Citation: 2010TCC361
Date: 201007108
Docket: 2006-1815(IT)I
BETWEEN:
PATRICIA & DANIEL BLAIS
O/A SATRONICS SATELLITES,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The Appellants have
appealed notices of assessment for the periods January 1 to December 31, 1998,
January 1 to December 31, 1999 and January 1 to March 31, 2000 wherein the
Minister of National Revenue (the “Minister”) assessed Part XIII tax in the
amounts of $8,023.24, $6,361.70 and $1,108.74 respectively, with respect to
payments made to a non-resident.
[2]
The Minister issued the
assessments on the basis that the payments made to DSI Distributing Inc. were
royalties, and in particular, were copyright royalties which were subject to
withholding under paragraph 212(1)(d) and, or subsection 212(5) of the
Income Tax Act (the “Act”). The Minister confirmed the assessments
on the basis that the Appellants were required by subsection 215(1) of the Act
to deduct or withhold an amount in accordance with paragraph 212(1)(d).
In the Notice of Confirmation, the Minister stated that the payments to the
non-resident were royalties in accordance with paragraph 212(1)(d) and
that the payments were copyright royalties.
[3]
The withholding rate of
25% imposed by paragraph 212(1)(d) of the Act was reduced to 10%
in accordance with the Canada-United States Income Tax Convention (1980)
(the “Convention”).
Preliminary Matters
[4]
On December 3, 2007 the
Respondent brought a motion to file an Amended Reply to the Notice of Appeal.
That motion was granted subject to one word being changed in the draft Amended
Reply. At the hearing of this appeal, it became apparent that the Amended Reply
had never been filed with the court.
[5]
Patricia Blais gave
evidence on behalf of the Appellants. She stated that she had telephoned the
court prior to the hearing and was told that only the original Reply was before
the court. She stated that she had prepared for the hearing on that basis.
[6]
Counsel for the
Respondent stated that he was able to make his submissions using either the
Reply or the Amended Reply. Ultimately he made his submissions with respect to
both the Reply and the Amended Reply.
[7]
I have reviewed the
transcript of the motion proceedings and I have concluded that the Appellants
have not been prejudiced by allowing the Amended Reply to be filed at this hearing.
They were not taken by surprise by the Respondent’s submissions. At the hearing
of the motion with respect to the Amended Reply, the Appellants heard the
arguments and the position that would be taken by the Minister of National
Revenue (the “Minister”).
[8]
Counsel for the
Minister explained that the Reply was amended so that the Appellants would better
know the Minister’s position and the case they had to meet. In particular, Patricia
and Daniel Blais are in partnership and this was not addressed in the original
Reply. Also, the reference to taxation years in the Reply was misleading as
Part XIII tax must be withheld and remitted forthwith and not on an annual
basis. The Amended Reply speaks specifically to the periods in issue. Finally,
the Reply referred to the payments as being copyright royalties. It is the
Minister’s position in the Amended Reply that the payments in issue were not
copyright royalties but were “royalties” or “rents” or other similar payments.
[9]
The Minister abandoned
his position that the payments were copyright royalties as copyright royalties
are exempt from taxation under subparagraph 212(1)(d)(vi) of the Act.
He is entitled to make the alternative argument that the payments were rents or
other similar payments as that argument is supported by the section of the Act
on which he relied.
[10]
Although it was not
raised by the Appellants at the hearing, I have concluded that the Minister has
not changed the basis of the assessment. He has only put forth an alternative
argument. Rothstein J.A., as he then was, stated the following in Anchor
Pointe Energy Ltd. v. R.[1]:
37 Subsection
152(9) permits the Minister to rely upon an alternative argument in support of
an assessment after the normal reassessment period. There is no suggestion here
that Anchor Pointe is no longer able to adduce relevant evidence with respect
to the Minister's new basis or argument. Therefore, if the Global
decision constitutes a new basis or argument in support of the reassessment,
the Minister may rely upon it even though it was not relied upon prior to
expiry of the normal reassessment period.
[11]
I have made these
observations as the Appellants argued their case solely on the ground that the
payments to the non-resident were not copyright royalties.
Issue
[12]
The issue in this
appeal is whether the amounts paid by the Appellants to the non-resident were
“rents”, “royalties” or other similar amount.
Facts
[13]
Patricia Blais and her
husband, Daniel Blais, operated as partners under the name Satronics
Satellites. They had a contract with DSI Distributing Inc. which operated under
the name National Programming Service (“NPS”). NPS was located in Indianapolis, Indiana. NPS sold satellite television programming
to the Appellants who, in turn, sold United States (“US”) source
television programming to persons in Ontario.
