Twentieth Century Fox Film Corp. v. The Queen, 85 DTC 5513, [1985] 2 CTC 328 (FCTD)

Addy, J:—The plaintiff is appealing its reassessment by the defendant for income tax purposes for the years 1978, 1979 and 1980.

There is very little dispute as to the facts in this case. The decision will ultimately depend mainly on the interpretation of the applicable statutory provisions and, to some extent, on the proper approach to the problem from an accounting standpoint. Most of the facts are to be found in a very detailed agreed statement of facts filed at trial. The most relevant paragraphs of the agreed statement are the following:

1. The Plaintiff is a Delaware corporation resident in Los Angeles, California.

2. The Plaintiff produces and distributes motion pictures, video tapes and television programs and is involved in television broadcasting, film processing, record and music publishing and other related fields.

3. Prior to December 31, 1972 all phases of the distribution in Canada of the Plaintiff’s theatrical and television product was carried on by a subsidiary of the Plaintiff, Twentieth Century Fox Corporation Limited (“Fox Canada’’) pursuant to a license agreement between Fox Canada and Twentieth Century Fox InterAmerica Inc. (“Fox”), a subsidiary of the Plaintiff, resident in the United States. Between April 28, 1972 and December 31, 1972, pursuant to an agency agreement dated April 28, 1972, Fox Canada distributed the Plaintiff’s film in part through the efforts of its own employees and in part through its independent agent, Bellevue Film Distributors Limited (“Bellevue”).

4. Pursuant to the license agreement with Fox, Fox Canada paid to Fox rentals for the use of the Plaintiff’s films in Canada. Pursuant to the agency agreement with Fox Canada, between April 28, 1972 and December 31, 1972 those rentals other than those derived from television were collected on behalf of Fox Canada by its agent, Bellevue.

5. On or about November 20, 1972 the decision was made by the Plaintiff to establish a branch operation in Canada to handle the distribution in Canada of the Plaintiff’s theatrical and television product, effective the beginning of business December 31, 1972.

6. On or about January 2, 1973 all of the assets of Fox Canada, except the real property located in Calgary, Alberta were transferred to the Plaintiff in consideration for the Plaintiff assuming all of the obligations of Fox Canada.

7. By agreement dated January 2, 1973 the license agreement between Fox and Fox Canada was terminated, effective December 30, 1972, and at all material times thereafter the Plaintiff distributed its theatrical and television product in Canada through its branch offices located in Toronto and Montreal and its independent agent, Bellevue.

8. Pursuant to an agreement dated January 2, 1973 the Plaintiff terminated the agency agreement between Fox Canada and Bellevue and entered into an agreement directly with Bellevue that adopted the terms of the agreement of April 28, 1972 between Fox Canada and Bellevue. Pursuant to the agreement of January 2, 1973 Bellevue had the same obligations towards the Plaintiff as it had had towards Fox Canada.

9. After December 30, 1972 the Plaintiff’s branch operations in Canada were carried on in the same manner as Fox Canada had operated in Canada when it had distributed the Plaintiff’s product in Canada.

10. Certain employees of Fox Canada became employees of the Plaintiff and remains in Toronto to operate the branch.

11. The offices of the employees who dealt with the motion picture theatres for the branch in Toronto, including those who had previously been employed by Fox Canada, were at all material times after December 30, 1972 located at Bellevue’s offices in Toronto.

12. Both during the years that Fox Canada distributed the Plaintiff’s product in Canada and the years that the Plaintiff operated through its Canadian branch, the contracts made with Canadian exhibitors to exhibit the Plaintiff’s films in Canada were negotiated by personnel operating out of the location in Canada (of either the subsidiary or the branch) but were signed by the Plaintiffs personnel operating out of Los Angeles.

13. Personnel located in Canada did not have the authority to sign documents that could bind the Plaintiff. Advertising, budgets and programs were also developed in Los Angeles based on input from Canadian employees.

14. By letter dated June 20, 1980 the Plaintiff terminated the agency agreement with Bellevue except for the non-theatrical distribution.

