T-2132-78
Midwest Oil Production, Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Calgary, January 11;
Ottawa, January 28, 1982.
Income tax — Income calculation — Appeal from 1974 and
1975 assessments — All crude oil was delivered to the Alberta
Petroleum Marketing Commission for purchase — Plaintiff
applied drilling incentive credits in satisfaction of natural gas
royalties payable to Alberta — Whether the royalty share of
crude oil delivered in kind to the Commission is an amount
receivable within s. 12(1)(o) of the Income Tax Act — Whether
the amount required to be included in income in respect of
natural gas royalties by s. 12(1)(o) is the actual amount paid,
or that amount plus the drilling incentive credits applied to
reduce the amount otherwise owing — Whether s. 12(1)(o) is
ultra vires — Whether the plaintiff is estopped from raising an
issue for the first time in this Court — Action dismissed —
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 12(1)(o), 165(1),
172(2), 175(3), 248(1) — The Mines and Minerals Act, R.S.A.
1970, c. 238, ss. 31(1),(2),(4), 121(1), 142(1),(2), 170.1(1) —
The Petroleum Marketing Act, S.A. 1973, c. 96, ss. 7(1), 15(1),
17, 18(1) — Exploratory Drilling Incentive Regulations, 1974,
Alta. Reg. 18174, s. 10 — The British North America Act,
1867, 30 & 31 Vict., c. 3 (U.K.) IR.S.C. 1970, Appendix II, No.
5], s. 125.
The plaintiff appeals its 1974 and 1975 assessments. Para
graph 12(1)(o) of the Income Tax Act requires a taxpayer to
include in his taxable income any amount that became receiv
able in the year by virtue of an obligation imposed by statute as
a royalty or an equivalent amount in relation to the production
in Canada of petroleum from an oil well situated on property in
Canada from which the taxpayer had, at the time of such
production, a right to take or remove petroleum. Effective
December 1, 1974 all crude oil was required to be delivered at
the custody transfer meter to the Alberta Petroleum Marketing
Commission (hereinafter APMC), which would purchase the
producer's share of crude oil and eventually would pay the
producer for it. The plaintiff argued that no amount thereafter
became receivable by Alberta as a royalty. The question there
fore is whether the royalty share of crude oil, or its value, of
Alberta delivered in kind by the plaintiff to the APMC after
December 1, 1974 is an amount receivable within the contem
plation of paragraph 12(1)(o). The plaintiff earned drilling
incentive credits under Alberta's program of incentives for the
drilling of wildcat wells. These credits could be applied in
satisfaction of obligations including natural gas royalties. The
Minister assessed the plaintiff on the basis that the natural gas
royalties receivable by Alberta included the actual amount paid
plus such credits. The plaintiff argued that the natural gas
royalties receivable by Alberta were reduced by the amounts of
the credits applied. The second issue is whether the amount
required by paragraph 12(1)(o) to be included in the plaintiff's
income in respect of natural gas royalties is the actual amount
paid to Alberta, or that amount plus the amount of drilling
incentive credits applied to reduce the amount which would
otherwise have been required to be paid. The third question is
whether paragraph 12(1)(o) is ultra vires in light of section
125 of The British North America Act, 1867 which prohibits
taxation of Crown lands. The last question is whether the
plaintiff is estopped from raising an issue because it was not
raised in its notices of objection.
Held, the action is dismissed. The amount receivable by
Alberta as a royalty is the measure of the tax levied on the
taxpayer, but it is the taxpayer, not the royalty, and not
Alberta, that is taxed. An appeal to the Federal Court from the
Tax Review Board is a trial de novo. A taxpayer cannot be
estopped from raising any issue it wishes in an appeal to the
Federal Court under subsection 172(2) of the Income Tax Act
solely because an issue is raised for the first time by the
pleadings. As in any action, the issues are those defined by the
pleadings. The assessments based on paragraph 12(1)(o) were
correct. "Receivable" in its ordinary meaning has nothing to do
with a change in ownership or title; it has to do with a change
in custody or possession. While it is impossible, prior to delivery
of the crude oil to the APMC, and perhaps after as well, to
point to a particular unit of crude oil and identify it as
Alberta's royalty share, it remains that the royalty share exists,
in fact, from the moment it is reduced to the lessee's possession
at the well-head. Subsection 170.1(1) of The Mines and Min
erals Act of Alberta requires that the royalty share be delivered
to the APMC and paragraph 15(1)(a) of The Petroleum
Marketing Act requires that the APMC accept delivery. Prior
to such delivery, Alberta's royalty share is, in the ordinary
meaning of the word, "receivable" by the APMC. The value of
that share is an amount, within the clear contemplation of
paragraph 12(1)(o) to be included in the lessee's income.
