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Citation: 2003TCC912
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Date: 20031209
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Docket: 2000-4873(IT)G
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BETWEEN:
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ELLIS VISION INCORPORATED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.
[1] Ellis Vision Incorporated has
appealed income tax assessments for 1996 and 1997 in which
the Minister of National Revenue, among other things, denied the
appellant's deductions of a reserve pursuant to
paragraph 20(1)(m) of the Income Tax Act
("Act"). The Minister also assessed the
appellant's 1997 taxation year reducing the
appellant's income to the extent it added to its income for
1997 the amount of the paragraph 20(1)(m) reserve it
claimed in its 1996 income tax return. The Attorney General
states that in response to representations made on behalf of the
appellant, the Minister reassessed the appellant for 1996 and
1997 on the basis that the revenue for income tax purposes be
recognized on the "billed basis" of accounting and
therefore allowed the appellant to deduct from income amounts not
billed as unbilled accounts receivable included in income.
[2] The appellant carries on the
business of producing and licensing documentary programs,
primarily wildlife and nature programs, and series, for broadcast
television. The appellant earns income from the licensing of the
programs and series to broadcasters throughout the world pursuant
to licence agreements. The appellant licenses programs that have
yet to be produced ("pre-licence" or
"pre-production" agreements) as well as programs
that have been produced and may have been shown previously on
television ("post-production" agreements). Once a
licence for a "pre-production" program with an
initial broadcaster of that program expires the program becomes
part of the appellant's library and the appellant derives
further revenue from licensing the programs to broadcasters.
[3]
The
productions include stand-alone programs as well as several
programs as part of a series. The appellant licenses the programs
and series to "on air" or standard television
broadcasters as well as to cable broadcasters. The appellant can
also distribute programs by licensing the programs for home video
sales. In these reasons programs and series are referred to as
such or as a "production".
[4] In carrying on its business, Ellis
Vision develops the concept for a program or series and then
approaches prospective broadcasting clients for commitments, to
acquire a licence to broadcast the productions, once completed.
Ellis Vision determines whether to produce the program based on
what broadcasters are willing to pay for licences and the number
of broadcasters willing to commit. If there is no significant
level of commitments, based on the appellant's "own sort
of corporate discipline", there is no production, according
to Stephen Ellis, president of the appellant.
[5] If significant commitments are
forthcoming, the appellant proceeds to hire the services of
cinematographers, writers, designers, music composers, editors
and other talented individuals to "put together an original
work", in the words of Mr. Ellis.
[6] The licence fees the appellant
receives are from both pre-licence and
post-production agreements. In a licensing agreement with
Ellis Vision the broadcaster agrees to various terms, such as a
time limit on the use of the program, the number of broadcasts
which it is entitled to show and the licence fee, among others.
In return, the broadcaster obtains the exclusive right to show
the program for the term of the licence in that broadcaster's
marketplace, in terms of geography and in terms of the type of
broadcasting, for example, "on air" or cable
television. Typically, Mr. Ellis declared, broadcasters pay more
in licence fees for a program yet to be completed than for
programs already completed. Ellis Vision attempts to generate as
many licences as possible throughout the world.
[7] Both Mr. Ellis and Ms. Trina
McQueen, former president of Discovery Channel in Canada and
former chief operating officer of CTV Network, stressed the
importance of exclusivity of a production to a broadcaster during
the life of a licence. Ms. McQueen stated it is important to the
licensed broadcaster that Ellis Vision ensure that nobody
other than the licensee can broadcast the production in the
licensee's area during the term of the licence. Ms. McQueen
described exclusivity as the "key to success" for
broadcaster; a broadcaster wants to promote the brand that
excites and relates to the viewer. A broadcaster is also
influenced by the price and term of the licence in deciding
whether to commit to a production.
[8] The more exclusivity the
broadcaster has in the licence, Ms. McQueen asserted, the more it
is important to the broadcaster that the licensor have insurance
for the production. In particular, as far as Ellis Vision is
concerned, the treatment and portrayal of animals requires that
the appellant be insured to defend the production, I assume,
against any maltreatment of the animals.