15. By agreement dated October 1, 1980 between the Plaintiff and Astral Films Limited (“Astral”), Astral agreed to provide the service of distributing the films to the theatres for a fee. After that date the Plaintiff’s theatrical distribution was conducted through the branch and its agent, Astral, and its non-theatrical distribution was conducted through the branch and its agent, Bellevue. Film for use on television was dealt with throughout by the Plaintiffs branch employees.

16. Prior to December 31, 1972 Fox Canada paid Part I income tax at a rate of approximately 50% under the Income Tax Act on its income earned in Canada and deducted Part XIII tax of 10% under the Income Tax Act from film rentals it paid to Fox for the use of the Plaintiff’s films in Canada. The withholding tax at the time Fox Canada ceased distributing the Plaintiff’s product in Canada was averaging $400,000 per year.

17. The decision by the Plaintiff to establish a branch operation in Canada to handle the distribution in Canada of its theatrical and television product was made in order to eliminate the Part XIII withholding tax and pay only Part I tax on the income from business carried on by it in Canada.

18. The Plaintiff claims in this action that it is not subject to any Part XIII withholding tax on rentals received by it from Canadian exhibitors. It claims that it is only subject to Part I tax on its branch’s net income from carrying on business in Canada.

19. The Plaintiff, in calculating the net profits attributable to the operations of its branch in Canada, prepared financial statements using the same format as had been used in earlier years when the Canadian operations had been conducted through its subsidiary, Fox Canada.

20. Prior to 1973 the Plaintiff’s subsidiary (Fox Canada) in calculating its Canadian profits, deducted from its gross rental receipts an amount described as its cost of goods sold which included the amount charged to it by Fox for the use by it in Canada of the Plaintiff’s films.

21. After the Plaintiff started to distribute its product through its Canadian branch, it was decided to keep a current account in the books of the Plaintiff and the branch during the year, of the amounts due by the branch to its head office. An inter-company account was accordingly set up during the years the branch operated in Canada which served as a control account through which would flow all payments from the branch to the Plaintiff. This account was reflected in the branch balance sheet as an amount “Due to Twentieth Century Fox Film Corporation” under the “Liabilities” column.

22. In the branch’s financial statements the Plaintiff recorded the film rentals received by the branch as “merchandise sold during year (Film Rental)”. In order to arrive at the branch’s gross trading profit for the year the Plaintiff deducted an amount described as the branch’s “cost of goods sold” in the year, which in fact reflected the costs allocated to the branch by the Plaintiff for the product distributed by thé branch.

23. The cost of goods sold amounts were, in each of the years in question made up of the costs of direct advertising, print costs subject to amortization and the negative rights charges or producer’s share.

24. The negative rights charges reflected a charge to the branch to recover a portion of the cost incurred by the Plaintiff to produce the master negative. Every month the Plaintiff allocated a cost to the branch for negative rights charges. This cost was calculated on the basis of a percentage of the gross rental receipts and was not a direct allocation of the cost of producing the negative.

25. The negative cost was made up of all the costs of shooting the motion picture, including the costs of all the actors and actresses and cameramen and the cost of the script.

26. During the years that the Plaintiff distributed its films in Canada whether through Fox Canada or its branch, the Plaintiff did the actual shooting of the motion pictures and developed the original negatives made from the shooting, from which positive prints were ordered by Fox Canada or the Canadian branch for distribution in Canada.

27. During the years that the Plaintiff was involved in film distribution in Canada through both Fox Canada and its Canadian branch, neither Fox Canada nor the Canadian branch were engaged in the production of films for theatre or TV in Canada. The Plaintiff from time to time produced films in Canada during those years but its production crews in Canada had no effective connection with Fox Canada or the Plaintiffs Canadian branch.

28. From the negatives or duplicate negatives of the films produced by the Plaintiff were made positive prints for distribution to the theatres for exhibition.

29. The cost of the prints was borne by Fox Canada in the years it operated in Canada and by the Plaintiffs branch in the years during which it operated in Canada. This cost was then amortized by both Fox Canada and the branch. In the years the branch operated in Canada the amortized print costs were reflected each year in the financial statements of the branch as a portion of the cost of goods sold figure.