Section 10 of the Exploratory Drilling Incentive Regulations,
1974 provides that the drilling incentive credits "may be
applied in satisfaction of moneys payable" by the plaintiff with
respect to natural gas royalties, among other things. The credits
did not reduce the amount receivable in 1974 and 1975 by
Alberta as a royalty in relation to the production of natural gas
by the plaintiff; they were merely available, at its option, to be
applied in partial satisfaction of that amount. They were so
applied.
Phillips v. The Corporation of the City of Sault Ste.
Marie [ 1954] S.C.R. 404, applied. Goldman v. Minister of
National Revenue [1951] Ex.C.R. 274, applied. Spence v.
Minister of National Revenue 64 DTC 651, discussed.
Rosenberg v. Minister of National Revenue 68 DTC 830,
discussed.
INCOME tax appeal.
COUNSEL:
John M. Roland, Q.C. and Brian G. Morgan
for plaintiff.
T. B. Smith, Q.C. and C. T. A. MacNab for
defendant.
SOLICITORS:
Osler, Hoskin & Harcourt, Toronto, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: This appeal is from the assess
ments of the plaintiff's income tax returns for the
years ended December 31, 1974 and 1975. It is
concerned with paragraph 12(1)(o) of the Income
Tax Act, R.S.C. 1952, c. 148, as amended by S.C.
1970-71-72, c. 63, s. 1, as that provision applied
during the period November 18, 1974 to May 25,
1976.'
12. (1) There shall be included in computing the income of a
taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable:
(o) any amount (other than an amount referred to in para
graph 18(1)(m), paid or payable by the taxpayer, or a
prescribed amount) that became receivable in the year by
virtue of an obligation imposed by statute or a contractual
obligation substituted for an obligation imposed by statute by
(i) Her Majesty in right of Canada or a province,
(ii) an agent of Her Majesty in right of Canada or a
province, or
(iii) a corporation, commission or association that is con
trolled, directly or indirectly in any manner whatever, by
Her Majesty in right of Canada or a province or by an
agent of Her Majesty in right of Canada or a province
as a royalty or an equivalent amount, tax (other than a tax or
portion thereof that may reasonably be considered to be a
municipal or school tax levied for the purpose of providing
services in the immediate area of the property of the taxpay-
' S.C. 1974-75-76, c. 26, s. 4(2) as amended by S.C. 1977-
78, c. 1, s. 5(1).
er), rental, bonus, levy or otherwise or as an amount, how
ever described, that may reasonably be regarded as being in
lieu of a royalty or an equivalent amount, tax, rental, bonus,
levy or other amount (whether such royalty or equivalent
amount, tax, rental, bonus, levy or other amount is receivable
pursuant to any other Act or a contract) that may reasonably
be regarded as being in relation to
(iv) the acquisition, development or ownership by a tax
payer of a Canadian resource property or a property that
would have been a Canadian resource property if it had
been acquired after 1971, or
(v) the production in Canada of
(A) petroleum, natural gas or related hydrocarbons, or
(B) metal or industrial minerals to any stage that is not
beyond the prime metal stage or its equivalent
from an oil or gas well or mineral resource situated on
property in Canada from which the taxpayer had, at the
time of such production, a right to take or remove
petroleum, natural gas or related hydrocarbons or a right
to take or remove metal or industrial minerals.
Subsection 248(1), with an immaterial exception,
defines "amount" as "money, rights or things
expressed in terms of the amount of money or the
value in terms of money of the right or thing ...".
The principal issues are:
1. Whether the royalty share of crude oil, or its
value, of Her Majesty in right of the Province of
Alberta (hereinafter "Alberta") delivered in
kind by the plaintiff to the Alberta Petroleum
Marketing Commission (hereinafter "APMC")
after December 1, 1974, is an amount within the
contemplation of paragraph 12(1)(o), and
2. Whether the amount required by paragraph
12(1) (o) to be included in the plaintiff's income
in respect of natural gas royalties is the actual
amount paid Alberta or that amount plus the
amount of Drilling Incentive Credits (herein-
after "DIC's") applied to reduce the amount
which would otherwise have been required to be
paid.
