annuity; that the sum of $15,000 was made the purehase price from beginning to end and the fact that in the result the amount paid might be greater or less than the primary price did not alter the legal position; that, therefore, the instalments were not annuities, but merely the manner and form in which a lump sum was paid. At page 145, Lord Wright states:
"The question involved in the case is the question which has so often to be debated where property has been sold, namely, whether the consideration is a sum of money, though payable in instalments, or whether it is an annuity. It is, of course, quite clear that for a lump sum of money the right to receive periodical payments may be purchased, and in that case if the transaction constitutes the purchase of an annuity and each one of these payments is in the nature of income in the appropriate hands and in the appropriate manner, it is taxable as such, but if that is not the case and the instalments are not annuities in the proper sense of the term, but are merely the method and the manner and the form in which a lump sum is paid, then the position is different, and the sums in question are not to be deemed income but capital, and accordingly in the hands of the payer when he comes to make his returns for super tax cannot be deducted under the provisions of sect. 27 of the Income Tax Act of 1918.’’
The learned Judge analyzes certain judgments.
I do not deem it expedient to sum up his comments, since I have annotated or will hereafter annotate them briefly.
In the case of Minister of National Revenue v. Dominion Natural Gas Company Limited (ubi supra) the report discloses that the respondent company supplied natural gas to inhabitants in parts of the city of Hamilton. Its right to do so was attacked in an action in which there were claimed a declaration that it was wrongfully maintaining its mains in the streets and wrongfully supplying gas to the inhabitants, an injunction against the continuance thereof, a mandatory order for removal of the mains, and damages. Respondent contested the action, and was successful. Its legal expenses of the litigation amounted to $48,560.94, after crediting all sums recovered from the other party as taxed costs. The question in dispute was whether that sum paid by respondent in 1934, should be allowed as a deduction in computing respondent’s taxable income for that year. The Supreme Court, reversing the judgment of Maclean, J., [1940] Ex. C.R. 9 ([1940-41] C.T.C. 144) held that the sum was not deductible. This judgment is evidently not applicable herein. There is, however, in the reasons for judgment of Duff, C.J., an obiter dictum which I may say with all due deference, does not seem to me pertinent; it is worded as follows (p. 24) :
"‘Again, in my view, the expenditure is a capital expenditure. It satisfies, I think, the criterion laid down by Lord Cave in British Insulated v. Atherton, 1926 A.C. 205 at 213. The expenditure was incurred ‘once and for all’ and it was incurred for the purpose and with the effect of procuring for the company ‘the advantage of an enduring benefit'. The settlement of the issue raised by the proceedings attacking the rights of the respondents with the object of excluding them from carrying on their undertaking within the limits of the City of Hamilton was, I think, an enduring benefit within the sense of Lord Cave’s language.”
In re The Hudson 9 s Bay Company Limited v. Stevens (Surveyor of Taxes) (1903-11), 5 R.T.C. 424, the headnote, fairly comprehensive and exact, is in the following terms :
“The Appellants are a Company established by Charter, who prior to 1869 were the owners of large territories in Rupert’s Land, North America. In 1869 they surrendered to the Crown their territory and rights of government in exchange, inter alia, for a money payment and for a right to claim, within fifty years, a twentieth share in certain lands in the territory as from time to time the lands were settled. The lands granted to the Company in pursuance of this agreement were sold by the Company from time to time, and the proceeds applied partly in payment of dividends and partly in reduction of capital.
Held, that the proceeds of the sales of the lands so granted were not profits or gains derived by the Company from carrying on a trade of dealing in land, and were not assessable to income tax.”
See also William M. O’Connor v. The Minster of National Revenue [1943] Ex. C.R. 168, 175 et seq., ([1943] C.T.C. 255) ; Samson v. Minister of National Revenue [1943] C.T.C. 47, 72; Inland Revenue Commissioners v. Wesleyan Assurance Society [1948] 1 All E.R. 555; Wilder v. Minister of National Revenue [1949] Ex. C.R. 347; ([1949] C.T.C. 302).
In the matter of Jones v. Commissioners of Inland Revenue, [1920] 1 K.B. 711, it appears from the report that the appellant had sold his interest in certain inventions and letters patent for a sum in cash and percentage, called a "‘royalty’’, payable for ten years on the sale of all machines constructed under the patent. It was held by the Court of King’s Bench that the sums received by the appellant in respect of the royalty were taxable income.