30. It was determined that a net profit of 1.7% of gross revenue would be the appropriate amount of net profit to attribute to the Plaintiffs Canadian branch operations as this percentage approximated the average net profit which had been earned by Fox Canada in the years in which it had distributed the Plaintiffs films in Canada.

31. The branch therefore determined its net profit on which Canadian taxes were paid in each of the 1978, 1979 and 1980 taxation years by applying the predetermined rate of 1.7% to the Plaintiff’s gross Canadian film rentals.

32. In order to arrive at such a net profit for the 1978, 1979 and 1980 taxation years, which would be equal to the predetermined rate of 1.7% in each of those years, the Plaintiff, at the end of each year, adjusted the negative rights charges (“producer's share") which had been charged to the branch.

49. After 1972 the Plaintiffs branch reported a net profit for its Canadian operations of approximately 1.7% of the Plaintiff's gross film rentals received by it on which it paid tax under Part I of the Income Tax Act. On October 18, 1982 Revenue Canada assessed Part XIII tax on the amounts charged to the plaintiff’s branch by the Plaintiff and described in the Schedules in the branch’s income tax returns as the cost of goods sold. It is these assessments for 1978 to 1980 which are the subject of dispute in this action.

50. On October 18, 1982 the Minister of National Revenue similarly assessed the 1973-1977 taxation years. Those assessments are now agreed to be statute-barred and accordingly are not involved in this action.

57. It is now agreed that in any event video tape receipts are exempt from Part XIII tax by virtue of the provisions of Article XIIIC of the Schedule to the Canada- United States of America Tax Convention Act, 1943, as amended, and the amounts thereof referred to in paragraphs 54 to 56 should not have been so taxed.

Other relevant facts, which are founded on admissions in the pleadings or on admissions at trial or are to be deduced from the evidence at trial are detailed hereunder:

1. The plaintiff, a non-resident corporation, was carrying on an active business in Canada at all relevant times.

2. There is no issue between the parties as to the fairness of the figure of 1.7 per cent of gross revenue for each of the three years in question. That proportion of 1.7 per cent was intended to represent not only the minimum amount of net revenue which would be considered as having been earned but also the maximum.

3. The Canadian branch of the plaintiff corporation carried on substantially the same business as the four Divisions of the plaintiff situated in the United States, but separate accounting was not carried out in the United States Divisions as such accounting was not required for United States income tax purposes. The only reason why separate accounting was carried out by the Canadian branch was to determine the amount to be payable for Canadian income tax purposes.

4. There is no dispute as to the accuracy of the figures in the accounts but only as to their application and use.

5. There was a constant daily liaison between the manager of the Canadian branch and head office in Los Angeles regarding the distribution and marketing of films. Distribution contracts in Canada were negotiated here by the branch but signed at head office or signed here after approval by head office.

6. Bellevue physically handled and distributed to the theatres and also collected back from them the 35-millimetre prints of the films. It also acted as agent to collect the moneys due. It paid for the printing cost in advertising bills and, after deducting its share of the cost, its commission and a Canadian withholding tax of 15 per cent, it turned over the balance to the Canadian branch which deposited the moneys in its Canadian accounts and, after setting aside some moneys for its own operating expenditures, transferred the balance to head office on a regular basis.

7. Part XIII income tax was assessed as follows:

8. In addition to conceding that no interest should be assessed on Part XIII tax and that Part XIII tax on rentals and royalties relating to video tapes should be deleted, counsel for the defendant, during final argument, conceded that the print costs and advertising costs hereinafter set forth are amounts which can reasonably be attributed to Canadian business as mentioned in the concluding words of section 805 of the Income Tax Regulations. The amounts so conceded are as follows:

	PRINT	ADVERTISING	TOTAL
1978	$ 275,186	$1,779,751	$2,054,937
1979	1,008,368	1,708,097	2,/16,465
1980	1,136,652	3,207,602	4,344,254
TOTAL	$2,420,206	$6,695,450	$9,115,656
Part XIII tax being conceded
($9,115,656 x 15%)			$1,367,348

The above figures were filed on consent as exhibit 60.