I shall refer to these as the crude oil and natural
gas royalty issues respectively. In addition to them,
the plaintiff raised at the trial, although it had not
pleaded, the constitutional validity of paragraph
12(1)(o) and the defendant pleaded that the plain
tiff is estopped from raising the crude oil royalty
issue inasmuch as it was not raised in its notices of
objection. It is convenient to deal with these mat
ters first.
The challenge to the constitutional validity of
paragraph 12(1)(o) is based on section 125 of The
British North America Act, 1867. 2
125. No Lands or Property belonging to Canada or any
Province shall be liable to Taxation.
In Phillips v. The Corporation of the City of Sault
Ste. Marie,' a provincial tax on the tenant of land
belonging to the Crown was considered by the
Supreme Court of Canada. The appellants, who
fell within the extended meaning of "tenant", were
required to reside on land owned by Her Majesty
in right of Canada. Taschereau J., as he then was,
at page 407, in delivering the Court's judgment,
said:
There can be no doubt that under s. 32(1), the assessor
places a value on Crown property for tax purposes, but the
person assessed in respect of the land is not the Crown but the
"tenant" who is the one who pays the tax. The value of the land
is the measure of the tax, but the Act does not make the land
liable to taxation and, therefore, does not conflict with s. 125 of
the B.N.A. Act.
Here, the amount receivable by Alberta as a royal
ty is the measure of the tax levied on the taxpayer
but it is the taxpayer, not the royalty, and not
Alberta, that is taxed.
The estoppel pleaded arises out of the fact that,
in filing its tax returns, the plaintiff did report the
amounts subject of the crude oil royalty issue as
taxable income. It also reported natural gas royal
ty as required by paragraph 12(1)(o) less the
2 30 & 31 Vict., c. 3 (U.K.) [R.S.C. 1970, Appendix II, No.
5].
3 [1954] S.C.R. 404.
amount of the DIC's. That deduction was the only
issue raised in the notices of objection put in issue
in this appeal. The crude oil royalty issue was
raised for the first time by the statement of claim
herein. The defendant readily admits that, had the
crude oil royalty issue been raised in the returns,
or by the notices of objection, the position taken
would have been identical to that it now urges on
the Court.
The Act provides:
165. (1) A taxpayer who objects to an assessment under this
Part may, within 90 days from the day of mailing of the notice
of assessment, serve on the Minister a notice of objection in
duplicate in prescribed form setting out the reasons for the
• objection and all relevant facts.
172....
(2) Where a taxpayer has served a notice of objection under
section 165, he may, in place of appealing to the Tax Review
Board under section 169, appeal to the Federal Court of
Canada at a time when, under section 169, he could have
appealed to the Tax Review Board.
Section 169 prescribes an identical condition
precedent to the right to appeal to the Tax Review
Board and there are a number of decisions by that
tribunal to the effect that it has no jurisdiction to
hear an appeal on an issue not raised in the notice
of objection. For example, and it is extreme, in
Spence v. M.N.R., 4 the issue raised in the notice of
objection was whether a company of which he was
a shareholder had conferred a benefit on a taxpay
er by paying the amount of a settlement of a
damage action against him as well as the inciden
tal legal expenses. The taxpayer sought, before the
Board, to claim as a deduction from income cer
tain alleged farm losses which he had not claimed
in his original return and in respect of which he
had sought to file an amended return only after his
original return had been assessed and the appeal
taken. Another example, certainly less extreme, is
4 64 DTC 651.
Rosenberg v. M.N.R., 5 where the Minister had
disallowed the taxpayer's deduction of a $3,550
loss on a loan to a company of which he was a
shareholder and also disallowed the deduction of
$2,450 he had paid under his guarantee of the
company's bank loan. The taxpayer dealt only with
the $3,550 item in his notice of objection and the
Board refused, for want of jurisdiction, to hear
him on the $2,450 item.
This Court appears not to have dealt with this
question directly. In Goldman v. M.N.R., 6 Thor-
son P. was concerned with whether an appeal to
the Exchequer Court from a decision of the
Income Tax Appeal Board was a trial de novo.
