Citation: 2006 FCA 349
HER MAJESTY THE QUEEN
DAWN'S PLACE LTD.
REASONS FOR JUDGMENT
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.
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).
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.
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.
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.
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.
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:
10. A supply of an invention, patent, trade secret,
trade-mark, trade-name, copyright, industrial design or other intellectual
property or any right, licence or privilege to use any such property, where
the recipient is a non-resident person who is not registered under
Subdivision d of Division V of Part IX of the Act at the time the supply is
10. La fourniture d’une invention, d’un
brevet, d’un secret industriel, d’une marque de commerce, d’une raison
sociale, d’un droit d’auteur, d’une conception industrielle ou de toute autre
propriété intellectuelle, ou des droits, licences ou privilèges afférents à
leur utilisation, au profit d’un acquéreur non résidant qui n’est pas inscrit
aux termes de la sous-section d de la section V de la partie IX de la loi au
moment de la fourniture.
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
3. (1) For the purposes of this Act, “copyright”, in relation to a
work, means the sole right to produce or reproduce the work or any
substantial part thereof in any material form whatever, to perform the work
or any substantial part thereof in public or, if the work is unpublished, to
publish the work or any substantial part thereof, and includes […].
(1) Le droit d’auteur sur l’oeuvre comporte le droit exclusif de produire ou
reproduire la totalité ou une partie importante de l’oeuvre, sous une forme
matérielle quelconque, d’en exécuter ou d’en représenter la totalité ou une
partie importante en public et, si l’oeuvre n’est pas publiée, d’en publier
la totalité ou une partie importante; ce droit comporte […].
It is an infringement of copyright for any person to do, without the consent
of the owner of the copyright, anything that by this Act only the owner of
the copyright has the right to do.
(1) Constitue une violation du droit d’auteur l’accomplissement, sans le
consentement du titulaire de ce droit, d’un acte qu’en vertu de la présente
loi seul ce titulaire a la faculté d’accomplir.
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.
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.
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:
PART OF THIS CONTRACT IS A LIMITED LICENCE, WHICH ALLOWS YOU TO DOWNLOAD AND
VIEW THE CONTENT OF THIS WEB SITE BUT GIVES YOU NO OWNERSHIP RIGHTS IN SUCH CONTENT.
ALL CONTENT IS SUBJECT TO COPYRIGHT. […]
Your Conduct: You agree that at all times:
a) Your access to
this Web Site is for your personal and non–commercial use only. […]
b) All content
displayed on this Web Site is subject to copyright and other intellectual
property rights of Dawn’s Place or its licensors, all rights reserved;
c) All content
made available to you, including content in the free portion of this Web
Site, is provided on the basis that you will be entitled to retain one copy
of each image or video file for your own enjoyment and personal use on one
computer, and, where content is streaming, you will be entitled to access
such streaming content for your own enjoyment and use;
d) You will not do
anything, or omit to do anything, which infringes the intellectual property
rights of Dawn’s Place or any other party, such rights including but not
limited to copyright, trademark, trade name, patent or trade secrets;
e) You will not
copy, publish, distribute or disseminate any of the content contained on this
Web Site to any third party under any circumstances […].
Grant of Limited License: Dawn’s Place grants to you a non-exclusive, limited
and revocable license to download and view the content of this Web Site on
your computer for your own personal and non-commercial use. Content includes
images, text, logos, graphics, information, software, computer code and
applications, animations, video and any and all types of multimedia. You do
not own the content.
Retention of Rights: All right, title and interest, including but not limited
to Copyright and Trade mark, in and to this Web Site and all content accessed
or presented by it, shall remain with and be the exclusive property of Dawn’s
Place. You agree to abide by the copyright law and all other applicable laws
of Canada, the United
and other countries which are signatories to international treaties and
conventions protecting content and software.
Non-Assignment by You: You may not assign this License and Contract. It is
and shall remain personal to you.
Termination: Dawn’s Place may terminate this License at any time upon notice
to you and may act unreasonably in so doing, in its absolute discretion. You
may terminate this License only by advising Dawn’s Place that you wish your
account rendered inactive.
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.
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.
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
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.
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.
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.
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.
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.
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.
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
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
10. A supply of … copyright … or any right, licence
or privilege to use any such property …
10. La fourniture … d’un droit d’auteur … ou
des droits, licences ou privilèges afférents à leur utilisation …
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.
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
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.
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
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,  3 S.C.R. 3. I am unable to read that case
(or any other case since Stubart Investments Ltd. v. The Queen,  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,  2 S.C.R. 601.
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.
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
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
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.
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.
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
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.
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
Denis Pelletier J.A.”