As a non-resident person carrying on business in Canada, the plaintiff is taxable under Part I of the Income Tax Act by virtue of paragraph 2(3)(b) and the provisions of subparagraph 115(1)(a)(ii) which reads as follows:

Sec. 2. (3) Tax payable by non-resident persons.—Where a person who is not taxable under subsection (1) for a taxation year

(b) carried on a business in Canada, or at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

Sec. 115. (1) For the purposes of this Act, a non-resident person’s taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under section 3 if

(a) he had no income other than

(ii) incomes from businesses carried on by him in Canada.

However, the nature of the plaintiff’s income, that is, film and video tape rentals, would appear to render it subject to Canadian withholding tax under Part XIII of the Act. The relevant taxing provision would be subsection 212(5):

212 (5) Motion picture films. Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of

(a) a motion picture film, or

(b) a film or video tape for use in connection with television that has been or is to be used or reproduced in Canada.

(It is to be noted that, for taxpayers residing in the United States, the rate of tax has been fixed at 15 per cent in lieu of 25 per cent by virtue of a Canada-US tax convention.)

It thus appears that, in considering these provisions without more, the same income would be subject to two separate kinds of taxes, that is, the normal tax on corporate income based on net profits under Part I and a fixed tax of 15 per cent on the gross amount of income pursuant to Part XIII, with the payors being obliged, pursuant to subsection 215(1), to deduct at source this last mentioned amount from all payments made to a non-resident person. To allow relief against this burden of double taxation, Parliament included in Part XIII subsection 214(13) the relevant portion of which reads as follows:

214 (13) Regulations respecting residents. The Governor in Council may make general or special regulations, for the purposes of this Part, prescribing

(c) where a non-resident person carried on business in Canada, what amounts are taxable under this Part or what portion of the tax under this Part is payable by that person.

Pursuant to this last mentioned provision the following relevant regulations were made by the Governor General in Council:

Section 802 of the Regulations:

AMOUNTS TAXABLE

802. For the purposes of paragraph 214(13)(c) of the Act, the amounts taxable under Part XIII of the Act in a relevant taxation year of a taxpayer are amounts paid or credited to the taxpayer in the relevant taxation year other than amounts included pursuant to Part I of the Act in computing the taxpayer’s income from a business carried on by it in Canada.

Under the heading "OTHER NON-RESIDENT PERSONS” subsection 805(1) of the Regulations reads as follows:

805 (1) Where a non-resident person carries on business in Canada he shall be taxable under Part XIII of the Act, on all amounts otherwise taxable under that Part except those amounts that may reasonably be attributed to the business carried on by him in Canada.

Articles Il and III of the schedule to The Canada-United States of America Tax Convention Act, 1943 read as follows:

Article II

For the purposes of this Convention, the term “industrial and commercial profits” shall not include income in the form of rentals and royalties, interest, dividends, management charges, or gains derived from the sale or exchange of capital assets.

Subject to the provisions of this Convention such items of income shall be taxed separately or together with industrial and commercial profits in accordance with the laws of the contracting States.

Article III

1. If an enterprise of one of the contracting States has a permanent establishment in the other State, there shall be attributed to such permanent establishment the net industrial and commercial profit which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net profit will, in principle, be determined on the basis of the separate accounts pertaining to such establishment. In the determination of the net industrial and commercial profits of the permanent establishment there shall be allowed as deductions all expenses, wherever incurred, reasonably allocable to the permanent establishment, including executive and general administrative expenses as allocable.

Thus, were it not for sections 802 and 805 of the Regulations, then pursuant to subsection 212(5) of Part XIII (now Part Ill) of the Act as well as Article Il of the schedule to The Canada-US Tax Convention Act 1943, rentals received from residents of Canada for the plaintiff’s film and video tapes would be subject to tax under that part of the Act. Section 805 excepts only the amount of income which may reasonably be attributed to the business carried on in Canada by the taxpayer. Section 802 on the other hand in effect provides that no withholding tax (i.e. Part XIII tax) shall be paid on amounts included in Part I.

