Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al.

Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al.
Collection
Supreme Court Judgments
Date
1977-11-23
Report
[1978] 2 SCR 545
Judges
Laskin, Bora; Martland, Ronald; Judson, Wilfred; Ritchie, Roland Almon; Spence, Wishart Flett; Pigeon, Louis-Philippe; Dickson, Robert George Brian; Beetz, Jean; de Grandpré, Louis-Philippe
On appeal from
Saskatchewan
Subjects
Constitutional law
Decision Content
Supreme Court of Canada
Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al., [1978] 2 S.C.R. 545
Date: 1977-11-23
Canadian Industrial Gas & Oil Ltd. (Plaintiff) Appellant;
and
The Government of Saskatchewan and The Attorney General for the Province of Saskatchewan (Defendants) Respondents;
and
The Attorney General of Canada, The Attorney General of Quebec, The Attorney General of Manitoba, The Attorney General of Alberta Intervenants.
1976: November 8, 9, 10; 1977: November 23.
Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR SASKATCHEWAN
Constitutional law—Oil and gas legislation—Whether ultra vires—Direct or indirect taxation—Regulation of trade and commerce—British North America Act, 1867, ss. 91(2), 92(2), (13)—The Oil and Gas Conservation, Stabilization and Development Act, 1973, 1973-74 (Sask.), c. 72, amended by 1973-74 (Sask.), c. 73—An Act to amend The Mineral Resources Act, 1973-74 (Sask.), c. 64—The Petroleum and Natural Gas Regulations, 1969 (Sask.).
The constitutional validity of certain statutes enacted by the Legislature of the Province of Saskatchewan and regulations enacted pursuant thereto was challenged by the appellant, a corporation engaged in the exploration for, drilling for and production of oil and natural gas in Saskatchewan and owning freehold leases, Crown leases and royalty interests in that Province. The appellant was unsuccessful in seeking to obtain a declaration of their invalidity, both at trial and on appeal to the Court of Appeal for Saskatchewan. It then appealed, with leave, to this Court from the judgment of the Court of Appeal.
The legislation was enacted following the sharp rise in the price of oil on the world market which occurred in 1973, and, in summary, it had the following effect: 1. Production revenues from freehold lands were subjected to what was called a “mineral income tax”. The tax was one hundred per cent of the difference between the price received at the well-head and the “basic well-head price”, a statutory figure approximately equal to the price per barrel received by producers prior to the energy crisis. The owner’s interest in oil and gas rights in producing tracts of less than 1,280 acres were exempted from the tax. Deductions approved by the Minister of Mineral Resources were allowed in respect of increases in production costs and extraordinary transportation costs. Provision was made for the Minister to determine the well-head value of the oil where he was of the opinion that oil had been disposed of at less than its fair value. 2. All petroleum and natural gas in all producing tracts within the Province were expropriated and subjected to what was called a “royalty surcharge”. Oil and gas rights owned by one person in producing tracts not exceeding 1,280 acres were exempted. Although introduced by regulation rather than statute, the royalty surcharge is calculated in the same manner as the mineral income tax. For all practical purposes they are the same, save one exception. The well-head value for the purposes of royalty surcharge is the higher of the price received at the well-head and the price per barrel listed in the Minister’s order.
The statutes and regulations in question were: (1) The Oil and Gas Conservation, Stabilization and Development Act, 1973-74 (Sask.), c. 72 (Bill 42); (2) An Act to amend The Oil and Gas Conservation, Stabilization and Development Act, 1973-74 (Sask.), c. 73 (Bill 128); (3) An Act to amend The Mineral Resources Act, 1973-74 (Sask.), c. 64 (Bill 127); (4) Amendments to The Petroleum and Natural Gas Regulations, 1969, under The Mineral Resources Act, as enacted by (a) Order in Council 95/74 (b) Order in Council 1238/74.
The appellant’s attack upon the legislation was made upon two grounds: 1. It was contended that both the mineral income tax and the royalty surcharge constitute indirect taxation, and are therefore beyond the power of the Province to impose, the provincial legislative powers being limited to direct taxation within the Province under s. 92(2) of the British North America Act. 2. It was contended that the legislation relates to the regulation of interprovincial and international trade and commerce, a matter over which the Federal Parliament has exclusive legislative power under s. 91(2) of the British North America Act.
