T-3869-73
Vauban Productions (Plaintiff) (Appellant)
v.
The Queen (Defendant) (Respondent)
Trial Division, Addy J.—Montreal, June 17;
Ottawa, Sept. 5, 1975.
Income tax—Plaintiff acquiring rights to show films on
Canadian French television—Transferring rights to CBC—
CBC paying 10% withholding tax on amount owing plaintiff—
Whether plaintiff exempt under Canada-France Tax Conven
tion Act, 1951—Whether contract for leasing of films or sale
of rights—Canada-France Tax Convention Act, 1951, S.C.
1951, c. 40, Art. 4(1), 13(111), (IV)—Income Tax Act, R.S.C.
1952, c. 148, s. 106(2).
Plaintiff acquired exclusive rights to show certain films on
French television in Canada. By contract, plaintiff transferred
rights in the films to the CBC, and when the CBC paid
plaintiff, 10% withholding tax was paid to defendant. Plaintiff
challenges this payment, claiming exemption under the
Canada-France Tax Convention Act, 1951. The question is
whether the contract was for leasing of films, or an outright
sale of rights.
Held, dismissing the appeal, if the contract were for the
leasing of films, there would be no exemption from the with
holding tax (Article 13(IV)). Plaintiff did not transfer all it had
received, but retained a residuary possessory right to the films.
The contract is inconsistent with an absolute sale. Where there
has not been an absolute transfer of the rights of the distributor
of films. to another party as user for the purpose of Article
13(III) and (IV), the transfer is considered to be a leasing. The
principle that a liberal interpretation should be given to a tax
Convention does not alter the intention.
Commissioners of Inland Revenue v. Rustproof Metal
Window Co. 29 T.C. 243; Commissioners of Inland Reve
nue v. British Salmson Aero Engines, Ltd. 22 T.C. 29;
Desoutter Bros. Limited v. J.E. Hanger & Co., Limited
[ 1936] 1 All E.R. 535; Strick v. Regent Oil Co. Ltd. 43
T.C. 1; Withers v. Nethersole (H.L.) [1948] 1 All E.R.
400; Technical Tape Corporation v. M.N.R. (1964) 35
Tax A.B.C. 389, applied. M.N.R. v. Paris Canada Films
Limited [1963] Ex.C.R. 43, followed. M.N.R. v. Stickel
[ 1974] C.T.C. 416, considered. Saunders. v. M.N.R. 54
DTC 524, discussed.
INCOME tax appeal.
COUNSEL:
P. Vineberg, Q. C., for plaintiff.
J. Potvin for defendant.
SOLICITORS:
Phillips & Vineberg, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: This is an appeal from a decision of
the Tax Review Board. There is no dispute as to
the facts arid, in lieu of adducing evidence at trial,
an agreed statement of facts was filed by the
parties.
The plaintiff corporation is a distributor of
motion-picture films with its principal place of
business in Paris, France. It has no permanent
establishment in Canada. It acquired from another
distributor in Leichtenstein exclusive rights in cer
tain motion-picture films, the rights being express
ly limited to the showing of the films on Canadian
French language television and for limited periods
of time in each case.
By contract, the plaintiff transferred to the
Canadian Broadcasting Corporation the exclusive
right to broadcast these films on its French net
work. For each film, the time, for which the CBC
acquired these exclusive rights to show the film,
was the exact period for which the plaintiff had
acquired the rights to the film as a distributor.
The price paid for the right to show the film was
in each case a fixed flat amount, regardless of the
degree of user.
In 1967, the CBC paid the plaintiff a total
amount of $119,250 in accordance with the con
tract and a withholding tax of 10% was paid to the
defendant on this amount pursuant to section
106(2) of the Income Tax Act'. The right to
withhold the amount is challenged and the Court
is requested to determine whether, by virtue of the
Convention forming part of the Canada-France
Tax Convention Act, 1951 2 , the plaintiff is
exempted from payment of the tax imposed under
the aforesaid section 106(2).
R.S.C. 1952, c. 148.
2 15 Geo. VI, c. 40.