[9] In Ms. McQueen's view, the
broadcaster rents - does not buy - programs and during the term
of the licence the licensor is expected to provide the
broadcaster with materials to promote the attraction. She
testified that Ellis Vision owns "every piece of film
they shot" and that is a very valuable asset. "Animal
programs don't date" as much as the other programs and
retain their value.
[10] The appellant and broadcasters
negotiate pre-production licences as though the program were a
finished program, Mr. Ellis explained. However, a
pre-production agreement would include additional terms to
provide the broadcaster with some comfort that the program will
meet its standards and that the broadcaster will accept the
program when delivered.
[11] Mr. Ellis estimated that the appellant
earns more than 50 percent of licensing fees from
pre-production agreements but licenses more program hours
for post-production or completed programs.
[12] Before 1996, according to Mr. Ellis,
the appellant reported income for accounting purposes by
"simply" accumulating costs on each production and
income was recognized in the year when revenues exceeded the
costs. The pre-1996 accounting policy is described in Note
1 to the financial statements for 1995 of the appellant:
All production costs, royalties advanced to cinematographers
and revenues (net of any foreign withholding taxes) related to
the production of a film or series are deferred until all
production efforts have been completed and revenues exceed costs
at which time deferred revenue is credited to the income
statement as revenue; deferred costs are charged to the income
statement as production costs, royalties and distribution costs,
as appropriate; and, foreign tax credits are applied against the
tax provision. Revenue in excess of production costs is resale
revenue.
[13] For tax purposes the appellant claimed
a reserve pursuant to paragraph 20(1)(m) of the
Act. In reporting its income for 1996, for example, the
appellant added to its income the amount of the reserve it
claimed in 1995.
[14] Arlene Cohen, chartered accountant, was
a tax manager of McLean Hunter from 1977 to 1995. MacLean Hunter
was the parent company of CFCN Communications Limited who
owned 50% of the shares of the appellant, then known as Keg
Productions Limited. Ellis Entertainment Corporation, controlled
by Mr. Ellis' father, also held 50% of the shares of the
appellant. She prepared tax returns for the appellant until its
fiscal year end of December 31, 1993. In preparing the
tax returns, Ms. Cohen reviewed the internal contracts and
licence agreements to ascertain an appropriate basis for
determining income for tax purposes. She reviewed the term of
each contract and the exclusivity feature of each contract and
amortized the contract revenue value over the licence period. She
prepared a schedule that reflected the appropriate income that
would be period-averaged over the life of each contract and
determined the income earned in the year and to be earned in the
future. The appellant claimed a paragraph 20(1)(m) reserve
with respect to the income Ms. Cohen believed would be
earned in future years.
[15] In the Ellis Vision's 1996
financial statements, the appellant's auditor, KPMG, reported
that the appellant:
altered its accounting policy in respect of revenue
recognition and production cost amortization to concur with the
guidance offered by Financial Accounting Standards. No. 53,
Financial Reporting by Producers and Distributors of motion
picture films.
[16] The Financial Accounting Standards No.
53 ["FASB Statement No. 53"] apparently were accounting
standards proposed for use in the United States.
Mr. Ellis testified the appellant "adopted it for our
purposes", but acknowledged that "there is no standard
per se in Canada for accounting in our particular sector
of business". Counsel stated that the U.S. accounting
standards are not relevant for purposes of these appeals,
although appellant's counsel stated that it does give one an
insight into how the appellant calculated income for accounting
purposes. I was advised later at trial that
FASB Statement No. 53 was subsequently rescinded.[1]
[17] The appellant's revenues from the
licence fees in 1996 and 1997 included the amounts of $4,659,350
and $11,560,443, respectively. The amounts were calculated in
accordance with FASB Statement No. 53. In filing its tax return
for 1996, the appellant added back to income the amount of
$1,700,000 it claimed as a paragraph 20(1)(m) reserve in
1995 and claimed a reserve for 1996 in the amount of $1,975,060.