After a lengthy review of the legislation then in
effect and that which it had replaced, he
concluded:
All these considerations lead to the conclusion that the
appeal to this Court from a decision of the Income Tax Appeal
Board, whether by the taxpayer or by the Minister, is a trial de
novo of the issues involved, that the parties are not restricted to
the issues either of fact or of law that were before the Board
but are free to raise whatever issues they wish even if different
from those raised before the Board and that it is the duty of the
Court to hear and determine such issues without regard to the
proceedings before the Board and without being affected by
any findings made by it.
The Supreme Court of Canada, in dismissing an
appeal from that judgment, did not deal with that
particular issue.' The relevant provisions of the
Act have since been extensively amended; how
ever, the conclusion that an appeal to this Court
from a decision of the Tax Review Board is a trial
de novo remains valid. That being so, I do not see
that this Court can be without jurisdiction to deal
with an issue not raised in the notice of objection
when the appeal is brought directly to the Court
5 68 DTC 830.
6 [1951] Ex.C.R. 274 at p. 281.
7 [1953] S.C.R. 211.
under subsection 172(2).
I do not think that a taxpayer can be estopped,
in any technical sense of that term, from raising
any issue it wishes in an appeal to this Court under
subsection 172(2) of the Act only because the issue
was not raised in its notice of objection or, if
applicable, before the Tax Review Board. It is to
be emphasized that it is the Minister's assessment,
not his reasons for it, that is the subject-matter of
the appeal. Section 175 of the Act provides the
methods by which an appeal shall be instituted in
this Court and further, that
175....
(3) An appeal instituted under this section shall be deemed
to be an action in the Federal Court to which the Federal Court
Act and the Federal Court Rules applicable to an ordinary
action apply, except ....
None of the exceptions has any relevance to this
issue. As in any action, the issues which the Court
must deal with are those defined by the pleadings
regardless of what has gone before. That is not to
say that an estoppel could not be successfully
pleaded on behalf of the fisc but the plea cannot be
sustained solely on the basis that an issue is raised
for the first time by the pleadings in this Court.
A good deal of the time taken by the trial was
devoted to evidence of a background nature. It is
not necessary to deal with much of it. It is suffi
cient to start at the point at which conventionally-
produced petroleum and natural gas, owned in situ
by Alberta, reaches the surface. I shall deal first
with the crude oil royalty issue.
A typical production situation, at least in so far
as the plaintiff was concerned, may be described in
the following terms. What rises, or is pumped, to
the surface in an oil well is a mixture of oil, gas
and water. The volume of that mixture is metered
at the well-head and the mixture is pumped to a
battery which receives like mixtures from other,
variously owned, wells. The battery is subject of a
contractual arrangement among all interested pro-
ducers which, inter alia, designates one of them its
operator. The production of each contributing well
is tested periodically to determine its composition.
The production of all of the wells becomes mixed
in processing at the battery which separates the
water, gas and oil. The crude oil flows through
storage tanks to the pipeline of a common carrier.
A custody transfer meter at the point of delivery to
the common carrier measures the quantity of
crude oil. It is at this point that title to the crude
oil passes to its purchaser, price is fixed by the
APMC and the quantity to be paid for is deter
mined. Likewise, it is at this point that the quanti
ty of Alberta's royalty share is fixed. Monthly
allocation of the crude oil produced, including the
royalty share, back to individual wells and their
owners, involves mathematical calculations taking
account of each well's gross production and its
composition as determined by tests during the
month. Without getting into lengthy and complex
details, it is enough to recognize that the battery
operator is constituted the agent of all its pro
ducers to receive and distribute their payments
and to carry out some of their obligations includ
ing delivery to the APMC of Alberta's royalty
share.
Prior to December 1974, all of the crude oil,
including Alberta's royalty share, was sold by the
producer to the purchaser at the custody transfer
meter and the producer was required to pay Alber-
ta the price received by it attributable to the
royalty share. Effective at 7:00 a.m., December 1,
1974, all crude oil was required to be delivered at
the custody transfer meter to the APMC. The
APMC purchases the producer's share of the
crude oil at that point and, in due course pays the
producer for it. The plaintiff's position is that,
upon the advent of this new regime, no amount
thereafter became receivable by Alberta as a roy
alty or equivalent amount and that the value of
Alberta's royalty share no longer fell within para
graph 12(1)(o).