Held (Dickson and de Grandpré JJ. dissenting): The appeal should be allowed.
Per Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon and Beetz JJ.: The taxation scheme comprising the mineral income tax and the royalty surcharge does not constitute direct taxation within the Province and is therefore outside the scope of the provincial power under s. 92(2) of the British North America Act.
Both the mineral income tax and the royalty surcharge are taxes upon the production of oil virtually all of which is produced for export from Saskatchewan. These taxing provisions have the following impact upon the Saskatchewan oil producer. 1. He is effectively precluded from recovering in respect of the oil which he produces any return greater than the basic well‑head price per barrel. He is subjected to an income freeze at that figure and can obtain no more than that. 2. He is compelled to sell his product at a price which will equal what the Minister determines to be the fair value of the oil which he produces. He must do this, because his production of oil is subject to a tax per barrel representing the difference between fair value and basic wellhead price. If he is the lessee of mineral rights in lands in respect of which the mineral rights were expropriated by the Crown, he does not even have the option to discontinue production. Discontinuance of production without ministerial consent is subject to a heavy penalty.
The tax in question is essentially an export tax imposed upon oil production. In the past a tax of this nature has been considered to be an indirect tax. In essence the producer is a conduit through which the increased value of each barrel of oil above the basic well-head price is channeled into the hands of the Crown by way of tax. The increase in value is itself the tax and it is paid by the purchaser of the oil.
As to the issue with respect to the regulation of trade and commerce, the effect of the legislation is to set a floor price for Saskatchewan oil purchased for export by the appropriation of its potential incremental value in interprovincial and international markets, or to ensure that the incremental value is not appropriated by persons outside the Province. The legislation gave power to the Minister to fix the price receivable by Saskatchewan oil producers on their export sales of a commodity that has almost no local market in Saskatchewan. Provincial legislative authority does not extend to fixing the price to be charged or received in respect of the sale of goods in the export market. It involves the regulation of inter-provincial trade and trenches upon s. 91(2) of the British North America Act.
Accordingly, the statutory provisions, and the regulations and orders enacted and made relating to the imposition of the mineral income tax and the royalty surcharge, are ultra vires of the Saskatchewan Legisla- ture. It followed that Part 1 of Bill 42 is ultra vires of the Legislature. Part II of the Act amended The Mineral Taxation Act, 1972 (Sask.), c. 79, by increasing the rate of tax. As this is an acreage tax imposed upon interests in land, it is valid. Part III of the Act not having been proclaimed a decision as to its validity, at this time, was unnecessary. Part IV of the Act, which deals with the expropriation of oil and gas rights, was within the legislative jurisdiction of the Province as being legislation relating to property and civil rights under s. 92(13) of the British North America Act. For the same reason Part V of the Act which provides for amendments to The Oil and Gas Conservation Act was upheld. In Part VI, which is headed “General”, ss. 41 and 42 are related to the carrying into effect of Part I and to the collection of the royalty surcharge and for that reason are invalid. The amendments to Part I contained in Bill 128 are equally invalid.
Bill 127, which relates to the amendments to The Petroleum and Natural Gas Regulations providing for the imposition of the royalty surcharge, is ultra vires of the Legislature.
Those Petroleum and Natural Gas Regulations which imposed the royalty surcharge and the various orders made by the Minister of Mineral Resources pursuant to Part I of Bill 42 are also invalid.
The appellant is entitled to judgment against the Government for the recovery of the sums paid by way of mineral income tax and royalty surcharge, with interest thereon from the respective dates of payment up to the date of repayment.
A.-G. for British Columbia v. McDonald Murphy Lumber Co. Ltd., [1930] A.C. 357, followed; Carnation Co. Ltd. v. Quebec Agricultural Marketing Board, [1968] S.C.R. 238, distinguished; R. v. Caledonian Collieries, Ltd., [1928] A.C. 358; Atlantic Smoke Shops Ltd. v. Conlon, [1943] A.C. 550; Cairns Construction Ltd. v. Government of Saskatchewan, [1960] S.C.R. 619; Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, [1931] S.C.R. 357; Reference re The Farm Products Marketing Act, [1957] S.C.R. 198; Amax Potash Ltd. v. Government of Saskatchewan, [1977] 2 S.C.R. 576, referred to.