However, in preparing its 1997 tax return, the appellant appears
not to have added to income any amount of the $1,975,060 it
deducted in 1996 but claimed a paragraph 20(1)(m) reserve
of $3,975,060, representing the $1,975,060 from 1996 and
$2,000,000 of additional amounts claimed as a reserve for
1997.
[18] The reserves for 1996 and 1997, Mr.
Ellis testified, represented income reported for the year in
accordance with FASB Statement No. 53 but which had not been
earned in the particular year.[2] A paragraph 20(1)(m) reserve was claimed
for tax purposes so that revenues that "relate to the future
years would be removed from the calculation" of income since
"we wanted to ultimately be taxed on the revenue that
we'd earned during the period in which we were
reporting". These reserves were disallowed by the
Minister.
[19] Counsel for the appellant queried Mr.
Ellis as to the terms of a "pre-production" of a
"pre-licence" agreement, referring to a specific,
but standard, agreement in 1995 between the appellant and the
Discovery Channel, an American cable network ("Discovery
Agreement"). Agreements with other broadcasters contain
similar obligations and on discovery of the respondent, his
representative, Mr. Cray Ellis, acknowledged that the agreements
are substantially similar.
[20] Before the appellant entered into a
licence agreement, such as that with Discovery, principals of the
appellant determined broadcasters' interest in the particular
production and the number of titles in a series broadcasters
would be prepared to acquire. Usually the appellant had
on-going business relations with potential licensees.
Discovery, for example, had licensed Ellis Vision productions in
the past.
[21] Under the Discovery Agreement, the
appellant licensed to Discovery four programs (not in existence
at the time) to be included in a series entitled "Profiles
of Natures" for the period April 1, 1996 to March 31, 1999.
The programs were original works to be created by Ellis Vision.
Discovery had the option to extend the period for an additional
one or two years, at its discretion. Mr. Ellis said licences can
range for up to seven years. Where there is a shorter period,
there is usually an option period. Delivery dates in the
Discovery Agreement were January 20, 1996 for program
rough-cuts[3]
and February 14, 1996 for all remaining program materials.
Because this was a "pre-production" agreement,
Mr. Ellis explained, the customer, Discovery, expected to be able
to look at the programs at a state before the production was
completed.
[22] The four programs were ultimately
produced and shown on television.
[23] In the agreement with Discovery, the
appellant agreed that during the period of the licence (including
the option period) none of the programs, nor any elements or
versions, shall be shown on any form of television within
Discovery's territory, unless authorized by Discovery. Mr.
Ellis explained that exclusivity is "important in order to
ensure that the channel's brand is clear in the minds of the
public that will be tuning them as to what they may be expected
to see on that channel" and not elsewhere.
[24] Discovery agreed to pay a sum of money
as a licence fee payable in eight equal payments, the first
payment within twenty days after the execution of the agreement
by the parties, the second payment within twenty days after
"delivery to and consultation with" Discovery with
respect the program rough-cuts, the third payment within thirty
days after delivery to and acceptance by Discovery of all the
program materials, and the next five payments on July 20, 1996,
October 20, 1996, January 20, 1997, April 20, 1997 and
September 20, 1997. Further quarterly payments were to be made by
Discovery on the exercise of the option.
[25] The Discovery Agreement also gave
Discovery the right to creative and editorial consultation
through all the phases of pre-production, production,
post-production and editorial completion of the programs.
This is the right for Discovery to look at programs before
completion, which Mr. Ellis referred to earlier. The appellant
agreed to exercise its best efforts to satisfy Discovery. Upon
expiration or termination of the Agreement, Discovery was to
erase and destroy all copies of the programs in its
possession.
