Canada v. Dawn’s Place Ltd., [2006] GSTC 137, 2006 FCA 349

Date: 20061027

Docket: A-606-05

Citation: 2006 FCA 349

 

CORAM:       SHARLOW J.A.

                        PELLETIER J.A.

                        MALONE J.A.

 

BETWEEN:

HER MAJESTY THE QUEEN

Appellant

and

 

DAWN'S PLACE LTD.

Respondent

 

 

 

Heard at Edmonton, Alberta, on October 2, 2006.

Judgment delivered at Ottawa, Ontario, on October 27, 2006.

 

REASONS FOR JUDGMENT BY:                                                                          SHARLOW J.A.

CONCURRED IN BY:                                                                                             PELLETIER J.A.

                                                                                                                                    MALONE J.A.

 

Date: 20061027

Docket: A-606-05

Citation: 2006 FCA 349

CORAM:       SHARLOW J.A.

                        PELLETIER J.A.

                        MALONE J.A.

 

BETWEEN:

 

HER MAJESTY THE QUEEN

Appellant

and

 

DAWN'S PLACE LTD.

Respondent

 

 

REASONS FOR JUDGMENT

SHARLOW J.A.

[1]               The Crown is appealing the judgment of the Tax Court of Canada (2005 TCC 721) dated November 10, 2005, that allowed the appeal of Dawn’s Place Ltd. from an assessment of goods and services tax (GST) under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, in relation to the 2001 calendar year. The effect of the judgment is that fees paid in 2001 for a subscription to the internet website of Dawn’s Place were not subject to GST if the subscriber was not resident in Canada and was not registered under Subdivision d of Division V of Part IX of the Excise Tax Act at the time the supply was made.

Statutory framework

[2]               Generally, GST is imposed on the recipient of a supply made in Canada by a supplier in the course of a commercial activity (subsection 165(1) of the Excise Tax Act). The supplier is obliged to collect the GST from the recipient of the taxable supply, and remit the collected amount to the Crown (subsection 221(1) of the Excise Tax Act). The word “supply” is defined as the provision of property or a service in any manner whatever (subsection 123(1) of the Excise Tax Act).

[3]               A number of provisions in the Excise Tax Act deal with the question of when a supply is to be considered as having been made in Canada.  The only such provision that is relevant to this case is subparagraph 142(1)(c)(i). It provides that a supply is deemed to be made in Canada if it is a supply of intangible personal property that may be used in whole or in part in Canada.

[4]               A supplier who is appropriately registered (a GST registrant) is entitled to claim input tax credits. Input tax credits represent a refund of GST paid by the GST registrant on its “inputs” (generally, anything the GST registrant has acquired for consumption, use or supply in a commercial activity: section 169 of the Excise Tax Act). The effect, broadly speaking, is that the burden of the GST is borne at the level of the consumer, rather than the GST registrant.

[5]               No GST is payable on an exempt supply or a zero-rated supply. However, a GST registrant who is a supplier of a zero-rated supply may claim input tax credits, while a supplier of an exempt supply cannot. The effect is that the supplier of a zero-rated supply may be relieved of the burden of GST in respect of its inputs, but no such relief is available to the supplier of an exempt supply.

[6]               It is difficult to provide a useful generalization of the kinds of supply that are exempt or zero-rated. It must suffice in this case to note that usually, a supply will be zero-rated if it is exported or provided to a non-resident (“non-resident” means “not resident in Canada”; see subsection 123(1) of the Excise Tax Act). However, there are exceptions to that general rule.

[7]               Subsection 123(1) of the Excise Tax Act defines “zero-rated supply” as a supply included in Schedule VI of the Excise Tax Act. Section 10 of Part V of Schedule VI reads as follows:

 

[8]               This case involves material that is subject to copyright. Subsections 3(1) and 27(1) of the Copyright Act, R.S.C. 1985, c. C-42, read in relevant part as follows:

 

 

[9]               The question raised in this appeal is the scope of section 10.  Specifically, the question is whether access to an internet website operated by a Canadian enterprise (which is a supply of intangible personal property) is a zero-rated supply to any non-resident recipient (who is not a GST registrant), because the recipient has the right to download and retain a copy of copyrighted material accessed on the website.