Per Dickson and de Grandpré JJ., dissenting: The mineral income tax is not an income tax; it is, however, a direct tax, and therefore within provincial competence. The purchasers would be paying the same price whether the tax existed or not. This fact conclusively prevents the levy from being in the nature of an indirect tax or an export tax. It is not passed on to purchasers to augment the price they would otherwise pay. Instead, they pay exactly the price they would pay in the absence of the tax and the producers are taxed on the profits they would otherwise receive.
Although in name a royalty, the royalty surcharge is, in substance, a tax. Except as affecting lessees under pre-existing Crown leases, it is a levy compulsorily imposed on previously existing contractual rights by a public authority for public purposes. It is patent that the consensual agreement and mutuality ordinarily found in a lessor-lessee relationship is entirely absent in the relationship between the Crown and persons subjected to the royalty surcharge. Royalty surcharge is the same one hundred per cent levy as is imposed in other terms as mineral income tax. That it is a tax is not fatal. In object and purpose and mode of exaction it is congruent with mineral income tax. It is therefore direct and falls within provincial competence.
There was nothing in the case to lead to the conclusion that the taxation measures imposed by the Province were merely a colourable device for assuming control of extraprovincial trade. The language of the impugned statutes does not disclose an intention on the part of the Province to regulate, or control, or impede the marketing or export of oil from Saskatchewan. Nor was there anything in the extraneous evidence to form the basis of an argument that the impugned legislation in its effect regulated interprovincial or international trade. The entire legislative scheme is aimed at taxation and its effect, if any, upon extraprovincial trade and commerce is incidental and non-disabling.
APPEAL from a judgment of the Court of Appeal for Saskatchewan[1], dismissing an appeal from a judgment of Hughes J. Appeal allowed, Dickson and de Granpré JJ. dissenting.
J.J. Robinette, Q.C., W.M. Elliott, Q.C., and M.A. Gerwing, for the plaintiff, appellant.
G.J.D. Taylor, Q.C., K. Lysyk, Q.C., and R.S. Meldrum, Q.C., for the defendants, respondents.
T.B. Smith, Q.C., and J. Mabbutt, for the Attorney General of Canada.
P. Lamontagne, Q.C., and J.D. Knoppers, for the Attorney General of Quebec. J.D. Frost, for the Attorney General of Manitoba.
W. Henkel, Q.C., and E.B. Corenblum, for the Attorney General of Alberta.
The judgment of Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon and Beetz JJ. was delivered by
MARTLAND J.—The question in issue in this appeal is as to the constitutional validity of certain statutes enacted by the Legislature of the Province of Saskatchewan and regulations enacted pursuant thereto, to which reference will be made hereafter. Their validity was challenged by the appellant, a corporation engaged in the exploration for, drilling for and production of oil and natural gas in Saskatchewan and owning freehold leases, Crown leases and royalty interests in that Province. The respondents are the Government of the Province of Saskatchewan and the Attorney General of that Province. The appellant was unsuccessful in seeking to obtain a declaration of their invalidity, both at trial and on appeal to the Court of Appeal for Saskatchewan. It appeals, with leave, to this Court from the judgment of the Court of Appeal.