The plaintiff's rights and obligations are defined
by provincial legislation and by the leases entered
into with Alberta pursuant to that legislation.
There are some differences in the forms of lease
executed from time to time; however, the varia
tions appear immaterial to the issue here. The
material portion of one of the leases in evidence,
Exhibit 10, reads:
NOW THEREFORE THIS INDENTURE WITNESSETH that in
consideration of the rents and royalties hereafter provided ...
Her Majesty hereby grants unto the lessee ... the exclusive
right to explore for, work, win and recover petroleum and
natural gas within and under ... together with the right to
dispose of the petroleum and natural gas recovered.
... rendering and paying therefor unto Her Majesty a royalty
on all petroleum and natural gas obtained from the location
and on all substances obtained therefrom, at such rate or rates
as are now or may hereafter from time to time be prescribed by
the Lieutenant Governor in Council, such royalty to be free and
clear of and from all deductions whatsoever. The maximum
royalty payable on the petroleum and natural gas ... shall not
exceed one-sixth of the production from the location.
The last sentence is material only because of the
word "payable" in it. It has been abrogated by
legislation. Clause 5 of the lessee's covenants and
clause 12 of the mutual covenants are similarly
material and provide, in part, that:
5. The lessee shall well and truly pay or caused to be paid ...
the rent and royalty payable under this lease.....
12. If and whenever the rent or royalty hereby reserved, or
any part thereof, is in arrears and unpaid ....
The lease is, by definition, an agreement under
the terms of The Mines and Minerals Act, 8 and
petroleum, oil and natural gas are, by definition,
minerals. The Act provides, inter alia,
31. (1) A royalty is reserved to the Crown in right of Alberta
on the mineral that may be won, worked, recovered or obtained
pursuant to any agreement or certificate of record made or
entered into under this Act.
(2) The royalty to be computed, levied and collected on the
mineral won, worked, recovered or obtained pursuant to any
agreement or certificate of record made or entered into under
this Act, the former Act or The Provincial Lands Act shall be
the royalty prescribed from time to time by the Lieutenant
Governor in Council.
8 R.S.A. 1970, c. 238, as amended.
(4) A royalty reserved to the Crown in right of Alberta on a
mineral
(a) is payable in kind except as otherwise provided by this
Act or any order of the Lieutenant Governor in Council,
and
(b) is payable on the mineral when and where obtained,
recovered or produced.
121. (1) A lease grants the right to the petroleum and
natural gas that are the property of the Crown in the location
subject to any exceptions expressed in the lease.
142. (1) The petroleum and natural gas obtained from any
location acquired under this Part is subject to the payment to
the Crown of such royalty thereon as may from time to time be
prescribed by the Lieutenant Governor in Council.
(2) The royalty shall be collected in such manner as may be
prescribed by the Minister.
170.1 (1) Every agreement to which this section applies is
subject to the condition that the Crown's royalty share of the
petroleum recovered pursuant to the agreement shall be deliv
ered to the Alberta Petroleum Marketing Commission incorpo
rated under The Petroleum Marketing Act.
Paragraph (a) was added to subsection 31(4) and
section 170.1 was enacted by S.A. 1973, c. 94. All
leases material to this action were made subject of
section 170.1, effective March 1, 1974, by Alberta
Regulation 15/74. The 1973 amendments to The
Mines and Minerals Act were part of a legislative
scheme that included enactment of The Petroleum
Marketing Act 9 whereby the APMC was created
as a body corporate. That Act provides, inter alia,
7. (1) The Commission is for all purposes an agent of the
Crown in right of Alberta and its powers may be exercised only
as an agent of the Crown in right of Alberta.
15. (1) The Commission
(a) shall accept delivery within Alberta of the Crown's
royalty share of the petroleum recovered pursuant to an
agreement and required to be delivered to it by section
170.1 of The Mines and Minerals Act, and
(b) subject to subsection (2), shall sell within Alberta the
Crown's royalty share of petroleum at a price that is in
the public interest of Alberta.
17. The Commission shall pay the proceeds of sales of
petroleum by it under this Part to the Provincial Treasurer for
9 S.A. 1973, c. 96.
deposit in the General Revenue Fund in accordance with the
directions of the Provincial Treasurer.