[14]
Mrs. Blais tendered a
copy of a blank form which she said was the same as the form which she and her
husband had signed with NPS. The relevant portions of this form are:
NPS SATELLITE DEALER AGREEMENT & GUARANTEE
1.
Upon NPS’s acceptance of this Agreement,
Guarantee, and Dealer Application, NPS will establish and maintain an account
for the Dealer at the NPS facility and issue a 4 digit security code which will
enable the dealer to charge satellite television programming to its account.
2.
NPS may sell satellite TV programming to the
Dealer or do activations for the Dealer for certain satellite TV programmers
which NPS has from time to time the rights to authorize or sell.
3.
The Dealer agrees that NPS will receive payment
by the date printed on the programming invoice. If NPS does not receive payment
by that date, the programming will be automatically suspended and then
terminated.
…
6. NPS will credit the Dealer’s account for
commissions for all programming services that NPS had the right to sell that
have pre-established commission rates. Commission rates shall be determined by
NPS from time to time and are subject to change without notice. The Dealer will
receive commission credits on accounts it originates in the NPS computer
system. Commission programs are subject to change without notice.
…
GUARANTEE
WHEREAS, National Programming Service, LLC (“NPS”) has entered
an Agreement with the Dealer whereby NPS will sell satellite television
programming (“the Programming”) to the Dealer, which the Dealer will
subsequently offer and sell to its customers.
NOW, THEREFORE, in consideration of and to induce NPS to sell
the Programming to the Dealer, the undersigned for themselves and their heirs,
representative and assigns, jointly and severally, unconditionally guarantee
the complete fulfillment of all obligations of the Dealer with respect to the
Dealer’s NPS Star Dealer Agreement with NPS and the Dealer’s purchase of the
Programming, and all indebtedness and obligations of the Dealer arising
thereunder, whether heretofore or hereinafter incurred, including compromises,
renewals, and extensions thereof, any of which may be made without notice to
the undersigned. In the event of the Dealer’s default or breach of any
obligations owing to NPS, NPS shall not be bound to exhaust its recourse
against the Dealer, or against any person or any security NPS may at any time
have before being entitled to payment from the undersigned hereunder. The
liability of the undersigned shall not be affected by any extension, renewal or
the release, settlement, or compromise of or with any party liable to NPS, or the
release or non-perfection of any security. Each of the undersigned Guarantors
hereby waives notice of the acceptance of this Guarantee, and of presentment,
demand and protest and notices of non-payment and dishonour, and any other
demands and notices required by law and waives all setoffs and counterclaims.
The obligation of each of the undersigned guarantors hereunder shall be joint
and several and in addition to any other obligation that such guarantor may
have with respect to any agreement between NPS and the Dealer. The undersigned
agrees that this Guarantee and any contemporaneous or subsequent agreement will
be governed as to validity, interpretation, construction, effect and in all
other respects by the laws of the State of Indiana and further consents to jurisdiction and venue of any action to lie
in Marion County, Indiana. This Guarantee shall bind the undersigned and their
respective heirs, administrators, personal representatives, successors,
trustees, agents and assigns and shall inure to the benefit of all of NPS’s successors,
agents and assigns.
[15]
In a prepared statement
which Mrs. Blais read to the court, she described the partners’ relationship
with NPS as follows:
All of the rights in the programs for which we sold a subscription,
reside in third parties. The uplinking of the television signal in long
distance transmission does involve copyright. Therefore the uplinker, who are
independent third parties pay royalties to the US networks because the uplinking is a retransmission of work
protected by copyright. The US
networks hold the copyright to the retransmitted work and therefore have the
right to claim royalties on such transmissions. Because the retransmission of
the works protected by copyright occur outside of Canada, any use of the copyright occurs outside of Canada.
After the uplinking or retransmission takes place, the signals
carrying television programming are relayed to earth for reception. The signals
are uplinked to satellites outside of Canada and then relayed to earth continuously regardless of whether long
distance viewers watch this television programming or not. We are not involved
in the relay of signals to earth.
As with local transmission, anyone who is equipped to receive the
signal can watch television programming. Long distance viewers of satellite
transmission do not deal with the copyright of US networks anymore than viewers
of local television programming.
We had a contract with National Programming Service. We were a
reseller of satellite television activations. We would phone them for our
customer to activate a subscription and they would activate whatever channels
were available for long distance viewers. We obtained no rights to any
television signal or programming directly. We were a middleman providing a
service. We did not transmit, retransmit, copy or reproduce either the
television programming or signals. We had no rights to activate any television
channels ourselves. We contacted “NPS” to do the activation. They would take
the customer’s descrambler ID # and NPS would activate the channels that the
customer wanted to subscribe to.