Rowlatt, J., after referring to the judgments in Foley v. Fletcher and Secretary of State for India v. Scoble Çul)i supra) made the following statements (p. 715) :
11 On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendor’s hands. Chadwick v. Pearl Life Assurance Co., [1905] 2 K.B. 507, 514, was a case of that kind. In such a case the man bargains to have, not a capital sum but an income which he had before. I think, therefore, that what I have to do is to see what the sum payable in this case really it. The ascertainment of an antecedent debt is not the only thing that governs, although in many cases it is a very valuable guide. In this case there is no difficulty in seeing what was intended. The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent upon the volume of business done ; that is to say, he took something which rose or fell with the chances of the business. When a man does that he takes an income; it is the nature of income, and on that point I decide this case.”
I may say respectfully that I cannot agree with this decision.
It was urged on behalf of respondent that the sums received by appellant from Franco Public Service Limited in compliance with clause 4 of the agreement (exhibit 3), are periodical receipts, dependent upon the use of the franchise, that they are like royalties and are income of the appellant, notwithstanding that they are payable on account of the sale of the franchise to Franco Public Service Limited. Counsel pointed out that in virtue of clause 5 of the agreement all royalties must be deposited monthly to the credit of Wain-Town Gas and Oil Company Limited ; this provision seems to me immaterial herein.
Respondent’s contention that the receipts in question are dependent on the use of the franchise assigned by appellant to Franco Public Service Limited is unfounded. They are no more dependent on the franchise than on the use of Wain-Town Gas and Oil Company Limited’s charter or on its certificate to carry on business. Such a use is not that contemplated by the Act; the use thereby considered is of something that of itself produces. In the present case the receipts may be dependent on the use of gas in the ground or in Franco Public Service Limited’s transmission lines, but not on the use of the franchise, which is merely a means whereby Wain-Town Gas and Oil Company Limited is put in a position to gather receipts in much the same way as its charter does.
It was submitted by counsel for respondent that by clause 4 of the agreement (exhibit 3), Franco Public Service Limited agreed to pay to the appellant, from the proceeds of all sales of natural gas under the franchise, certain percentages of the gross sales of gas reckoned at consumers’ price, less consumers’ discounts.
To the question as to what is the franchise counsel referred to the observations of Stuart, J., in the case of Northern Alberta Natural Gas Company v. Edmonton [1920] 1 W.W.R. 31, appearing on page 44 of the report:
"‘The very essence of a franchise is the right to use streets and highways. If the use of these were not required, a company could act, as any other industrial concern does, entirely by private contract and as a private trader, and sell its commodity, e.g., gas, to the householders as it pleased. It is the unavoidable necessity of using the public streets to convey the commodity that forces such a company to secure the right to use them, and, it is this right which in substance constitutes the ‘franchise' ’’.
Counsel further submitted that the ‘‘receipts’’ of appellant are ‘‘dependent’’ upon the use of the right to operate pipe-lines under the streets of the town to convey natural gas and that the quantum of the receipts is likewise dependent upon the extent to which this right is used. He specified that it is the extent of operation of the pipe-lines which determines the amount of gas which can be sold and hence the percentage of gross sales of gas which the appellant will receive. He intimated that it cannot be too strongly emphasized that the franchise is not merely the right to lay pipe-lines but the right to use them for the purpose of supplying natural gas to the town’s inhabitants. This seems elementary.
It was contended for respondent that a franchise is real or personal property. In support of this contention counsel referred to the reasons for judgment of Harrison, J., in New Brunswick Power Co. v. Maritime Transit Company, [1937] 4 D.L.R. 376. A brief extract from these reasons may be useful (p. 395) :
té . . The defendant argues that the right to operate street cars 18 a franchise, but he says a franchise is not property. It is, I think, quite proper to call the plaintiff’s right to operate its street railway upon the streets and highways a franchise.’’
The learned Judge then refers to a definition of a franchise by Blackstone and continues :
"‘In later years the term ‘franchise’ has been used to include that body of rights or privileges conferred by a Legislature (with, of course, the assent of the King) upon corporations to enable them to supply the public with some commodity or service in general use such as gas, electricity or transportation. ’ ’ Further on he adds (p. 396) :
‘“In Canada no private person can establish a public highway or a publie ferry or railroad or share tolls for the use of the same without authority from the Legislature direct or derived, and the power given to invade public rights by the establish. ment of these public utilities is generally referred to as a ‘franchise’; see Calgary v. Can. Western Gas Co. (1917), 40 D.L.R., 201.