18. (1) The delivery to the Commission of the Crown's
royalty share of petroleum recovered pursuant to an agreement
operates to discharge the lessee with respect to his liability to
pay that royalty to the Crown in right of Alberta ....
The Petroleum Marketing Act was proclaimed
and the APMC was constituted on January 15,
1974. It became operative March 1. Without
necessarily accepting its legal conclusions, the
APMC's memorandum to producers, triggered by
its receipt of T-5 information slips early in 1975,
accurately describes the crude oil royalty regimes
in effect during 1974.
a) As regards production from Alberta Crown Lands during
the period commencing March 1, 1974 and ending Novem-
ber 30, 1974, the Commission took delivery of the Crown
royalty share of petroleum in kind. The lessees delivered this
Crown royalty share of petroleum to crude oil purchasers for
sale by the Commission. The lessees received from the crude
oil purchasers the proceeds of sale of the Crown royalty
share. The receipt of these proceeds was on behalf of the
Commission. Under this procedure there is no payment by
the lessee to the Commission of either "royalties from
Canadian sources" or "other income from Canadian
sources".
b) As regards production of petroleum from Alberta Crown
Lands for the month of December 1974 and following, the
Commission took delivery of the Crown royalty share of
petroleum at the battery and received payment for the
proceeds of sale of the Crown royalty share directly from the
crude oil purchasers. Again under this procedure there is no
payment by the lessee to the Commission of either "royalties
from Canadian sources" or "other income from Canadian
sources".
The regime described in paragraph b) prevailed
throughout 1975. The legal basis for that regime is
established by the provincial legislation, recited
above.
Stripped of verbiage inapplicable to the crude
oil royalty issue, paragraph 12(1)(o) requires a
taxpayer to include in his taxable income
... any amount that became receivable in the year by virtue of
an obligation imposed by statute by an agent of [Alberta] as a
royalty or an equivalent amount in relation to the production in
Canada of petroleum from an oil well situated on property in
Canada from which the taxpayer had, at the time of such
production, a right to take or remove petroleum.
The value of Alberta's royalty share is readily
expressed in terms of money. Indeed, it is routinely
expressed that way. Alberta's royalty share is an
"amount" within the extended definition of that
term under the Income Tax Act. The only serious
question is whether, under the regime in effect
from December 1, 1974, through 1975, it was an
" amount receivable". If it was an amount receiv
able, it was certainly an amount receivable by
Alberta's agent, the APMC, that fell squarely
within the prescription of the balance of paragraph
12(1)(o). It is unnecessary to decide whether the
obligation is imposed by statute or is a contractual
obligation substituted for a statutory obligation; it
is clearly one or the other or both.
All of the crude oil, including Alberta's royalty
share, belongs to Alberta in its subterranean situa
tion. At some point in the production process,
ownership of an undivided share of that crude oil
passes to its producer. I accept that ownership of
the royalty share remains with Alberta through
out, until sold by the APMC. Any alternative, for
example that the producer obtains title to all of the
crude oil at some point in the process and that title
to the royalty share passes to Alberta upon its
delivery to the APMC, does not strengthen the
plaintiff's case.
Nothing, in my view, turns on the term "receiv-
able" being the antonym of "payable" in common
accounting terminology nor the related conclusion
invited by the use of the word "payable" and
variations thereon in the leases and the provincial
legislation. This issue is not concerned with gener
ally accepted accounting principles but with the
interpretation of a statute. While it may be that no
royalty became payable in respect of crude oil
under the regime imposed December 1, 1974, that
is not the issue and I will leave to someone else the
possibly neat question whether an obligation to
deliver to another his own property gives rise to an
amount being payable. The issue here is whether
such an obligation gave rise to an amount being
receivable by Alberta or its agent, the APMC.
"Receivable" is not defined by the Income Tax
Act. It is not a technical term. Its primary mean
ing, according to The Shorter Oxford English
Dictionary, is "capable of being received", while
that of "receive" is "to take in one's hand, or into
one's possession (something held out or offered by
another); to take delivery of (a thing) from
another, either for oneself or for a third party".
"Receivable", in its ordinary meaning, has nothing
to do with a change in ownership or title; it has to
do with a change in custody or possession.