Facts

[10]           During 2001, Dawn’s Place operated an internet website containing a constantly changing collection of adult content images and video files. For the purposes of this appeal, it is undisputed that the contents of the website are subject to copyright, and that Dawn’s Place owns the copyright.

[11]           Adults may subscribe to the Dawn’s Place website for a specified period of time upon payment of a fee. The current subscription agreement contains the following clauses that are particularly relevant to this appeal:

 

[12]           The subscription agreement now appears on the Dawn’s Place website. A person who wishes to become a subscriber must agree to it before the subscription is accepted.  That was not the case during 2001, the period to which the GST assessment in this case relates. However, in the Tax Court and in this Court, the parties agreed that the terms of the current agreement should be treated as part of the contract between Dawn’s Place and its subscribers for 2001.

[13]           It is common ground that the payment of the subscription fee entitles the subscriber, for the duration of the subscription period, to access the contents of the website, including the images and video files, a chat room and a webcam. The subscriber has the right to download and retain for the subscriber’s own use, on one computer, any image or video file on the website.

[14]           Dawn’s Place imposes no geographic restriction on access to its website. Subscribers may be located in Canada or in any other country. Dawn’s Place is not able to determine with certainty where its subscribers are located. However, tracking the payments received by various means, Dawn’s Place has some information about the location of most of its subscribers or their internet service providers. It is not necessary in this case to determine the location of the Dawn’s Place subscribers, but I note the submission of Dawn’s Place that approximately 90% of the subscribers to its website are located outside Canada.

[15]           For the purposes of this appeal, it is undisputed that each subscriber to the Dawn’s Place website is the recipient of a supply of intangible personal property to which the deeming rule in paragraph 142(1)(c) applies. Therefore, Dawn’s Place is obliged to collect and remit GST on the fees it receives from its website subscribers, unless the supply is exempt or zero-rated.

Litigation history

[16]           On January 29, 2003, Dawn’s Place was assessed under the Excise Tax Act for the 2001 calendar year on the basis that GST was payable on fees received by Dawn’s Place as consideration for access to its website. Dawn’s Place appealed on the basis that the supplies are zero-rated to the extent that its subscribers are non-residents and not GST registrants. The Tax Court Judge agreed with Dawn’s Place. He allowed the appeal and remitted the matter to the Minister for a determination of the residence of the website subscribers.

[17]           The Tax Court Judge reasoned that, because copyright subsists in the contents of the website and the copyright is owned by Dawn’s Place, it necessarily follows that Dawn’s Place was supplying its subscribers with a right, licence or privilege to use the copyright in the website contents. From that he concluded that the supplies in issue were prima facie within the scope of section 10. He allowed the appeal and referred the matter to the Minister for a determination of which subscribers were non-residents and not GST registrants.

[18]           The Crown argued that the Tax Court Judge erred in his interpretation of section 10, and that he should have concluded that it does not apply because the supply in this case is not within the scope of section 10. If the Crown is correct, this appeal must succeed.

Discussion

[19]           In determining whether section 10 applies to the provision by Dawn’s Place of access to its website, it is necessary to determine whether the content of the website is subject to copyright. However, that is not the end of the analysis. It is necessary also to characterize the supply sought to be taxed. The Tax Court Judge erred in failing to address that question.

[20]           I characterize the transaction as the supply of access to the Dawn’s Place website, including a single copy of the contents of the Dawn’s Place website. The fact that the copy is made by the subscriber himself through his own computer is a necessary incident of the supply. Indeed, there is no other way to access and retain material on a website. However, that incidental copying does not change the essential nature of the supply.