[26] Exhibit A to the Discovery Agreement
describes Discovery's territory and sets out the warranties
by the appellant. The appellant is obligated to protect the
copyright of each program in Discovery's territory during the
licence period and to secure an errors and omissions liability
insurance for the final 12 months of the Agreement to the
exhibition of the programs. Mr. Ellis stated that usually the
licensor is obliged to carry insurance for the life of the
licence. During the life of the licence, Mr. Ellis explained,
Ellis Vision is "expected to support the licence agreement
should [the broadcaster] have needs that come up that are beyond
the requirements of the initial materials delivered" by
Ellis Vision to the broadcaster. This includes material to
publicize the programs, photos for advertising and also
participation in press conferences and interviews. Ideally, the
appellant tries to discharge its obligation to provide the
material and services at the beginning of the licence period.
Usually the appellant absorbs the cost of these materials.
Mr. Ellis could not recall a time when a broadcaster was
asked to pay for the added services.
[27] Also, during the term of the licence,
Ellis Vision is to protect all copyrights pertaining to each
program delivered to the licensee from infringement and is to
take action to prevent any unauthorized use of the program. This,
Ms. McQueen insisted, is very important to a licensee. The
appellant also has to purchase an error and omissions liability
insurance policy applicable to the exhibition of the production;
in the Discovery agreement, the policy was for the first 12
months of the term.
[28] In the appellant's view it does not
sell broadcast rights, as claimed by the Minister. The broadcast
rights to the various programs remain the appellant's
property. The broadcaster makes use only of intellectual property
during the period of the licence and at the end of the licence
period, the intellectual property reverts to the appellant,
according to the appellant. I agree.
[29] During cross-examination Mr.
Ellis confirmed that the appellant had no restriction on how it
may use the fees received under a licence agreement. He noted,
however, that the appellant is expected to deliver on the terms
of the licence agreements throughout the term and that there may
be situations when a licensee asks the appellant to take action,
for example, to protect copyright, and in such a case the
appellant has to spend money. The appellant has some financial
risk concerning the timely delivery of a program; in such a case
the appellant may have to reimburse any fees already paid.
Historically, this has not been an issue for the appellant.
[30] The issue before me is to decide
whether the appellant is entitled to claim a reserve under
subparagraph 20(1)(m) for its 1996 and 1997 taxation
years in respect of licence fees received for the use of a
production for a future period.
[31] These appeals turn on the application
of subsection 9(1) and paragraphs 12(1)(a) and
20(1)(m) of the Act. Subsection 9(1) states
that:
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Subject to this Part, a taxpayer's income for a
taxation year from a business or property is the
taxpayer's profit from that business or property for
the year.
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Sous réserve des autres dispositions de la
présente partie, le revenu qu'un contribuable
tire d'une entreprise ou d'un bien pour une
année d'imposition est le bénéfice
qu'il en tire pour cette année.
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[32] The following amounts are to be
included in computing a taxpayer's income for a taxation year
from a business or property by virtue of
subparagraph 12(1)(a)(i):
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any amount received by the taxpayer in the year in the
course of a business that is on account of services not
rendered or goods not delivered before the end of the year
or that, for any other reason, may be regarded as not
having been earned in the year or a previous year, or
...
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les sommes reçues au cours de l'année
par le contribuable dans le cours des activités
d'une entreprise soit qui sont au titre de services non
rendus ou de marchandises non livrées avant la fin
de l'année ou qui, pour toute autre raison,
peuvent être considérées comme
n'ayant pas été gagnées durant
cette année ou une année
antérieure, ...
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[33] Subparagraphs 20(1)(m)(ii) and
(iii) provide that notwithstanding
paragraphs 18(1)(a), (b) and (h), in
computing its income for a taxation year from a business or a
property, a taxpayer may deduct the following amounts:
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... subject to subsection (6), where amounts described
in paragraph 12(1)(a) have been included in
computing the taxpayer's income from a business for the
year or a previous year, a reasonable amount as a reserve
in respect of ...
(ii) services that it is reasonably anticipated
will have to be rendered after the end of the year,
(iii) periods for which rent or other amounts for
the possession or use of land or chattels have been paid in
advance, or
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... sous réserve du paragraphe (6), lorsque des
sommes visées à l'alinéa
12(1)a) ont été incluses dans le
calcul du revenu tiré par un contribuable d'une
entreprise, pour l'année ou une année
antérieure, une somme raisonnable à titre de
provision dans le cas : ...
