Payments received as part of the consideration for the sale of a capital asset, even if structured as a percentage of future mineral production, constitute the purchase price of the asset (a capital receipt) rather than taxable income or profit derived from the property.

Lord Macmillan.-

The respondent, Mrs. Spooner, in the year 1927 received a sum of $9,570'41 in circumstances set out in an agreed statement of facts. The question is whether this sum was “income” of the respondent within the meaning of the Income War Tax Act (Revised Statutes of Canada, 1927, Chap. 97). It appears that the respondent, who was the owner in freehold of a ranch in Alberta, entered into an agreement on 15th April 1925, with Vulcan Oils Ltd., a company incorporated under the laws of the Province of Alberta, and having for its objects “drilling for and procuring the production and vending of oil.” By this agreement the respondent sold to the company all her right, title and interest in and to twenty acres of her land, subject to the provisos, conditions and royalties hereinafter reserved.” In consideration of the said sale” the company agreed to pay to the respondent the sum of $5,000 in cash on the execution of the agreement, to issue to her 25,000 full paid shares of $1 each in the company, and further to deliver to her order :

“the royalty hereby reserved .... namely, 10 per cent of all the petroleum, natural gas and oil produced and saved from the said lands free of costs.”

The company undertook to deliver this percentage at least once in every 30 days, to keep and make available to the respondent proper books of account showing the quantity of petroleum, natural gas and oil produced from the lands, and to permit the respondent at all times to enter upon and inspect the workings. It was also agreed that the company should forthwith acquire the necessary plant and commence drilling as expeditiously as possible, and upon oil or petroleum being discovered should carry on the operation of pumping or otherwise procuring those products from the lands. “In the event of oil or gas being discovered in commercial quantities on the said lands” the respondent, “as part of the consideration for this agreement” covenanted to transfer to the company in fee simple the 20 acres already mentioned and also 20 additional acres:

“reserving always however to the vendor the said royalty of 10 per cent of all petroleum, natural gas and oil in respect to the”

first-mentioned 20 acres. The company duly commenced operations, and in the fall of 1926 struck oil in commercial quantities. In the year 1927 the company did not deliver to the respondent any of the oil produced, but sold the whole of it, and paid over $9,570'41, being 10 per cent of the gross proceeds, to the respondent, which sum she accepted in satisfaction of the “royalties” reserved to her under the agreement. When the present question arose the respondent had not yet conveyed the lands to the company and the title still remained in her own name. The respondent in her income-tax return for the year 1927 reported no income, but she was subsequently assessed to tax in respect of this sum of $9,570'41 which she had received from the oil company, the amount of the tax being $301'07. The Minister of National Revenue, the present appellant, to whom the respondent appealed, confirmed the assessment subject to adjustment as to depletion in accordance with S. 4, Chap 12 of the Statutes of 1928.” The respondent having appealed to the Exchequer Court of Canada her appeal was dismissed by Audette, J. On a further appeal to the Supreme Court of Canada the respondent obtained a unanimous judgment in her favour, setting aside the assessment. From this judgment the Minister of National Revenue has now appealed to His Majesty in Council. The Income War Tax Act contains the following definition of income :

“3.(1) For the purposes 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, o