[21]           I reach that conclusion despite the use of the word “licence” in the subscription agreement. As I read the subscription agreement, the “grant” of a “non-exclusive, limited and revocable license to download and view the content of this Web Site on your computer for . . . personal and non- commercial use” does nothing more than give the subscriber the permission of Dawn’s Place to make that single copy.

[22]           Having determined what the transaction is, it is necessary to consider whether or not it fits with the scope of section 10. I reproduce below the relevant parts of section 10:

 

For the purposes of this case, I need not distinguish between the terms “right”, “licence” and “privilege”. I will use the word “right” to refer to all three.

[23]           There is a difference between the French and English versions of section 10. The English version of section 10 refers to a supply of copyright or the supply of a right to use copyright. The French version refers to a supply of copyright or the supply of a right pertaining to the use of the copyright. The parties were alerted to that difference at the hearing of this appeal, and they both made written submissions addressing that point. Those submissions have been considered.

[24]           In my view, the two versions do not differ in meaning. Both versions contemplate a transaction in which the copyright itself is transferred from one person to another (for example, an assignment or sale), or where the holder of copyright enters into an agreement by which another person becomes entitled to use the copyright. A typical example would be the grant of a license to publish a particular work within a certain geographic location. Both versions require consideration of the meaning of the “use” of copyright.

[25]           It is not suggested that the transaction in this case is a supply of the copyright itself. Rather, the contention of Dawn’s Place is that section 10 refers to any supply (including the supplies in this case) in which a person is given permission to make a copy of copyrighted material, if the copying would be an infringement absent the permission. The argument of Dawn’s Place is based on the assumption that, without the consent of Dawn’s Place, any subscriber who downloads the contents of the website would infringe the copyright.  I need not decide whether that assumption is valid.  Assuming it is valid, the result of the interpretation proposed by Dawn’s Place is that section 10 would apply to any transaction by which a person obtains permission to make even a single copy of a copyrighted work (assuming the recipient is a non-resident and not a GST registrant).

[26]           The interpretation proposed by Dawn’s Place is the broadest possible literal interpretation of section 10. Dawn’s Place argues that because section 10 is an exempting provision, it should be broadly and expansively interpreted. The authority cited for that proposition is Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3.  I am unable to read that case (or any other case since Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536), as support for that proposition. It is now established that the Courts must interpret tax legislation in its entire context and in its grammatical and ordinary sense, harmoniously with the statutory scheme, and with a view to achieving consistency, predictability and fairness: see Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601.

[27]           The Crown proposes an interpretation of section 10 that recognizes the substantive distinction between the supply of copyrighted material, and the supply of some or all of the bundle of rights that comprises the copyright. The Crown argues that the language of section 10 should be understood to apply only to the latter. The scope of section 10, under the Crown’s interpretation, is not wide enough to cover the supply in this case.

[28]           In my view, the Crown’s interpretation is the correct one. It is an interpretation that is consistent with the ordinary and grammatical meaning of section 10, and also with the statutory scheme. Section 10, read in its entirety, clearly is addressed to transactions that represent certain dealings in the rights of copyright and other intellectual property, and the rights attached to such intellectual property. To interpret section 10 so broadly that it applies to a transaction of an entirely different nature, merely because one of the incidents of the transaction happens to involve a permitted copying of copyright material, would be an unwarranted extension of the tax relief that section 10 was intended to achieve.

[29]           An analogous issue arises in the context of the interpretation of tax treaties, in which it may be important to determine whether a payment is a royalty (that is, consideration for the use of intellectual property), or ordinary business income. The most recent commentary to Article 12 of the OECD Model Tax Convention on Income and Capital (as produced in Perla Gyöngyi Végh, ed., OECD Model Tax Convention on Income and on Capital, Condensed Version – 2005; and Key Tax Features of Member Countries (Amsterdam: International Bureau of Fiscal Documentation, 2005)) states a functional test, one that that focuses on identifying the essential consideration for which the payment is made. Thus, in a transaction that in essence is an acquisition of data or images transmitted electronically, any incidental copying is merely the means by which the data is captured and stored. The essential consideration for the payment in that case is the data, not the use of the copyright, even though the copyright is incidentally used. In my view, the reasoning underlying the OECD commentary is sound.