The legislation was enacted following the sharp rise in the price of oil on the world market which occurred in 1973. The effect of the legislation has been summarized in the reasons of my brother Dickson, which I have had the advantage of reading. For purposes of convenience I substantially repeat that summary here:
First, production revenues from freehold lands were subjected to what was called a “mineral income tax”. The tax was one hundred per cent of the difference between the price received at the well-head and the “basic well-head price”, a statutory figure approximately equal to the price per barrel received by producers prior to the energy crisis. The owner’s interest in oil and gas rights in producing tracts of less than 1,280 acres were exempted from tax. Deductions approved by the Minister of Mineral Resources were allowed in respect of increases in production costs and extraordinary transportation costs. Provision was made for the Minister to determine the well-head value of the oil where he was of the opinion that oil had been disposed of at less than its fair value. Secondly, all petroleum and natural gas in all producing tracts within the Province were expropriated and subjected to what was called a “royalty surcharge”. Oil and gas rights owned by one person in producing tracts not exceeding 1,280 acres were exempted. Although introduced by regulation rather than statute, the royalty surcharge is calculated in the same manner as the mineral income tax. For all practical purposes they are the same, save one exception. The well-head value for the purposes of royalty surcharge is the higher of the price received at the well-head and the price per barrel listed in the Minister’s order.
The statutes and regulations under consideration are:
(1) The Oil and Gas Conservation, Stabilization and Development Act, 1973, S.S. 1973‑74, hereinafter referred to as “Bill 42”;
(2) An Act to amend the foregoing Act, being Chapter 73, S.S. 1973-74, hereinafter referred to as “Bill 128”;
(3) An Act to amend The Mineral Resources Act, Chapter 64, S.S. 1973-74, hereinafter referred to as “Bill 127”;
(4) Amendments to The Petroleum and Natural Gas Regulations, 1969, made under The Mineral Resources Act as made by:
(a) Order in Council 95/74, made pursuant to Section 18 of Bill 42 and confirmed by Section 1(a) of Bill 127;
(b) Order in Council 1238/74, made pursuant to Section 2 of Bill 127.
In reviewing the legislation, I will consider Bill 42 as amended by Bill 128, as all material amendments contained in Bill 128 are deemed to be retroactively effective as of January 1, 1974, the day on which Parts I and II of Bill 42 came into force. The remaining Parts of Bill 42, except Part III, came into force on the day of assent, December 19, 1974. Part III has not been proclaimed.
Section 3 of Bill 42 provides for the imposition of a mineral income tax payable monthly, commencing in January, 1974. This section reads:
3. A mineral income tax shall be paid as hereinafter required for each month, commencing with the month of January, 1974, by every person having an interest in the oil produced from a well in a producing tract.
The tax payable under s. 3 is calculated as set forth in subs. 4(1) of Bill 42, and is as follows:
4. (1) Subject to section 4A, the tax payable is an amount equal to the amount by which the well-head price received for each barrel of oil produced and sold in each month exceeds the basic well-head price, times the taxpayers’ share of the number of barrels of oil produced from the well from which the taxpayer shares the oil or the proceeds thereof subject to the allowance provided for in section 6.
The basic well-head price referred to in the preceding subsection is set out in Schedule II to Bill 42.
The well-head price referred to in subs. 4(1) means the price at the well-head of a barrel of oil produced in Saskatchewan and includes the wellhead value determined by the Minister under s. 4A. Under this section, when the Minister is of the opinion that oil, the income from which is subject to taxation, is being disposed of in any manner at less than its fair value, he determines what the well-head price should have been and calculates the tax payable on the basis of that determination.
Subsection 4(2) requires a producer of oil from a well to forward monthly a return to the Minister showing the production of oil from such well during the immediately preceding month and showing the well-head price received from the oil produced, the names and addresses of all persons entitled to share in the proceeds of the oil, the share of each in the production by way of royalty or otherwise, together with the amount payable with respect to each barrel or part of a barrel of the share of the oil.
The Act further provides that a person liable for the tax may deduct therefrom the cost of research, exploration, etc., where such undertakings are carried out with the approval of or under an agreement with the Minister. In the absence of the consent of or agreement with the Minister, the Minister may allow as a deduction part of the cost of exploration not exceeding fifty per cent of the total cost. An exemption from the tax provisions of the Bill is made in s. 5 with regard to oil and gas rights of an owner in producing tracts where the aggregate area of all producing tracts owned by such owner, or in respect of which he holds an interest other than a lease, does not exceed 1,280 acres.
Section 11, in effect, makes final and conclusive all determinations by the Minister relative to the imposition and calculation of the tax, and denies the review of such determination in any judicial proceedings. Section 17 authorizes the making of regulations by the Lieutenant‑Governor in Council.