[16]
The facts disclosed in
the evidence were that NPS informed the Appellants of the list of channels
which they had available. The Appellants in turn gave the list of channels to
their customers who chose the channels they wanted. The customers subscribed to
have access to the channels for a period of three months, six months or a year.
The Appellants then sent this information along with the number on the
customer’s descrambler unit to NPS which activated the descrambler unit for the
chosen channels. The Appellants were paid by their customers. The Appellants
then deducted their commission and sent the remainder of the payment to NPS.
Mrs. Blais stated that she paid NPS on a weekly basis by credit card.
[17]
It was the Respondent’s
position that the language in paragraph 212(1)(d) is broad enough to include
the payments made to NPS. Counsel for the Respondent argued that the payments
had the characteristics of a “rent”, “royalty” or similar payment.
Analysis
[18]
The relevant part of
paragraph 212(1)(d) of the Act reads as follows:
212. (1) Tax
-- 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 the non-resident person as, on account or in lieu of payment of,
or in satisfaction of,
…
(d) rents, royalties, etc. -- rent, royalty or similar payment, including,
but not so as to restrict the generality of the foregoing, any payment
[19]
In R. v. Saint John
Shipbuilding & Dry Dock Co.[2]
Ryan, C.J. said the following concerning the terms “rent” and “royalty”:
15 The
payments have none of the characteristics of rentals or royalties. The word
"rental" is not a familiar one to use in connection with property
rights of the kinds enumerated but I see no reason to think that when used in
reference thereto it would connote characteristics different from those it has
in its more familiar use in relation to tangible property. A rental can, of
course, be paid in a lump sum but in my opinion the word is inseparable from
the connotation of a payment for a term, whether fixed in time or determinable
on the happening of an event or in a manner provided for, after which the right
of the grantee to the property and to its use reverts to the grantor. "Royalties",
though a broad term, when used in the sense of a payment for the use of
property, connotes a payment calculated by reference to the use or to the
production or revenue or profits from the use of the rights granted. In
Jowitt's Dictionary of English Law the term is defined thus:
Royalty, a
payment reserved by the grantor of a patent, lease of a mine or similar right,
and payable proportionately to the use made of the right by the grantee. It is
usually a payment of money, but may be a payment in kind, that is, of part of
the produce of the exercise of the right. See RENT.
Royalty also
sometimes means a payment which is made to an author or composer by an assignee
or licensee in respect of each copy of his work which is sold, or to an
inventor in respect of each article sold under the patent. (emphasis added)
[20]
I conclude that the
payments in question had none of the characteristics of “rent” or similar
payment. The Appellants’ customers subscribed to receive access to certain
programming and they paid a subscription fee for this access. It was this
subscription fee, less commission, which the Appellants paid to NPS. Even if
the term “rent” is given a broad meaning, it cannot be said that the payment
from the Appellants to NPS was “rent” or that the Appellants or its customers
rented the programming. Property rights were not acquired in the programming
and at the end of the customers’ subscriptions, nothing reverted to NPS. The
customers acquired only the right to view their chosen channels. At the end of
the subscription period, the customers merely lost that right.
[21]
In Hasbro Canada v. R.[3], Dussault T.C.J.
reviewed the term “royalty” as discussed in Vauban Productions v. R.[4] and Grand Toys Ltd. v.
Minister of National Revenue[5]
and at paragraph 22 he concluded the following:
22 A
royalty or similar payment is therefore one made for the use of property,
rights or information whereby the payments for such use are contingent upon the
extent or duration of use, profits or sales by the user.
[22]
The payments from the Appellants
to NPS cannot be said to be in the nature of or have the characteristics of a
“royalty” or similar payment. The payments were for the performance of services
by NPS. They were for NPS to activate the descrambler units held by the Appellants’
customers for the subscription period. The payments were not contingent on the
extent or duration of use, profits or sales by the Appellants or its customers.
The word “contingent” is defined in the Dictionary of Canadian Law as:
Conditional upon the
occurrence of some future uncertain event.
There
was nothing contingent about the payments in the present appeal. They were
referable to the subscription fees paid to the Appellants by its customers.
These subscription fees were predetermined by NPS for the period of the
subscription.
[23]
I conclude that the payments made
by the Appellants to NPS did not possess those characteristics that would bring
them within the phrase “rent, royalty or similar payments”.
[24]
In making the assessments and in
confirming the assessments, the Minister has only relied on the phrase in the
preamble of paragraph 212(1)(d) of the Act. Consequently, it is not
necessary for me to consider whether the payments made by the Appellants to NPS
come within the ambit of any of the subparagraphs in paragraph 212(1)(d).
[25]
The appeal is allowed and the
assessments are vacated. The Appellants are entitled to costs in the amount of
$1,000.
Signed at Toronto,
Canada, this 8th day of July 2010.
“V.A. Miller”
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