A francise to operate a street railway and to collect tolls for such service is a property right, an incorporeal hereditament, the interference with which is a private nuisance, and the party wronged may have the nuisance abated.”
In answer to appellant’s claim that a franchise is a ‘‘chose in action’’ and not property, counsel for respondent stated that it is established that ‘‘a chose in action’’ is personal property and in support of this statement he cited Williams on Real Property, 23rd ed. pp. 3 to 6, and Halsbury’s Laws of England, 2nd ed. vol. 25, pp. 189 to 194. Counsel’s contention in this regard seems to me well founded.
The next argument raised by counsel for respondent is that the receipts are like royalties. In his brief, counsel for respondent save general definitions of the word ‘‘royalty’’, gathered from Webster’s New International Dictionary, 2nd ed., The Standard Dictionary of the English Language and from the decisions in Perry v. Clergue (1903), 5 O.L.R. 357 ; The King v. Trusts and Guarantee Co. Ltd. (1916), 15 Ex. C.R. 403, (1916), 54 8.C.R. 107 ; Attorney-General for British Columbia v. The King (1922), 68 D.L.R. 106.
In Web sterns Dictionary we find the following definition of the word "‘royalty’’:
"‘7(a) a share of the product or profit (as of a mine, forest,
ete.) reserved by the owner for permitting another to use his property.
(b) A duty or compensation paid to the owners of a patent or a copyright for the use of it or the right to act under it, usually at a certain rate for each article manufactured, used, sold, or the like ; ‘ ‘
In the Imperial Dictionary of the British [sic] Language we read this definition :
"‘4. A tax paid to one who holds a patent protected by government
for the use of the patent, generally at a certain rate for each article manufactured; a percentage paid to the owner of an article for its use.”
The Standard Dictionary of the British [sic] Language gives this definition :
"‘3. A share of proceeds paid to a proprietor by those who
are allowed to develop or use property, or operate under some right belonging to him, as to the owner of mining lands for ore taken out, to the owner of a copyright for books published and sold, or to the owner of a patent for articles manufactured and disposed of thereunder.’’
The case of Perry v. Clergue, in which it was held (inter alia) that the right to create and license a ferry, having been one of the jura regalia or royalties belonging to the Province at the Union, continued to belong to them after Confederation according to section 109 of the British North America Act, 1867, notwithstanding subsection 13 of section 91 giving the Dominion legislative power in relation to ferries, is, to my mind, irrelevant.
In the case of The King v. Trusts and Guarantee Co. the facts were briefly these: A resident of the Province of Alberta was, at the time of his death, the registered owner of a parcel of land in that province under a patent issued to him by the Department of the Interior of Canada. He died leaving no heirs or next of kin. Letters of administration to his property, real and personal, were granted to the defendant. The land was subsequently sold by the latter and the provincial government claimed the proceeds and administration expenses, as belonging to it under the Alberta Statute 5 Geo. V, chap. 5, section 1. Upon an information exhibited by the Attorney-General of Canada to have it determined that such proceeds belong to the Crown in right of Canada, it was held that the right of escheat to the lands in question, or of the principle of escheat did not apply and the lands were to be treated as bona vacantia, the right to them belonged to the Crown in right of the Dominion as jura regalia.
I must say that this judgment seems to me beside the point at issue.
The headnote in the case of Attorney-General for British Columbia v. The King is in the following terms:
"‘The rights of bona vacantia in regard to the assets of a defunct English corporation which previously had carried on business in British Columbia is vested in the Province under subsees. 102 and 109 of the British North America Act, being comprised in the word ‘royalties’ which at the time of the union were assigned to the Province”.
I do not think that this judgment has any more bearing on the present case than the two previous ones.
Counsel for respondent drew the attention of the Court to the fact that no specific mention is made in the dictionaries regarding sums paid to the owner of a franchise. He specified that in the case of the Attorney-General v. British Museum, [1903] 2 Ch. 612, Farwell, J., held that a franchise was a royal privilege or a branch of the King’s prerogative subsisting in a subject by a grant from the King and he referred to the reasons for judgment of Harrison, J., in New Brunswick Power Company V. Maritime Transit Company (ubi supra).