Part IV of Bill 42 contains provisions for the expropriation of oil and gas rights in Saskatchewan. Under this Part, all petroleum and natural gas rights in all producing tracts in the Province, except those rights exempted from taxation by s. 5, are, as of January 1, 1974, deemed to be transferred to and vested in the Queen in the right of the Province of Saskatchewan, subject to leases existing and encumbrances registered prior to December 10, 1973.
Part IV further provides that the holder of a lease of oil and gas rights that have been expropriated is made subject to regulations 63 and 632? of The Petroleum and Natural Gas Regulations, 1969, as ratified by subss. 1A and 1B of s. 10 of The Mineral Resources Act, being Bill 127. Their effect is to make the oil production subject to payment of the royalty surcharge regulations in accordance with regulation 63 and regulation 63B.
Part IV then makes provision for compensation to those whose holdings have been expropriated, and where the expropriated rights are not under lease, the legislation provides for the Minister to issue to the former owner a Crown lease under The Petroleum and Natural Gas Regulations, 1969, thus allowing continuation of production on that basis.
By Order in Council No. 410/73, the Regulations governing the payment of royalties under Crown leases were amended by repealing ss. 57 to 65 inclusive, and substituting therefor new sec- tions. The pertinent new sections are s. 58 and s. 63. The royalty payable on the Crown leases is established by s. 58, which reads:
58. (1) The oil and gas produced from Crown lands acquired under these regulations, or under any former Petroleum and Natural Gas Regulations or under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council, shall for each calendar month be subject to a royalty, free and clear of all deductions as follows:
(a) with respect to oil, at a rate established on the total monthly production of each well as set forth in the following table and applied to ninety-eight and twelve one‑hundredths per cent of the total production from such well:
TABLE
Monthly Production
in barrels
Crown royalty expressed as
per cent
0 to 600
Monthly Production
60
601 to 2040
5 +
Monthly Production
120
Over 2040
449 +.25 (Monthly Production—2040)
Monthly Production
x 100
The term of the royalty established by s. 58 is set out in s. 63, which is as follows:
63. The royalty provisions herein set forth shall continue in force from the first day of April, 1973, for a period of five years in the case of oil, and for a period of two years in the case of gas, and thereafter until such provisions are amended, revised or substituted by the Lieutenant Governor in Council.
By Order in Council 95/74, the above s. 63 was repealed and a new section substituted therefor. The pertinent part of this new s. 63 is subs. (1), which imposes a royalty surcharge. This section reads:
63. (1) Oil produced or deemed to be produced from Crown lands acquired under these regulations or under any former Petroleum and Natural Gas Regulations or under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council shall, for each calendar month, be subject to payment of a royalty surcharge calculated as follows:
(oil produced less Crown royalty oil less Road Allowance Crown levy) times (international well-head price less basic well-head price);
The amendments made by Order in Council 95/74 were contained in Schedule I to Bill 42, which, by s. 18, gave power to make amendments and which were declared to have the same force and effect as if statutorily enacted.
Part VI of Bill 42 contains, in s. 42, a provision which is of considerable importance. It reads as follows:
42. Where on or after the tenth day of December, 1973, any person having an interest in respect to the oil and gas rights acquired by the Crown under this Act:
(a) causes production to be stopped without the consent of the minister therefor, other than temporarily where necessary in order to make repairs, that may cause damage or loss, present or future, to the proven recoverable reserves, is guilty of an offence and liable on summary conviction to a fine of $1,000 for each day during which the offence continues;
(b) removes equipment for production, storage, treating or transportation without the prior consent therefor of the minister is guilty of an offence and liable on summary conviction to a fine of not less than $1,000 nor more than $10,000.
The effect of this section is that any person who is producing oil from lands in respect of which the Crown has expropriated the oil and gas rights has no right to elect not to produce oil which would become liable for payment of the royalty surcharge. He is compelled, by the imposition of a heavy penalty imposed for failure to comply, to continue the production of oil.