No issue arises as to section 106(2) itself, it
being fully agreed by the parties in the facts as
stated, that, should the plaintiff be exempt by
virtue of the aforesaid Convention, the appeal is to
be allowed with costs, otherwise the appeal is to be
dismissed with costs.
Paragraph I of Article 4 of the Convention reads
as follows:
I.—The income from industrial, mining, commercial, finan
cial and insurance enterprises is taxable by the State in the
territory of which there is a permanent establishment.
There is no doubt that the income from the
transfer of the rights comprises a commercial
enterprise and, therefore, if no other provision
existed, would exempt the plaintiff from withhold
ing tax.
However, the issue turns on the interpretation of
paragraphs III and IV of Article 13 of the Con
vention and their application to the facts as
outlined in the case at bar. The English text of
those paragraphs reads as follows:
III.—The proceeds of royalties (redevances) derived from
the sale or licensing of the use of patents, trademarks, secret
processes or formulae, are taxable in the State of the debtor.
IV.—The word "royalties" as used in paragraph III of this
Article should be understood to include the income from the
lease of motion picture films.
It is interesting to note that in the French text,
paragraph III of Article 13 reads as follows:
III.—Les produits ou redevances (royalties) provenant de la
vente .... [The underlining is mine.]
It seems clear that there is a typographical error in
the English version and that the word "of' be
tween the words "proceeds" and "royalties" should
read "or", the correct text therefore being: "The
proceeds or royalties (redevances) derived
from ...."
The term "royalties" normally refers to a share
in the profits or a share or percentage of a profit
based on user or on the number of units, copies or
articles sold, rented or used. When referring to a
right, the amount of the royalty is related in some
way to the degree of use of that right. This is
evident from the various dictionary definitions of
the word "royalty" when used in connection with a
sum payable. Royalties, which are akin to rental
payments, have invariably been considered as
income since they are either based on the degree of
use of the right or on the duration of the use, while
a lump sum payment for the absolute transfer of a
right, without regard to the use to be made of it, is
of its nature considered a capital payment,
although it may of course be taxable as income in
the hands of the recipient if it is part of that
taxpayer's regular business. This concept of the
basic difference between "royalties" and "lump
sum payments" for the transfer of rights has been
recognized in the following cases: Commissioners
of Inland Revenue v. Rustproof Metal Window
Co., Ltd. 3 ; Commissioners of Inland Revenue v.
British Salmson Aero Engines, Ltd. 4 ; Desoutter
Bros. Limited v. J. E. Hanger & Co., Limited 5 ;
Strick v. Regent Oil Co. Ltd. 6 ; Withers v.
Nethersole 7 ; and Technical Tape Corporation v.
M.N.R. 8 .
Since the moneys received by the plaintiff
cannot be considered as "royalties (redevances)
derived from the licensing of the use of patents,
trade marks, secret processes or formulae" nor can
they conceivably be considered as "proceeds
derived from the sale of any patents, trade marks,
secret processes or formulae," the question turns
on whether the moneys are "income from the lease
of motion-picture films" as stated in paragraph IV
of Article 13.
When including in the word "royalties" in para
graph III, the income from leasing as mentioned in
paragraph IV, paragraph III, in so far as it might
relate to the leasing of motion-picture films, would
necessarily read as follows: " ... royalties includ
ing the income from the lease of motion-picture
films ... are taxable in the State of the debtor."
The sole question to be determined therefore is
3 29 T.C. 243 at 254 and 255.
4 22 T.C. 29 at 36.
5 [1936] 1 All E.R. 535 at 536.
6 43 T.C. 1 at 18, 44, 50 and 59.
7 (H.L.) [1948] 1 All E.R. 400 at 403 and 405.
6 (1964) 35 Tax A.B.C. 389.
whether the contract between the plaintiff and the
CBC was for the leasing of films or whether it was
one for the outright sale of rights. In the former
case, there would be no exemption from the with
holding tax and in the latter case, there would be.
A temporary letter of commitment sent by the
plaintiff to the CBC was accepted by the latter
and was subsequently replaced by a formal con
tract between the parties. The letter of commit
ment (filed as Exhibit II in the agreed statement
of facts) specifically provided that it would remain
in effect only until the formal contract (Exhibit
III) was executed.