Referring to the definition of the word “patent” in The Standard Dictionary of the English Language as ‘‘a grant of any privilege, franchise, etc., made by sovereign authority”, counsel suggested that there would seem to be equal basis for saying that a sum paid to the owner of a franchise for the use of it was a “royalty” as for saying that a sum paid to the owner of a patent or a copyright for the use of it is a “royalty”. He concluded that the respondent’s submission is that sum paid to the proprietor of a franchise for the right to use it is a “royalty”.
Counsel for respondent further submitted that, to come within the words of paragraph (f) of subsection 1 of section 8, it is not necessary that the receipts’ ‘ be in fact "‘royalties'', if they are "like” royalties. The question of what constitutes receipts "‘like royalties’’ was considered by Mr. Justice Cameron in May McDougall Ross v. Minister of National Revenue, [1950] C.T.C. 169. At page 176 the learned Judge expressed the following opinion:
"It is sufficient to brine the receipts into tax if they are ‘like' rents, royalties or annuities, provided, of course, they fulfil the other requirements of the subsection. Royalties, 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 themselves to do away with any requirement that the receipts must be paid to any 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.’’
The facts in that case are substantially different from those in the case at bar. There the appellant, who on June 30, 1938, owned certain lands in the Province of Alberta, transferred all hydrocarbons, except coal, in said lands and the right to work the same to a company in consideration of a sum in cash and the execution of an incumbrance to secure to her a further sum of $60,000. payable out of 10% of oil produced from the lands, with the option to the company to pay her the cash market value of such production. The company made certain payments in 1944 and 1945 which appellant did not include in her estate returns for those years. The respondent, considering these payments to be ‘‘income’’, allowed a deduction of 25% for exhaustion and assessed the balance to tax. These payments were taxable since they depended not only for their existence, but also for their quantum, on the ownership of minerals; they depended on "‘the use or production of’’ the property transferred.
Counsel contended that, while it is true that Mr. Justice Cameron "‘did not actually decide the point’’, he has intimated that " receipts” may be "‘like royalties’’, even though they are not paid to an owner. Counsel added that such is the respondent’s submission. He acknowledged that, if real or personal property were sold, the receipts of the purchase price cannot be ‘‘rents’’ or ‘‘royalties’’ in their true meaning. He stated, however, that Parliament must be presumed to have recognized this inconsistency ; hence the use of the words "‘other like periodical receipts.’’
The respondent’s last claim is that the receipts are income notwithstanding that they are payable on account of the sale of the franchise to Franco Public Service Limited. In counsel’s Opinion it is apparent from the concluding words of paragraph
(f) of subsection 1 of section 3 that Parliament intended to make it clear that certain "‘receipts'' were to be treated as ^income”, even though they were the consideration for a sale of real or personal property. He relied on the case of Spooner v. Minister of National Revenue (ubr supra). The facts in this case are simple. The respondent sold her right, title and interest in land which she held in freehold to a company in consideration of a sum in cash, shares in the company and an agreement to deliver to her 10% (described as a royalty) of oil produced from the land, on which the company covenanted carrying out drilling and, if oil was found, pumping operations. The company struck oil and paid to respondent in 1927 10% of the gross proceeds of the oil produced, which she accepted in discharge of the royalty. At page 690 we find the following observations by Lord MacMillan, who delivered the judgment of the Judicial Committee of the Privy Council :
‘Into which category, then, does the present case fall? Their Lordships agree with Newcombe, J., that ‘the case is not without its difficulties’, as all cases must be which turn upon such fine distinctions, but they are not prepared to differ from the view of the transaction which that eminent judge took, and with which all his colleagues agreed—namely, that ‘the respondent has converted the land, which is capital, into money, shares and 10 per cent of the stipulated minerals which the company may win . . . there is no question of profit or gain, unless it be as to whether she made an advantageous sale of her property.’ It was for the Minister to dis- place this view as being manifestly wrong. In their Lord- ships’ opinion he has failed to do so.”
In the judgment of the Supreme Court ([1931] S.C.R. 399; [1928-34] C.T.C. 178) Neweombe, J., speaking for the Court, expressed this opinion (p. 406) :
66 . . but the question here is, does a man take an income within the meaning of the Canadian Act when he sells his land in consideration of a part of the oil and gas to be extracted from it by the purchaser, if, as is stated in the present admissions, ‘the appellant was not and is not a dealer in or in the business of buying and selling oil lands and leases’; and, when there is no provision for taxing the property delivered by the purchaser to the appellant, either as annuity or royalty; neither of these words having been used in the statute to describe any right such as that which the vendor acquired under the agreement.