(ii) de services qui, selon ce qu'il est
raisonnable de prévoir, devront être rendus
après la fin de l'année,
(iii) de périodes pour lesquelles le loyer
ou d'autres sommes relatives à la possession ou
à l'usage d'un fonds de terre ou de biens
meubles, ont été payées à
l'avance,
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[34] These provisions must be analyzed on
the basis that, as in Vauban Productions v. The Queen,[4] the
transfer of an exclusive right for a limited period of time to
show certain films on a broadcaster's television station is
not a sale of the right, as suggested at one time by the
respondent, but can be described as a lease or the transfer to
the licensee of the right to use the production.
[35] According to the respondent, the
revenues the appellant billed or received in its 1996 and 1997
taxation years from the licences acquired the "quality of
income" to the appellant in those years and, therefore,
these amounts are to be included in calculating the
appellant's profits in these years pursuant to
subsection 9(1); the appellant's income for the year
from its business was its profits from the business for the year.
Revenue less expenditures result in profit.[5] And profits must be taken into
account or assessed in the year that the amount is ascertained.[6]
[36] Amounts become taxable as income in the
taxation year that the amounts received exhibit the nature and
quality of income. An amount has the "quality of
income" when a taxpayer's right to it is absolute and
under no restrictions, contractual or otherwise, as to its
disposition, use or enjoyment.[7] An amount may have the "quality of
income", respondent's counsel argued, even though the
amount is not actually received by the taxpayer, but only
"realized" in accordance with the accrual method of
accounting. If the amount is free of conditions or restrictions
upon its use, it is taxable in the year that it is received or
realized, subject to any contrary provision in the Act or
other rule of law.[8]
[37] Respondent's counsel also argued
that the appellant "is not being asked to include in its
income any amount that it is not also being permitted to claim as
deductions in respect of ... capital cost allowance".
Capital cost allowance had been claimed on the older
post-production programs and was entitled to capital cost
allowance (at the rate of 100%) on the newer pre-licensing
programs it was working on in 1996 and 1997. The respondent's
calculation requires the appellant to take into income amounts
attributable to the production but at the same time the appellant
is entitled to deduct the capital cost associated with the newer
productions. The end result, counsel declares, is that the
respondent's calculation provides an accurate picture of the
appellant's income position in 1996 and 1997. Counsel relies
on the comments of Iacobucci, J. in Ikea[9], who doubted whether, in
the circumstances of that case, the amortization of tenant
inducement payments could possibly yield a truer picture of
income than its immediate deduction.
[38] Under the various licensing agreements
in the appeals at bar, Ellis Vision was entitled to receive fees
or bill for fees at, or soon after, execution of the licence or
delivery of the production or by dates specified in the
agreements. At the happening of any such event, respondent's
counsel declared, Ellis Vision did all it was required to do to
be entitled to the fee that it received or for which it was
permitted to bill: the fees received or billed in each of these
circumstances were received or realized by the appellant free of
conditions or restrictions upon their use and therefore are
taxable in the year received or billed.
[39] In any event, respondent declares, to
the extent that the broadcasters had recourse against Ellis
Vision under the licence agreements, such liabilities were
contingent and did not affect the taxability of the fees. The
fact that the appellant may be under an obligation to repay any
amount received, does not change the character of the receipt
from income to liability.[10]
[40] It is the respondent's view that if
the amount billed or received by the appellant in 1996 or 1997
constitutes income that is included in the calculation of the
appellant's profit for each of the years under section 9
of the Act, then paragraph 12(1)(a) cannot apply.
Paragraph 12(1)(a) only serves to identify additional
amounts to be included in the income calculation otherwise
provided for under section 9.[11]
[41] In any event, counsel adds, the facts
at bar do not fit the wording of paragraph 12(1)(a). Under
the licensing agreements, once Ellis Vision was entitled to bill
or receive amounts under the agreements it was no longer required
to provide services or goods pursuant to the agreements.