The formal contract consists mainly of a stand
ard film rental form of the Canadian Broadcasting
Corporation with some added typewritten clauses.
In these added clauses there are some contradicto
ry expressions as to the nature of the undertaking
between the parties. There is, for instance on the
one hand, the mention of assigning of rights which
would be more consistent with the concept of an
absolute transfer, yet, on the other hand, there is
also mention of the cost of rental (prix de loca
tion) and rental rights (droits de location). There
are in the portion of the contract consisting of the
printed form other clauses which apparently would
apply only to the leasing of a right. These clauses
are as follows:
3) This agreement shall be subject to the following terms and
conditions:
a) For the purpose of this contract, the ownership of each
property listed in the said Schedule, including all property
rights in Copyright, shall at all times be that of and remain
with the Distributor; but the Corporation shall be entitled to
possession of the said properties as physical properties
according to the provisions of the said Schedule without any
charge in addition to the rental rate herein reserved.
e) The Distributor authorizes the Corporation to do such
editing as it deems necessary to meet the Corporation's
standards and to conform to the scheduling and timing of its
programs.
f) Except as otherwise provided in the said Schedule, the
Corporation, at its own cost and expense, agrees to return
each property to the Distributor in good condition, normal
wear and tear excepted, within 30 days after the date of the
last broadcast of each property or after expiry of the period
provided in the Schedule, as the case may be, it being
understood that Sundays and holidays shall not be included
in the computation of such time period.
When attempting to determine the true nature
or essence of a contract, as well as when interpret
ing a particular clause, one must not only examine
the words used by the parties but, with due regard
to the actual subject matter, one must construe
those words in the light of the entire bargain
between the parties as evidenced by the contract as
a whole. In doing so, although every effort must be
made to attribute some meaning and purpose to all
of the words used, it is at times necessary, especial
ly in the case of contracts written on printed
forms, to completely disregard certain provisions
when they are obviously totally redundant, contra
dictory, or meaningless having regard to the con
tract as a whole.
Paragraph 3a) of the contract appears to be
quite contradictory of and inconsistent with any
absolute transfer by the plaintiff as distributor of
all rights it might have had in the films but this
sentence might possibly be disregarded in the
event of the whole of the remainder of the contract
clearly showing that the true intention of the
parties was for the Canadian Broadcasting Corpo
ration to acquire and for the distributor to divest
itself of all the rights which the latter had original
ly acquired.
As evidenced from Exhibit I at page 4 of the
agreed statement of facts, the plaintiff distributor
acquired certain rights which would include the
right to either sell the acquired rights to others or
to show the films itself on Canadian television in
the French language. On the other hand, the CBC
only acquired the right to show the films on its
own network and not the right to sell, lease or
assign to others the rights acquired by it. It is
therefore quite clear that the CBC did not receive
all of the rights which the distributor Vauban had
received. In other words, the rights of the latter
were distributor and user's rights while those of
the former were solely user's rights.
To this argument, however, counsel for the
plaintiff replies that, although the CBC might not
have received exactly the same rights, which the
distributor Vauban had originally acquired, the
latter in effect had divested itself of any remaining
rights whatsoever by granting the Canadian
Broadcasting Corporation the exclusive right to
show the films for the whole of the period for
which Vauban had any title to the films.
It is not necessary to decide whether this state of
affairs is sufficient to constitute an absolute trans
fer as opposed to a leasing, for, when one compares
paragraph 3f) of the contract which is quoted
above with paragraph (2) of Exhibit I (page 4 of
the agreed statement of facts), it appears quite
evident that, in fact, Vauban did not transfer all
that it had received. Paragraph (2) of Exhibit I
reads as follows:
[TRANSLATION] (2) Regarding the copies of 16mm which you
will require in order to exploit the acquired rights it is under
stood as follows: either you purchase copies at our expense in
Canada (as other used copies in good state are available) or
cause to be made new copies at our expense by laboratories who
hold the negatives and then have them sent to Canada.
You may use the same copies when we will be selling you
further rights of exploitation of the same films.