The Mineral Resources Act was amended by Bill 127, being 1973-74 (Sask.), c. 64. Section 2 of the amending Act added subss. (1A) and (1B) to s. 10 of the Act. Those subsections gave power to make amendments to The Petroleum and Natural Gas Regulations, 1969, as set out in the Schedule to the Act, and, with the exception of s. 63B, made the Regulations retroactive to January 1, 1974. Subsection 1B provided that Regulation 63B would come into force on January 1, 1974.
The Schedule to the Act contains the amendments which were made by Order in Council 1238/74. Section 60 and subs. 63(1), as finally amended, read:
60. Every sale of oil, unless otherwise ordered by the minister, shall include the Crown’s royalty share of oil, and for the purpose of determining the royalty payable to the Crown, the sale shall be deemed to be at the well-head value established by the minister.
63. (1) Oil produced or deemed to be produced from Crown lands acquired under these regulations or under any former Petroleum and Natural Gas Regulations or under any lease or special agreement authorized or approved by an order of the Lieutenant Governor in Council shall, for each calendar month, be subject to payment of a royalty surcharge calculated as follows:
(oil produced less Crown royalty oil less Road Allowance Crown levy) times (well‑head value, as established by the minister less basic well-head price);…
The basic well-head price, for the purpose of the mineral income tax, was established for the period January 1, 1974, to May 31, 1974, by Schedules II and III to Bill 42. The basic well‑head price from and after June 1, 1974, was established by s. 63B of The Petroleum and Natural Gas Regulations as authorized and confirmed by the schedule to Bill 127.
For the purpose of calculating the royalty surcharge, the basic well-head price is set out in the Regulations. The end result has been that the same basic well-head price is used from month to month in determining both the mineral income tax and the royalty surcharge.
By the Minister’s Order WOV-01/74, the Minister ordered that the well-head value for the purpose of the payment of the mineral income tax, Crown royalty and the royalty surcharge on each type of crude oil produced in Saskatchewan should be the higher of the price received at the well-head and the price per barrel as listed in the order.
The Court was advised during argument that, subsequent to the trial of this action and while the appeal to the Court of Appeal was under consideration, Order WOV-01/74 was rescinded by Order WOV-01/75. This order contained a new and higher list of prices per barrel applicable from and after July 1975. Well-head value was stated to be the higher of the price per barrel received at the well-head and the price listed in the order. Unlike Order WOV-01/74 it does not refer to mineral income tax.
In summary, Bill 42 imposes a mineral income tax on the income received on oil produced in Saskatchewan in respect to producing properties. The royalty surcharge is made applicable in respect to production from Crown lands. In each case the determination of the basic well‑head price is the same; that is, by the Minister. In the case of the mineral income tax, the basic well-head price is set out in the schedules to the legislation. In the case of the royalty surcharge, the basic well-head price is set out in the regulations. The method of calculation is the same in each case. As the basic well-head price has been set at the same figure, whether by statute or by regulation, and as the well-head value had been set by the Minister at the same figure for the purposes of both the mineral income tax and the royalty surcharge, the calculation of the mineral income tax and the royalty surcharge has been the same. When effect is given to the expropriation provision of Bill 42, the mineral income tax would apply only to those tracts exempted by s. 27(2) of Bill 42. The royalty surcharge applies both to Crown-owned land, owned by the Crown prior to the enactment of Bill 42, and to oil rights vested in the Crown under the expropriation provisions of Bill 42.
The practical consequence of the application of this legislation is that the Government of Saskatchewan will acquire the benefit of all increases in the value of oil produced in that Province above the set basic well-head price fixed by the statute and regulations, which is approximately the same as that which existed in 1973 before the increase in world prices for oil. In this connection, there is the important fact that 98 per cent of all crude oil produced in Saskatchewan is destined for export from the Province either to Eastern Canada or the United States of America.
The appellant’s attack upon the legislation is made upon two grounds:
1. It is contended that both the mineral income tax and the royalty surcharge constitute indirect taxation, and are therefore beyond the power of the Province to impose, the provincial legislative powers being limited to direct taxation within the Province under s. 92(2) of the British North America Act.
2. It is contended that the legislation relates to the regulation of interprovincial and international trade and commerce, a matter over which the Federal Parliament has exclusive legislative power under s. 91(2) of the British North America Act.