The plaintiff produces films in the United States and, in order to do so, incurs all the related production costs for the express object and purpose of renting prints of the films to various outlets such as TV stations and cinemas. Its film distribution activities and the advertising activities and public relations promotions connected with them are the equivalent of the sales and the sales promotion activities of a manufacturer who produces goods tor sale. The distribution of the product results in the generation of income and profits which of course is the ultimate goal of the entire undertaking. The revenue-producing activities of the plaintiffs Canadian branch were substantially the same as the revenue-producing activities which the four US Divisions of the plaintiff carried out south of the border. Therefore, this is not the case of a US firm being engaged in business dealings in Canada, promoted, controlled and carried out entirely from the United States without a branch or organization in Canada. On the contrary, the Canadian business was promoted and carried on by and through the plaintiffs Canadian branch, although the company’s US head office reserved the ultimate right to sign or approve distribution contracts and was in almost daily communication with its Canadian manager. The facts convince me that the Canadian organization was by no means a mere token presence whose real purpose was merely to avoid Part XIII tax but, that it was carrying on here a bona fide active business role, notwithstanding the fact that decision to replace the former Canadian company (Fox Canada) by a Canadian branch of the US company was taken mainly for the purpose of avoiding Part XIII tax. Fox Canada, in my view, had formerly been carrying on in Canada an active business role in every sense of the word and that role was entirely assumed and taken over by the Canadian branch of the plaintiff.

Although film production, even in the case of productions actually filmed here, is not carried on or controlled by its organization in Canada and although most of the major advertising negatives are also produced in the USA, the Canadian advertising, public relations activities, film printing and distribution activities and contract negotiations connected thereto are carried on by the plaintiff in Canada through its Canadian branch and the resulting revenues must necessarily result from or be considered as reasonably attributable to the business being carried on by the plaintiff in this country.

It is quite true that the commercial success of a film often depends to a greater degree on its intrinsic public appeal which in turn will depend on many intangible factors such as the reputation of the cast, the originality or the timeliness of the tale, the techniques of the director, the lavishness of the production or the musical appeal of the score, rather than on the business acumen and sales ability, or on the public relations and direct advertising activities of the personnel engaged in negotiating distribution contracts and in distributing the prints. Furthermore since, in the present case, none of the production costs are incurred here and therefore none of the benefits directly attributable to the quality of production originate here, it becomes necessary to ensure that the final figure declared to be the net profits realized in Canada bears a fair share of the negative right charges incurred in the USA for the benefit of the organization as a whole. A fair portion of these charges, in addition to the local operating expenses, can be deducted from the revenues earned in this country in order to arrive at a figure which would represent the true net profit for Canadian business operations of the plaintiff. This does not mean, however, that the revenues themselves are not to be considered as reasonably attributable to an active business of the plaintiff carried on in Canada nor does it mean that some proportion of the revenues is to be excluded. In the case at bar, the Minister of National Revenue does not quarrel with the allocation of production costs or negative rights. This has been confirmed by the assessments and conceded by the defendant. Indeed, counsel for the defendant repeatedly stated that the Minister is, in fact, satisfied with what he referred to as the “bottom line” figure. What the defendant is seeking to do is to remove part of that revenue from revenue which the plaintiff claims to be reasonably attributable to its business in Canada and to tax that amount.

The main difficulty arises from the fact that, from an accounting standpoint, the method by which the final amount of net profits is arrived at, for each of the years in dispute, does not conform to normal accounting practices. I do not accept the expert evidence tendered which purports to show that it does. Indeed, I would say that the calculations of negative right charges do not make sense and represent nothing more than a juggling of figures in order to arrive at a predetermined result.