It seems evident, therefore, that the Canadian
Broadcasting Corporation was obliged to return
the copies of the films to Vauban (and not to the
original distributor or owner of the films) within
thirty days after the last broadcast or after the
expiry of the period for which the rights were
granted, after which Vauban would enjoy the right
to retain the films pending the possibility of its
receiving further rights of distribution from the
original distributor. It seems quite evident, there
fore, that not only did the CBC not receive every
thing that Vauban had originally acquired but,
Vauban definitely retained a residuary possessory
right to the films which it had received from the
original distributor or owner.
Finally, paragraph 3e), which is quoted above,
would be meaningless, at the very least, if not
totally inconsistent with the remainder of the con
tract had Vauban assigned all its rights to the user.
A specific authorization to , do something with
regard to property or a right, at a time subsequent
to the date of alleged transfer. of that right or
property, is inconsistent with the concept that, at
the time of the alleged transfer, the transferor
divested himself or intended to divest himself of all
of his interest therein.
The three above-quoted clauses from the con
tract are completely consistent with the concept of
a leasing of a right or the temporary assignment of
part of the right to the plaintiff and are inconsist
ent with an absolute sale. The fact that the con
sideration was paid in a lump sum and not by
instalments does not alter the nature of the
transaction.
Where, in circumstances such as the present
case, there has not been an absolute transfer of the
rights of the distributor of films to another party
as a user, then, for the purposes of Article 13
paragraphs III and IV of the Convention, the
transaction is to be considered a leasing of film
rights. A decision which has some bearing on the
subject is one by the Exchequer Court in the case
of M.N.R. v. Paris Canada Films Limited 9 . In two
of the situations, with which the Court was con
cerned in that case, exclusive rights were trans
ferred from one distributor, who apparently had
all the rights tb the film, to another, for a limited
number of years, in consideration of a bulk sum
payment. Dumoulin J. held, in the circumstances,
that that particular contract constituted a leasing.
At page 50 of the report he is quoted as saying:
Notwithstanding the mention, in exhibits 9 and 10, of the
term "cession", currently associated with notions of sale, the
purport of the transaction, a grant of cinematographic repro
duction rights for a five-year period at global prices of, respec
tively, $3,500 and $5,000, undoubtedly fall in the classification
of "income from the lease of motion picture films".
Although it does not appear to be categorically
stated in the case itself, it appears that the decision
as to exhibits 9 and 10, to which the learned Judge
was referring in the above quotation, turned on the
fact that there existed a reversionary interest in
the original distributor. In the case at bar,
although there would not normally be any interest
in the actual term reverting to the distributor
Vauban unless, pursuant to paragraph 3f) above, a
film was returned immediately following "the date
of the last broadcast" and that date preceded "the
expiry of the period provided in the Schedule,"
there nevertheless was in essence a possessory in
terest in the films themselves, which reverted to
the distributor Vauban and which had not been
granted to the user.
In arriving at this decision, I am conscious of
the principle enunciated in the case of Saunders v.
9 [1963] Ex.C.R. 43.
M.N.R. 10 where the President of the Tax Appeal
Board stated at page 526:
The accepted principle appears to be that a taxing Act must
be construed against either the Crown or the person sought to
be charged, with perfect strictness—so far as the intention of
Parliament is discoverable. Where a tax convention is involved,
however, the situation is different and a liberal interpretation is
usual, in the interests of the comity of nations. Tax conventions
are negotiated primarily to remedy a subject's tax position by
the avoidance of double taxation rather than to make it more
burdensome. This fact is indicated in the preamble to the
Convention. Accordingly, it is undesirable to look beyond the
four corners of the Convention and Protocol when seeking to
ascertain the exact meaning of a particular phrase or word
therein.
The principle, although not directly stated,
seemed to have been followed by the Supreme
Court of Canada in the case of the M.N.R. v.
Stickel". However, the principle that a liberal
interpretation should be given to a tax Convention
does not alter the intention.
The present appeal by way of action is therefore
dismissed with costs.
10 54 DTC 524.
" [1974] C.T.C. 416.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.