Direct or Indirect Taxation
My brother Dickson has reviewed the leading authorities dealing with the distinction between direct and indirect taxation. It is not necessary for me to repeat that review here. He has pointed out that it has been settled that:
The dividing line between a direct and an indirect tax is referable to and ascertainable by the “general tendencies of the tax and the common understanding of men as to those tendencies. The general tendency of a tax is the relevant criterion”.
He has also pointed out that certain well understood categories of taxation have been generally established as falling within one or other of these classes. Thus custom levies are recognized as being indirect taxes, whereas income and property taxes have been recognized as being direct taxes. Similarly, a commodity tax has, as a general rule, been regarded as an indirect tax. The appellant submits that the levies here in question are commodity taxes, and refers to the Privy Council decision in R. v. Caledonian Collieries, Limited[2], in which Lord Warrington of Clyffe made the following statement:
The respondents are producers of coal, a commodity the subject of commercial transactions. Their Lordships can have no doubt that the general tendency of a tax upon the sums received from the sale of the commodity which they produce and in which they deal is that they would seek to recover it in the price charged to a purchaser. Under particular circumstances the recovery of the tax may, it is true, be economically undesirable or practically impossible, but the general tendency of the tax remains.
It is said on behalf of the appellant that at the time a sale is made the tax has not become payable, and therefore cannot be passed on. Their Lordships cannot accept this contention; the tax will have to be paid, and there would be no more difficulty in adding to the selling price the amount of the tax in anticipation than there would be if it had been actually paid.
In that case the tax was imposed upon the gross revenue of every mine owner, at a rate not to exceed 2 per cent. The Privy Council considered that the general tendency of the tax would be for a mine owner to seek to recover the tax from his purchasers.
A sales tax, imposed upon vendors of goods, has been generally regarded as an indirect tax. On the other hand, where the tax, although collected through the vendor is actually paid by the ultimate consumer, the tax has been held to be direct. (Atlantic Smoke Shops Ltd. v. Conlon[3]; Cairns Construction Limited v. Government of Saskatchewan[4]). However, in the present case the tax is imposed upon and payable by the producer in relation to the sale price of the oil which is produced. It is a sales tax, but the contention of the respondents is that it is not an indirect tax because the legislation does not contemplate and seeks to preclude the recovery of the tax from the purchaser. The respondent contends that the mineral income tax is, as its name implies, an income tax, and so, a direct tax. I agree with the reasons of my brother Dickson for holding that that tax is not an income tax as that term is understood in the authorities which say that an income tax is a direct tax.
The respondent submits, with respect to the royalty surcharge, that it is not a tax, but that it is a genuine royalty payable to the Crown, as the owner of mineral rights, by its lessees who have been authorized to extract minerals from Crown lands. To determine the validity of this contention it is necessary to consider the nature of the legal relationship between the Crown and the persons from whom payment of the royalty surcharge is demanded.
Some of these persons were the holders of petroleum and natural gas leases from the owners of the freehold interest in such minerals. Their obligation to pay royalties depended upon the terms of the lease from the freehold owner. The effect of Part IV of Bill 42 was to expropriate the rights of the freehold owners in the petroleum and natural gas in their lands, save in the case of freehold owners of producing tracts which had an aggregate total area of 1,280 acres or less. Owners coming within this exemption would retain title to their petroleum and natural gas rights and the legal relationship between them and their lessees would continue. However, Bill 42 imposed on such lessees the obligation to pay mineral income tax in respect of their production.
With respect to lands not falling within the exemption, the owners were divested of their title, which was given, by the statute, to the Crown. This was accomplished by s. 28(1) of Bill 42, but the transfer to and vesting of title in the Crown was stated to be “subject to any lease affecting the same that may exist immediately preceding the tenth day of December, 1973”. The rights of leaseholders in this category were thus preserved. However, s. 33(2) subjected such lessees to the same royalty surcharge as was imposed upon lessees leasing directly from the Crown. It provided:
33(2). Any person having a lease of the oil and gas rights or any of them shall be subject to section 63 of The Petroleum and Natural Gas Regulations, 1969, when enacted pursuant to section 18 and shall be liable to pay the royalty surcharge provided for therein from the first day of January, 1974, as if the lease came within subsection (1) of section 63.
