Brad-Lea Meadows Ltd. v. MNR, 90 DTC 1269, [1990] 1 CTC 2306 (TCC)

Brulé, T.C.J.:—This is an appeal from a notice of assessment for the taxpayer's 1985 taxation year in which the Minister considered an affiliation fee paid to Best Western International Inc. to be a royalty and therefore subject to tax within the meaning of subparagraph 212(1)(d)(i) of the Income Tax Act and Article XII of the Canada-U.S. Tax Convention (1980). The consideration of the affiliation fee is the sole issue in this appeal.

Facts

A summary of such was provided by the appellant in its notice of appeal and where not admitted by the respondent evidence was given to the Court. The important points to this appeal are hereinafter excerpted from the statement of facts.

Statement of Facts

1. Brad-Lea Meadows Limited ("Brad-Lea") is a corporation incorporated under the laws of the Province of Ontario.

2. Best Western International Inc. ("Best Western") is a corporation without share capital incorporated under the laws of the State of Arizona. Best Western was formed by a number of independent motel owners and operates as a non-profit association to assist its members in meeting the competitive challenge presented by the large motel chain and franchise operations.

3. Best Western provides services to a new member of the association with respect to its initial association with Best Western. The new member pays a onetime affiliation fee to Best Western which reimburses Best Western for the cost of providing the services. These services include:

(a) training to familiarize the new member with Best Western and its centralized reservations systems;

(b) a library of Best Western produced training films and operations manuals for on-site training;

(c) computer terminal and training for making and receiving reservations;

(d) a review of the property of the new member by the Quality Control and Design Departments of Best Western and assistance to the member in making improvements in these areas;

(e) if requested, a visit to the new member by a Marketing Representative of Best Western to undertake a needs analysis;

(f) assistance by the Advertising Department of Best Western in creating new property logos, trademarks or signs; and

(g) an initial supply of Best Western Travel Guides,"How-To Brochures”, and miscellaneous Best Western supplies.

4. Best Western allocates the cost of providing the services listed in 3 above among its members on a reasonable basis. The affiliation fee that is charged for the services is calculated in relation to the number of motel units of members and is subject to fixed minimum and maximum amounts.

5. Best Western bases the rates of charges to its members, including affiliation fees, on budgeted figures for a year which may result in an excess or a deficiency of membership fees over membership costs in a particular membership year. Such excesses or deficiencies are normally adjusted in the rates applicable to the following membership year such that Best Western is simply reimbursed for its costs and does not in the long run generate either a profit or a loss.

6. In a letter dated November 21, 1983, the Director of the Accounting and Collections Division of Revenue Canada, Taxation advised Price Waterhouse that the monthly fees paid by Canadian members to its client, Best Western, represent ” . . a reimbursement of specific expenses and should not be subject to Canadian non-resident withholding tax except to the extent that such payments represent charges for the use of a ‘Best Western' sign”.

7. Brad-Lea, as a member of the association, paid an affiliation fee of $30,947.00 to Best Western in the 1985 taxation year.

Appellant's Position

Counsel for the appellant had two submissions to make to the Court. The first was on the basis that the fee paid in this case did not fall within the provisions of subparagraph 212(1)(d)(i) as relied upon by the Minister for the assessment. The second point raised was that the Minister had already allowed similar payments in previous years.

In support of the second point numerous copies of assessments and letters and a court order were presented to the Court as exhibits.

As to the first submission it was pointed out that the services offered for the fee paid in no way related to the profit of the appellant and were not a part of what might be considered a royalty payment as is envisaged by the statute. Further it was argued that what was offered to the appellant was a "package deal” and even if a part could be considered as a royalty payment, which was denied, there was an obligation on the Minister to show what portion of the fee was considered to be subject to tax by subparagraph 212(1)(d)(i) of the Income Tax Act.