[30]           It is appropriate to comment on one argument that was raised in this appeal but does not form any part of my reasoning in this case. I refer to the argument that the correct interpretation of section 10 must respect the doctrine of neutrality, which is the notion that tax should not provide an incentive or disincentive it determining the manner in which business is conducted. Specifically, the Crown argued that if the supply of copyrighted material in electronic form is zero-rated, then the supply of electronic versions of copyrighted material would have an advantage over the supply of the same content in the form of a magazine. Dawn’s Place agreed that neutrality was important, but argued that the supply of electronic material to non-residents is the functional equivalent of the export of magazines, so that if the supply in this case is not zero-rated, the export of magazines would have an advantage over the supply of electronic material to non-residents.

[31]           I found the submissions on neutrality to be of no assistance, given the record of this case. The doctrine of neutrality generally is a guideline for the development of tax policy, which in turn may inform the drafting and enactment of tax legislation. However, except for what may be inferred from the language of section 10 and the relevant elements of the statutory scheme, I have no basis for determining the policy underlying section 10. In particular, I have no basis for determining whether, or to what extent, section 10 is intended to give effect to the doctrine of neutrality.

Conclusion

[32]           For the foregoing reasons, I would allow this appeal, set aside the judgment of the Tax Court of Canada dated November 10, 2005, and dismiss the appeal of Dawn’s Place from the reassessment made under Part IX of the Excise Tax Act for the period January 1, 2001 to December 31, 2001, notice of which is dated January 29, 2003.

[33]           As this is an appeal by the Crown from a judgment of the Tax Court of Canada under the informal procedure of that Court, the Crown is required to bear the reasonable and proper costs of Dawn’s Place unless the amount in dispute exceeds a certain threshold. In this case, that threshold is exceeded, which means that the costs of this appeal fall to be determined on the basis of the Federal Courts Rules, SOR/98-106. Normally, the result would be that the successful party, in this case the Crown, would be awarded costs.

[34]           At the conclusion of the hearing, Dawn’s Place requested that the matter of costs be deferred pending further written submissions. The submission of Dawn’s Place is to be served and filed by November 6, 2006. If the Crown wishes to respond, the responding submission is to be served and

 

 

 

filed by November 10, 2006. Formal judgment in this case will be deferred pending the receipt of those submissions.

“K. Sharlow”

“I agree

            J.D. Denis Pelletier J.A.”

 

“I agree

            B. Malone J.A.”

 

FEDERAL COURT OF APPEAL

 

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

 

 

DOCKET:                                                                              A-606-05

 

(APPEAL FROM A JUDGMENT OF THE TAX COURT OF CANADA DATED NOVEMBER 10, 2005, FILE NO. 2004-3381(GST)I)

 

STYLE OF CAUSE:                                                              HER MAJESTY THE QUEEN

                                                                                                v.

                                                                                                DAWN’S PLACE LTD.

 

PLACE OF HEARING:                                                        Edmonton, AB

 

DATE OF HEARING:                                                          October 2, 2006

 

REASONS FOR JUDGMENT BY:                                     Sharlow J.A.

 

CONCURRED IN BY:                                                         Pelletier J.A.

                                                                                                Malone J.A.

 

DATED:                                                                                 October 27, 2006

 

 

APPEARANCES:

 

Belinda Schmid Bonnie F. Moon	FOR THE APPELLANT
Gordon Beck Tom O'Reilly	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

John Sims, Q.C. Deputy Attorney General of Canada Ottawa, ON	FOR THE APPELLANT
MacPherson Leslie & Tyerman LLP Edmonton, AB	FOR THE RESPONDENT