[42] Also, in counsel for the
respondent's view, the amounts received or billed by the
appellant were received in the year they were received or billed;
they had the "quality of income" in that year, contrary
to subparagraph 12(1)(a)(i), which applies in situations
when the amounts "may be regarded as not having been earned
in the year". The appellant did not receive unearned income
during the years in appeal. The appellant did all it had to do
under the licence agreements when it billed or received the
licence fees.
[43] Appellant's counsel argued that the
licence fees received by Ellis Vision were not all earned when
received; the fees are earned as the contracts progress and
ultimately come to their conclusion. The amounts received should
be recognized rateably over the term of the licence.
[44] Finally, the respondent argued that the
appellant does not qualify for the paragraph 20(1)(m)
reserve since subparagraph (iii) refers to advanced payments of
rent or other amounts for the use of chattels and the grant of
right to the use of a production is not a chattel; it is an
incorporeal property. Had Parliament intended to reserve in
subparagraph 20(m)(iii) to be available in such
circumstances, Parliament would have used the word
"property" as defined in the Act, not the word
"chattels".[12]
[45] Notwithstanding that the amounts the
appellant received in its 1996 and 1997 taxation years from
broadcasters under the licence agreements may have been included
in computing the appellant's profits for those years under
subsection 9(1) of the Act, I cannot find any prohibition
in the Act that precludes the appellant from taking
advantage of paragraph 20(1)(m) and claiming a
reserve.
[46] All amounts that are received or
receivable in a taxation year by a taxpayer in the course of a
business are to be included in the taxpayer's income for that
year. However paragraph 20(1)(m), among other provisions
in the Act, recognizes that a taxpayer may have been
prepaid an amount that is or was required to be included in
computing income for the year or previous year. In such
circumstances the recipient of the amount may be eligible to
deduct a reasonable reserve.
[47] I do not agree with the
respondent's position that if a taxpayer's income from a
business is its profits from that business pursuant to subsection
9(1), one is foreclosed from considering amounts described in
subsection 12(1)(a). Amounts included in income for
purposes of subsection 9(1) may be described in paragraph
12(1)(a): services not rendered or goods not delivered
before the end of the year or rent or other amounts for
possession or use of chattels, for example, paid in advance are
amounts described in paragraph 12(1)(a). Paragraph
20(1)(m) permits a reasonable reserve when amounts that
are "described" in paragraph 12(1)(a) have
been included in computing the taxpayer's income from a
business for the year, or previous year, and rents or other
amounts have been paid in advance, or services may reasonably be
anticipated to be rendered in a future year. I agree with
appellant's counsel: the word "described" in
paragraph 20(1)(m) means just what it says it does. The
word in the French version of the Act is
"visées", which, in the context of paragraph
20(1)(m), is analogous to the words "referred
to", or "directed at" in English.[13]The "amounts described in
paragraph 12(1)(a)" do not mean only amounts that
were included in income "by virtue of"
paragraph 12(1)(a); the amounts may be included in
income by virtue of paragraph 12(1)(a) and the amounts may
also be included in income as profit from a business in
accordance with subsection 9(1).
[48] The parties agree that section 12
includes in the income of a taxpayer amounts that would not
otherwise be included in profit under subsection 9(1).
Paragraph 12(1)(a) includes certain amounts of income
that the taxpayer has received in the year that are subject to a
future obligation or are "regarded as not having been earned
in the year or previous year".
In Blue Mountain Resorts
Limited v. The Queen,[14] a ski hill operator sold season passes in one
year for use of a ski lift in the next year. There was no
obligation to return to any ski pass income to its customers. The
taxpayer claimed a paragraph 20(1)(m) reserve in the year
of sale on account services were not rendered before the end of
the year of sale. Beaubier, J. held that using the words of
paragraph 12(1)(a), the amount received by the taxpayer in
the year in the course of business was on account of services not
rendered before the end of the year. Accordingly, pursuant to
subparagraph 20(1)(m)(ii), the taxpayer was entitled to a
reserve since an amount described in paragraph 12(1)(a)
had been included in computing the taxpayer's income from a
business for the years in respect of services it is reasonably
anticipated will have to be rendered after the end of the year.