A party cannot avoid taxation by failing to account for either income or liabilities in accordance with generally accepted accounting principles. It is equally true that a party should not be held liable for taxation merely because of a failure to follow those principles or to use proper terminology in the accounts. Assessment must in all cases be based on the true nature of the transactions and operations which the books of account purport to re- fleet. (Quemont Mining Corp Ltd et al v MNR, [1966] CTC 570 at 603; 66 DTC 5376 at 5395; Edinburgh Life Assurance Co v Lord Advocate, [1910] AC 143 at 163.) Terminology used in the books of account or supporting documents merely constitutes circumstantial or indirect evidence of the apparent nature of various transactions. Like all circumstantial evidence, unless supported by other evidence, it should not be considered as conclusive and must be disregarded when clearly contradicted by other direct or more reliable evidence.

Both parties are of the view that the fixing of a predetermined rate of 1.7 per cent to the gross Canadian receipts from rentals results in a fair and reasonably accurate calculation of net profits. The intermediate figures subsequently inserted, purporting to represent true negative right charges, are artificially adjusted in order to arrive at this result. They are therefore fictitious as they do not flow from an actual calculation of those charges and a proportionate allocation of the charges to the Canadian branch as compared to the business generated and carried out by the American divisions of the plaintiff. If an attempt were made to do this, the accounting task might well prove to be a very considerable one. It would entail many detailed calculations, estimates and allocations on the part of the plaintiff thereby creating equal difficulties for the defendant in attempting to verify these figures. It would involve detailed studies of the activities of all the American divisions in order to determine the true allotment of negative rights against the Canadian operation. Since the American branches do not account individually for their own operations, the task would undoubtedly prove to be a monumental one. A pragmatic solution to that problem was adopted by the plaintiff and the end result was approved by the defendant as representing the final figure resulting from a fair allocation of negative rights.

It may well be that the defendant would be entitled to refuse to accept this method of allocating negative rights as part of the cost but that is not the question in issue before me. The expenses are not in issue but, rather, the income-producing activities of the plaintiff in Canada. The defendant, in arguing the case, approached the problem as if the US head office were charging a commission or a rental to its Canadian branch on the amount of Canadian sales. Regardless of what certain expressions in some of the accounting documents might tend to indicate, the true nature of the relationship between the Canadian branch of the plaintiff and the plaintiff itself cannot possibly involve a commission or a rental: a legal entity cannot rent to or contract with itself. It is clearly the plaintiff which, at law, is carrying on business in Canada and not a separate entity known as the Canadian branch. Indications to the contrary in the books of account must therefore be disregarded. For that same reason I do not accept the conclusions of the expert called on behalf of the defendant, as he treated the Canadian branch from an accounting standpoint as if it were a separate legal entity contracting with the US organization of the plaintiff.

In the circumstances of the present case, the fact that a large proportion of the actual work in Canada has been allocated to and performed by independent agents does not affect the situation. The actual work and production of the agents was under the immediate supervision and control of the Canadian branch of the plaintiff and the work itself constitutes in every way actual business activities and operations of the plaintiff in Canada performed through those agents as well as directly by the plaintiff. The fact that a company chooses to have certain of its business activities carried out by agents does not of itself prevent those activities from being the business operations of the company. There may well be situations where a foreign taxpayer, in order to avoid liability for tax under Part XIII, would create either a fictitious or non-active presence or a sham branch organization in this country in an endeavour to impart the character of revenue from a business actively carried on by it in Canada, to what is in essence a rental, a commission, a royalty or some other such passive form of income paid to it by Canadian resident individuals or firms who are the persons who are in fact actively carrying on the business here. I am satisfied, however, that, having regard to the activities of the plaintiff in Canada, such is not the case here. Illustrative of that conclusion is the fact that the Canadian branch is operating in exactly the same manner as was the former Canadian subsidiary of the plaintiff. That subsidiary has of course been paying Part XIII tax and it would appear that it would have had no reason to exist here at all had it not been actively engaged in promoting its own business in this country.