While it is impossible, prior to delivery of the
crude oil to the APMC, and perhaps after as well,
to point to a particular unit of crude oil, either
after separation or while still in mixture with gas
and water, and identify it as a unit of Alberta's
royalty share, it remains that the royalty share
exists, in fact, from the moment it is reduced to
the lessee's possession at the well-head. Subsection
170.1(1) of The Mines and Minerals Act requires
that the royalty share be delivered to the APMC
and paragraph 15(1)(a) of The Petroleum Mar
keting Act requires that the APMC accept deliv
ery. Prior to such delivery, Alberta's royalty share
is, in the ordinary meaning of the word, "receiv-
able" by the APMC. The value of that share is an
amount, within the clear contemplation of para
graph 12(1)(o) of the Income Tax Act, to be
included in a lessee's income. The value ascribed to
the share in the assessments subject of this appeal
is not in issue.
Turning to the natural gas royalty issue, effec
tive in 1972, Alberta established a scheme of
incentives to the drilling of wildcat wells. The
plaintiff earned credits under that program.
Amounts credited to it could not be withdrawn in
cash but were available to be applied in satisfac
tion of prescribed obligations including natural gas
royalties. The plaintiff paid natural gas royalties of
$22,170.97 in 1974, and $50,122.47 in 1975, and
included those amounts in its taxable income pur
suant to paragraph 12(1)(o). The plaintiff also
requested Alberta to apply DIC's totalling
$3,138.56 in 1974, and $24,122.44 in 1975,
against natural gas royalties. The Minister
assessed on the basis of natural gas royalties
receivable by Alberta in the amounts of
$25,309.53 in 1974, and $74,234.91 in 1975. I note
a $10 discrepancy in the 1975 addition.
Regulations '° in effect during 1974 and 1975,
provided:
10. Credit established pursuant to section 8, upon the written
request of the holder thereof, and subject to procedures estab
lished by the Department, may be applied in satisfaction of
(a) moneys payable by him with respect to any applications
and dispositions made under Part 5 of The Mines and
Minerals Act,
(b) moneys payable by him pursuant to section 40 of The
Mines and Minerals Act, or
(c) taxes levied under The Freehold Mineral Taxation Act,
and becoming due and payable between January 1, 1974 and
December 31, 1979.
Moneys payable to Alberta on the sale by a lessee
of Alberta's royalty share of natural gas fall within
paragraph (a).
In pleading, the plaintiff alleged that the natural
gas royalties receivable by Alberta were reduced
by the amounts of the DIC's applied. It argued,
correctly, that it never had a right to receive the
amount of the DIC's in money but was entitled
only to apply it as section 10 prescribed. The
argument then was that the DIC's were, therefore,
not a debt or sum owing by the Crown to the
plaintiff and, thus, could not constitute a set-off
against the royalty obligation as might be the case
with mutual debts. It follows, presumably, that,
since the DIC's could not be a set-off against the
royalty, their application to that obligation must
have had the effect of reducing the obligation in a
way that, to the extent of the reduction, the obliga-
1 0 Exploratory Drilling Incentive Regulations, 1974, Alta.
Reg. 18/74.
tion is to be deemed never to have existed rather
than to have been partly satisfied.
I hope I am not misrepresenting the position
but, I must admit, I find it hard to understand. In
any event, the whole argument ignores completely
the plain words of section 10. The DIC's "may be
applied in satisfaction of moneys payable" by the
plaintiff with respect to natural gas royalties,
among other things. The DIC's did not reduce the
amount receivable in 1974 and 1975 by Alberta as
a royalty in relation to the production of natural
gas by the plaintiff; they were merely available, at
its option, to be applied in partial satisfaction of
that amount. They were so applied.
The plaintiff also argued that, in any event,
because the actual amount of natural gas royalty
receivable by Alberta in respect of a given calen
dar year cannot be ascertained until the following
year, the amounts assessed to the plaintiff for 1974
and 1975 should have been assessed for 1975 and
1976 respectively. This issue was not raised by the
pleadings and I do not, therefore, propose to deal
with it. It is an issue which, if properly raised,
would likely have been subject of evidence and not
just argument as was the constitutional issue.
Having found that the assessments based on the
application of paragraph 12(1)(o) were correct, it
is not necessary to deal with the defendant's alter
native pleading of paragraph 18(1)(m) and subsec
tion 69(6) of the Income Tax Act. The action is
dismissed with costs.
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