This is similar to the appeals at bar.
[49] The appellant claims that it has
obligations under the licence agreements that continue during the
term of the licence. The fees it received at the beginning of the
term of the licence, in its view, "may be regarded as not
having been earned in the year"; this is an amount
"described" in paragraph 12(1)(a).
[50] Broadcasters pay the appellant a
"rent", appellant's counsel submitted, for the use
of the property over a term and the licence fees that the
appellant attributed to subsequent years represented fees
allocable to the use of intellectual property in the production
during periods occurring within such subsequent taxation years. I
agree. In Sussex Square Apartments Ltd. v. The Queen,[15] Bowman, J., as
he then was, explained, at paragraph 32, that amounts received
for a sublease of property are rent and where the rent for the
entire period of the sublease is paid at the beginning of the
term of the sublease they must be included in income under
paragraph 12(1)(a).
[51] Bowman, J. acknowledged that paragraph
12(1)(a) does not refer to rent specifically but,
... it applies to rent and that the words following 'for
any other reason' are not to be construed eiusdem
generis. I draw this inference from subparagraph
20(1)(m) ...[16]
and he concluded that
it is clear that subparagraph 20(1)(m)(iii) is premised
upon the assumption that paragraph 12(1)(a) covers rent
for periods beyond the year of receipt.[17]
[52] A production licensed by Ellis Vision
is a one-of-a-kind property; it is the culmination of an
intellectual process. The licensee has exclusive right to the
production during the term of the licence. Ellis Vision cannot
license the licenced production to other persons in the territory
described in the licence during its term and is obliged to
protect the licensee's exclusive use of the production in
that territory during the term of the licence. Ellis Vision may
never in fact have to honour its obligation under the licence.
However, Ellis Vision did have future and absolute
obligations under the licence to ensure exclusivity of the
production to the licensee, among other things, and it is certain
it would have to fulfill those obligations if called upon. These
obligations were not conditional or dependant on some event.
[53] I am also of the view that the right to
the production licensed to a broadcaster is a chattel. The French
version of subparagraph 20(1)(m)(iii) uses the words
"de biens meubles" for "chattels"
in the English version. The Civil Code of Quebec divides
property, whether corporeal or incorporeal, into immoveables and
moveables, that is, "les biens" (properties) are
divided among "immeubles" (immoveables) and
"meubles" (moveables).[18] Moveables are things which can be
moved either by themselves or by an extrinsic force. Property
that is not immoveable, either by nature or by destination or
accession, is moveable property if not otherwise qualified by
law.
[54] Subsection 248(1) defines
"property" and "biens" for purposes of the
Act as any kind of property
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whether real or personal or corporeal or incorporeal
...
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meubles ou immeubles, corporels ou incorporels ...
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and, without restricting the generality of the foregoing,
includes
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a) a right of any kind whatever ...
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a) les droits de quelque nature qu'ils soient
...
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What are "chattels" in common law are "biens
meubles", or "moveable property" in the civil law.
An incorporeal property, including a right to use a production,
is a chattel for the purposes of subsection 20(1)(m).
[55] Ellis Vision is entitled to deduct an
amount as a reserve in accordance with paragraph 20(1)(m).
Ellis had transferred the right to use a production in a defined
area for a specific term to a licensee. To the extent the
licensee pays in advance to enjoy this right, Ellis Vision is
entitled to a reasonable reserve in respect of the amount it so
received. The amount is described in
paragraph 12(1)(a): it is either on account of a
service that, in the main, is not rendered before the end of the
year or is not earned in the year of receipt or a previous year
in the course of Ellis Vision's business, or as an amount for
the use of a chattel that was paid in advance.[19]
[56] The appeals will be allowed, with
costs, and the reassessments will be referred back to the
Minister of National Revenue for reconsideration and to assess in
a manner consistent with these reasons.
Signed at Ottawa, Canada, this 9th day of December,
2003.
Rip, J.
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