The case is not without its difficulties, but I am not satisfied that the Crown has made out its claim. And, inasmuch as it is the duty of those who assert and not of those who deny, to establish the proposition sought to be established, I think the Crown must fail.’ Secretary of State in Couneil of India v. Scoble, [1903] A.C. 299.’’
Regarding the question of the receipts being "‘like royalties”, counsel for appellant pointed out that the issue in Jones v. Commissioners of Inland Revenue centred around royalties dependent to the thing sold, i.e., the invention. He submitted that the true position in so far as royalties payable on account of the user of a patent or a copyright is laid down in the decision of the Court of Appeal in Withers v. Nethersole, [1946] 1 All E.R. 711, where Lord Greene, M.R., made the following observations (p. 715) :
4 One might perhaps have expected that where a piece of property, be it copyright or anything else, is turned to account in a way which leaves in the owner what we may call the reversion in the property so that upon the expiration of the rights conferred, whether they are to endure for a short or a long period, the property comes back to the owner intact, the sum paid as consideration for the grant of the rights, whether consisting of a lump sum or of periodical or royalty payments, should be regarded as of a revenue nature. We emphasize the word ‘intact’—salva rei substantia, to use the expression adopted by Lord Fleming in Trustees of Earl Hag v. C'.I.R. (22 Tax Cas. 725, at p. 735)—since, save in the special cases of wasting property, if the property is permanently diminished or injuriously affected, it means that the owner has to that extent realized part of the capital of his property as distinct from merely exploiting its incomeproducing character.’’
The decision of the Court of Appeal was affirmed by the House of Lords, [1948] 1 All E.R., 400.
In the case of Perrin v. Dickson (Inspector of Taxes), [1929] 2 K.B. 85; [1930] 1 K.B. 107, the facts were briefly these. By a policy of assurance effected by the appellant with an Assurance Society to provide for his son’s eduction, the Society, in consideration of six premiums of £90 each, paid annually between 1912 and 1917, agreed to pay him an annuity of £100 each year for seven years as from September 29, 1920. It was agreed that, if the son should die before the expiry of this period, the premiums were to be repaid to the parent or his representatives less any annual payments already made, but without interest. The parent also effected a similar policy to provide for his daughter’s education, by which the Society agreed to pay him £50 a year during a period of five years. The parent duly received the annual payments for the seven years (1920 to 1926) and assessments were made on him for income tax on these sums as on an annuity for these years. It was held that the annual payments made by the Society did not constitute an annuity, but were intended to effect a repayment of the principal sum with interest, and therefore that income tax was only payable upon such part of them as consisted of interest. The judgment of Rowlatt, J., in the King’s Bench Division was affirmed by the Court of Appeal. In his reasons for judgment Lord Hanworth, M.R., expressed the following opinion (p. 119) :
"The view that I have taken is to follow what I conceive to be the method directed in Scoble’s case, [1903] 1 K.B. 494. Kach case must be examined on its own data. I do not feel at all pressed with the observations that the effect of the decision will be to release all annuities for a fixed term of years from income tax. The immunity will be given only in proper cases in which an attempt is being made wrongly to tax capital under statutes which are intended to charge income and income only, for, as was said by Bramwell, B., in Foley v. Fletcher (3 II. & N. 788, cited by Serutton, L.J., in Lord IIowe 9 s case, [1919] 2 K.B. 336, 353), 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. The appeal is dismissed with costs. ’
Reference may also be made advantageously to Halsl)ury f s Laws of England, 2nd edition, volume 17, p. 180, paragraph 378 (an fine), and the decisions therein quoted; Beal’s Cardinal Rules of Legal Interpretation, 3rd ed., pp. 92, 267, 318; Craies, Treatise on Statute Law, 4th ed., p. 154; Maxwell, The Interpretation of Statutes, 9th ed., pp. 19, 291 ; Shore v. Wilson, (1842), 9 C. & F. 355, 565; Burton v. Reevell et al., (1847), 16
M. & W. 307, 309 ; The Queen on the prosecution of J. F. Pemsel v. the Commissioners of Income Tax, (1889), 22 Q.B. 296, 306.
Considering the nature and substance of the transaction involved it seems to me that the agreement (exhibit 3) is a sale and not a deed creating annuities or royalties. For the above reasons I have reached the conclusion that the assessments in question and the decision of the Minister affirming the same are ill founded and must be set aside and that the appeal must be allowed.
The appellant will be entitled to its costs against the respondent.
Appeal allowed.