The following cases were cited in support of this argument:

Quality Chekd Dairy Products Association v. M.N.R., [1967] C.T.C. 452; 67 D.T.C. 5303;

The Queen v. Saint John Shipbuilding & Dry Dock Co. Ltd., [1980] C.T.C. 352; 80 D.T.C. 6272;

The Queen v. Farmparts Distributing Ltd., [1980] C.T.C. 205; 80 D.T.C. 6157.

Minister's Position

As to the second point of relying on a previous Revenue Canada decision not to consider assessments to previous years this, it was said, is irrelevant. Best Western Inc. has appealed previous assessments of a similar nature and such assessments were vacated. That decision, counsel said, had no bearing on the present appeal.

The question of whether or not the affiliation fee should be considered a royalty payment was discussed by counsel for the respondent who stressed that the subparagraph in question included the words "any payment" and therefore the payment made by the appellant fell within the taxing section. This included a one time payment as was the case here. In support of this reference was made [to] the Farmparts case, supra, and also counsel referred to this case as distinguishable from the Saint John Shipbuilding case, supra, in that the latter was decided based on the then existing Canada-U.S. Tax Convention provisions in which were different than at the time of this appeal.

Counsel questioned whether or not the onus was on the respondent to delineate any separation as to a possible royalty and services but indicated that in any event the ingredients of the package were so inseparable that they really were for the use of the name “Best Western" and therefore taxable by the statute.

Analysis

Dealing with the second point argued by the appellant as to the previous decision of Revenue Canada I do not accept this argument. The Minister is not estopped from assessing in a different year, and certainly here with a different appellant. Many changes to statutes or to the services rendered, or other jurisprudence from superior courts, may have intervened. The Federal Court of Appeal decision in Sogemines Development Company Limited v. M.N.R., [1973] C.T.C. 383; 73 D.T.C. 5304 illustrates that the Minister is not bound by assessments of prior years.

The matter of the affiliation fee considered to be a royalty within the meaning of subparagraph 212(1)(d)(i) of the Act and Article XII of the Canada- U.S. Tax Convention was set out in the notification of confirmation by the Minister in this action. I cannot, after careful research, find any authority or descriptive words which show an affiliation fee to be a royalty. No evidence was produced to counter the appellant's statement that such was not so.

Considering the make-up of the fee paid by the appellant it is found from the statement of facts, supra, that such consisted of many things. Certainly they are not inseparable as was suggested by the Minister’s counsel. If they were not separated in making an assessment then one must look at the cases of Quality Chekd Dairy Products and Farm parts Distributing Ltd., both supra.

In the former case the Exchequer Court held at page 5306 that the onus was on the respondent to adduce evidence of the proper apportionment to be made of a payment involving what the Court held to be in part a "royalty" and part for "know-how". By failing to do this the appeal was allowed.

The Farm parts case at page 6162 also repeated that the Minister had failed to make an allocation and therefore the taxpayer was entitled to succeed.

As to the separation of the items constituting the affiliation fee it is necessary to look at subparagraph 212(1)(d)(i). It reads, after the preamble, that tax is to be paid on

(d) . . . rent, royalty or similar payment . . . including, but not so as to restrict the generality of the foregoing, any payment

(i) for the use of or for the right to use in Canada any property, invention, trade name, patent, trade mark, design or model, plan, secret formula, process or other thing whatever,

Counsel for the Minister stressed the words "any payment" but one must read these words in conjunction with the words that follow: "for the use of or for the right to use in Canada etc." Many of the items described in the fee paid do not involve any "use" but are services which the taxpayer may or may not take advantage of as needed or wanted. Thus the so-called package does not consist of all inclusive items contemplated by subparagraph 212(1)(d)(i). The result is that because no separation was made the taxpayer must succeed. There is no need for the Court to decide what items, if any, could be considered as royalty payments.

The appeal is therefore allowed, with costs, and the matter is referred back to the Minister for reconsideration and reassessment.

Appeal allowed