The defendant relied quite heavily on the case of United Geophysical Co of Canada v MNR, [1961] Ex CR 283; [1961] CTC 134 in which Thurlow, J, as he then was, held that the plaintiff company, a wholly-owned US subsidiary of another US corporation, was subject to withholding tax on rentals which it paid to its parent US corporation for the latter's Canadian assets which were leased to it. The case however is quite distinguishable on the facts. There were two separate legal entities involved and the relevant part of the business of the parent corporation in that case was described as a “mere sideline’ — refer to pages 292-93 of the above-mentioned report (CTC 142):

The other and wider view of the scope of the Corporation’s business is that it embraced the supplying of geophysical services to clients but included as a sideline after May 1, 1955, the providing at approximately cost to the appellant, its wholly-owned subsidiary, of administrative, supervisory and other services, as well as equipment for the appellant’s use. This, I think, is the correct view, . . . [Emphasis added.]

The learned judge also stated at pages 293-94 (CTC 144):

Accordingly, in this view, as well, of the scope of the Corporation’s business, I am of the opinion that the “rental” for the equipment was income from that part of its business which was carried on in the United States and could not reasonably be attributed to any part of the business which may have been carried on by the Corporation in Canada. Such rental would not, therefore, be taxable under Part I of the Act or be included in computing the Corporation’s income for the purposes of that Part. [Emphasis added.]

In addition, in the above-mentioned case, there is no indication that the US parent corporation ever paid any income or ever filed any return under Part I of the Act.

More importantly, however, since the United Geophysical case was decided, the law has been amended in a most significant way. The law as applicable to the years involved in United Geophysical case, 1955/6, contained the withholding tax provisions in Part III (now Part XIII) and the “reasonably attributable" rule now found in Regulation 805 was found in subsection 31(1) of the Act. The rule about no withholding on amounts included in income under Part I now found in Regulation 802 was contained in an earlier version of Regulation 805. Regulation 805 was amended in 1956 to substitute the “reasonably attributable” test for the ‘‘no withholding tax if included in Part I" test and subsection 31(1) of the Act was amended in 1960 to remove from the Statute the “reasonably attributable" test. Section 802 of the Regulations was changed, effective 1978, to apply the “no withholding tax if included in Part I“ test to all non-resident persons carrying on business in Canada.

The defendant also relied on the following cases namely: International Harvester of Canada Ltd v Provincial Tax Commissioner, [1949] AC 36 (PC); Commissioner of Taxation (NSW) v Hillsdon Watts Ltd (1936-37), 57 CLR 36 (HC of A); Commissioner of Taxation v Kirk, [1900] AC 588 (PC); Australian Machinery and Investment Company Limited v DFC of T, [1946] 8 ATC 81; Mount Morgan Gold Mining Co Ltd v Commissioner of Income Tax

(Queensland) (1922-1923), 33 CLR 76 (H C of A). However, all of these cases dealt not with income but with net profits and the apportionment between two jurisdictions not only of revenue but mainly of expenditures. Finally, the authority for imposing taxation cannot be founded, as the defendant seemed to argue, on the Canada-US Tax Convention but only on the Income Tax Act and Regulations. The purpose of the treaty is to avoid double taxation and not to provide additional taxing provisions. I recently applied this principle in Gladden Estate v The Queen, [1985] 1 CTC 163; 85 DTC 5188. Thus, the term “permanent establishment” in the treaty and on which the defendant relies to some extent, has significance only when considering the treaty itself and should not be imported into the interpretation of the Income Tax Act or its Regulations.

For the above reasons I conclude that, in the circumstances of the present case, section 802 of the Regulations applies to the exclusion of the section 805. Should that not be the case, I am in any event satisfied that the plaintiff has established on the facts that the rental of films in Canada as in the United States and other countries forms an essential and integral part of the business of the plaintiff and that the revenues from film rentals must necessarily be considered as reasonably attributable to the business which was carried on in Canada during the years in issue. No logical nor legal reason exists for arriving at a different conclusion.

A judgment will therefore issue referring the matter back to the Minister of National Revenue for reassessment for the years 1978, 1979 and 1980 on the basis that the plaintiff was taxable solely pursuant to Part I of the Income Tax Act and that no withholding tax was payable pursuant to Part XIII.

The plaintiff will be entitled to its costs.

Appeal allowed.