The levy thus imposed cannot, in my opinion, be a royalty. The royalty payable by the lessee was fixed by the terms of his lease, and that lease was preserved by the terms of s. 28(1). It was not expropriated by the Crown. The imposition upon the lessee of the royalty surcharge levy was, in my opinion, a tax upon the lessee’s share of the production to which he was lawfully entitled. I agree with my brother Dickson that this levy fell within the criteria laid down by Duff J., as he then was, in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction[5], at p. 363, for deciding whether a levy constituted a tax.
Another class of lessees upon whom the royalty surcharge is imposed consists of those who were the holders of Crown leases at the time the royalty surcharge was imposed. In respect of these it was argued by counsel for the respondents that the Crown leases themselves, samples of which were filed as exhibits, contemplate the imposition of such a royalty. These leases contained the following provision:
And also rendering and paying therefor unto the Lessor any royalties at such rates and in such manner and at such times as are from time to time prescribed by the Order of the Lieutenant Governor in Council: such rents and royalties to be free and clear of and from all rates,’ taxes and assessments and from all manner of deduction whatsoever.
I do not accept this submission. In my opinion the word “royalty” was used in the leases in its customary sense as meaning a share of the production obtained by the lessee. My view is reinforced by the use of the word “rate” which contemplates the determination of the proportions of production allocated to the lessor. The regulation which imposed the royalty surcharge imposed an obligation upon lessees, holding existing leases, to turn over to the Crown 100 per cent of the proceeds of production beyond the basic well-head price, as fixed by the Government. The existing royalties, which were genuine royalties, continued unchanged.
In my opinion the royalty surcharge made applicable to these Crown leases was not a royalty for which provision was made in the lease agreement. It was imposed as a levy upon the share of production to which, under the lease, the lessee was entitled, and was a tax upon production.
I agree with the reasons of my brother Dickson for concluding that the royalty surcharge is a tax imposed upon Crown lessees of the same nature as the mineral income tax imposed upon lessees holding leases from freehold owners. It is significant that the royalty surcharge is computed in the same manner as the mineral income tax, and that the proceeds of both are to be paid into the same fund.
The reasons given by the Court of Appeal for concluding that the mineral income tax was a direct tax are summarized in the following extract from the judgment:
I think it must be concluded that the tax is one which is demanded from the very persons whom it is intended and desired should pay it. It is not one which is demanded from persons in the expectation and intent that they shall indemnify themselves at the expense of others. In my view, the language of the sections under which the tax is imposed, calculated and payment directed, leaves no doubt but the legislators intended the tax to be paid by the persons upon whom it was imposed and from whom payment is demanded.
If there were any doubt as to this view, I think that doubt would be resolved by an appreciation of the situation that would result if the persons taxed attempted to indemnify themselves at the expense of the purchasers of the oil. If the tax paid pursuant to Bill 42 was added to the sale price of the crude at the well-head, then to the extent it was so passed on, it would increase the well-head price. The effect, therefore, would simply be to increase the tax by the amount which the wellhead price was so increased. In other words, such action by the taxpayers would result in no benefit to themselves, but could, if the selling price were increased by the total amount of the tax, substantially increase the tax collected by the Government. Surely such a result following from an attempt to pass on the tax clearly indicates that the Legislature intended the tax to be paid by those upon whom it was imposed and from whom payment was demanded.
With respect, my consideration of the real substance and intent of the legislation under review leads me to a different conclusion.
Both the mineral income tax and the royalty surcharge are taxes upon the production of oil virtually all of which is produced for export from the Province of Saskatchewan. Section 3 of Bill 42 imposes the mineral income tax upon every person having an interest in the oil produced from a well in a producing tract. Section 63(1) of The Petroleum and Natural Gas Regulations, 1969, requires payment of the royalty surcharge upon oil produced or deemed to be produced from Crown lands.
Section 4(1) of Bill 42 as originally enacted fixed the tax payable as being the amount of the difference between the basic well-head price and the international well-head price de