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Citation: 2005TCC721
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Date: 20051110
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Docket: 2004-3381(GST)I
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BETWEEN:
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DAWN'S PLACE LTD.,
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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
Little J.
A. FACTS:
[1] The Appellant is a corporation incorporated under the laws of the Province of Alberta.
[2] In the Reassessment Period (the "Reassessment Period") (from January 1, 2001 to December 31, 2001) the Appellant operated an adult content Website.
[3] The Appellant produced digital images, graphics and text and assembled them into various web pages. The various web pages are hereinafter referred to as the "Website".
[4] The Appellant maintains that it employed sufficient skill and effort in producing the original images, graphics and text so as to be able to claim copyright to the Website.
[5] The Appellant received fees in the amount of $344,963.34 in the Reassessment Period from the operations of the Website by requiring persons seeking access to the Website to subscribe as members.
[6] The Appellant established Terms and Conditions regarding members' subscriptions ("Terms and Conditions"). The Terms and Conditions specified that members would be granted a limited licence to access the Website.
[7] Counsel for the Appellant filed a document that contains the Terms and Conditions governing the use of the Website (Exhibit A-3). The Terms and Conditions provided as follows:
2.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;
...
12. 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.
13. 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 States and other countries which are signatories to international treaties and conventions protecting content and software.
[8] The Appellant retained the services of various internet service providers to establish the procedure for selling subscriptions via the internet.
[9] Counsel for the Appellant filed Exhibit A-4 which indicates that the Appellant had 12,479 subscriptions through one of the service providers from January 1 to December 31, 2001. Of the amount of 12,479 subscribers only 1,321 (or 10.86%) were Canadian subscribers.
[10] Counsel for the Appellant filed Exhibit A-6 which indicates that the Appellant had 4,286 subscriptions from another service provider from January 1 to December 31, 2001. Of the amount of 4,286 subscribers only 402 (or 9.6%) were Canadian subscribers.
[11] Counsel for the Appellant also filed Exhibit A-5 which indicates that the Appellant had 4,709 subscriptions from January 1, 2002 to May 12, 2002. Of the amount of 4,709 subscriptions only 437 (or 9.2%) were Canadian subscribers.
[12] Counsel for the Appellant maintains that based on the information contained in Exhibits A-4 and A-6 in the year 2001 approximately 90% of the persons subscribing to the Appellant's Website were non-residents of Canada.
[13] By Notice of Reassessment dated January 29, 2003 the Minister of National Revenue reassessed the Appellant for the 2001 year. The basis of the Reassessment was that the revenue of $344,963.34 generated by the sale of membership subscriptions by the Appellant was consideration for the supply of intangible personal property in Canada that was taxable in accordance with section 165 of the Excise Tax Act (the "Act").
B. ISSUE:
[14] The issue is whether the Appellant is required to pay Excise Tax of 7% on the membership fees of $344,963.34 that were paid to access the Appellant's Website.
C. ANALYSIS:
[15] Section 123 of the Act defines a zero-rated supply to be a supply included in Schedule VI.
[16] Section 10 of Part V of Schedule VI of the Act reads:
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 made.
[17] Counsel for the Appellant maintains that the contents of the Appellant's Website are intellectual property governed by Section 10.
[18] Counsel for the Appellant maintains that three requirements must be met in order to come within the wording of Section 10:
First - the supply must be 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";
Second - the supply be to a non-resident person; and
Third - the person not be a GST registrant at the time they receive the supply.
[19] In determining whether Section 10 applies in this situation I believe that we should focus on the word "copyright".
[20] The word "copyright" is defined in Black's Law Dictionary, Eighth Edition as follows:
copyright - The right to copy; specif., a property right in an original work of authorship (including literary, musical, dramatic, choreographic, pictorial, graphic, sculptural, and architectural works; motion pictures and other audiovisual works; and sound recordings) fixed in any tangible medium of expression, giving the holder the exclusive right to reproduce, adapt, distribute, perform, and display the work.
The words "intellectual property" are defined in Black's Law Dictionary, Eighth Edition as follows:
intellectual property - A category of intangible rights protecting commercially valuable products of the human intellect. The category comprises primarily trademark, copyright, and patent rights, but also includes trade-secret rights, publicity rights, moral rights, and rights against unfair competition. [Cases: Copyrights and Intellectual Property - 1. C.J.S. Copyrights and Intellectual Property ss. 2, 4-5.] A commercially valuable product of the human intellect, in a concrete or abstract form, such as a copyrightable work, a protectable trademark, a patentable invention, or a trade secret.
[21] In Compo Company Ltd. v. Blue Crest Music Inc., [1980] 1 S.C.R. 351 at 371, the Supreme Court of Canada confirmed copyright law, like tax law is a statutory construction. At page 371 the Court stated:
... [C]opyright law is neither tort law nor property law in classification, but is statutory law, it neither cuts across existing law in rights of property or conduct nor falls between rights and obligations heretofore existing in common law. Copyright legislation simply creates rights and obligations upon the terms and in the circumstances set out in the statute.
[22] Subsection 3(1) of the Act defines the scope of "copyright" in the following way:
For the purposes of the 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 to authorize such acts.
[23] Section 2 is the interpretation section of the Act and defines a number of relevant terms:
[E]very original production in the literary, scientific or artistic domain, whatever may be the mode or form of its expression, such as compilations, books, pamphlets and other writings, lectures, dramatic or dramatico-musical works, musical works, translations, illustrations, sketches and plastic works relative to geography, topography, architecture or science.
[24] "Artistic work" is defined to include "paintings, drawings, maps, charts, plans, photographs, engravings, sculptures, works of artistic craftsmanship, architectural works and compilations of artistic works". And the definition of photograph "includes photo-lithograph and any work expressed by any process analogous to photography".
[25] Thus any original photographs, or digitally enhanced photographs, drawings or logos, which are a large part of the Website, should be considered artistic work.
[26] The definition of "compilation" is also instructive, as it may extend the meaning of "artistic work" by including:
(a) a work resulting from the selection or arrangement of literary, dramatic, musical or artistic works or of parts thereof, or
(b) a work resulting from the selection or arrangement of data;
[27] While the definition of an artistic work and other aforementioned definitions provide that a broad scope of works may be the subject of copyright, the Section 5 requirement, that the work be original acts to limit this scope.
[28] Until recently there was much debate over what constituted originality. The United States favoured looking at the creativity involved in the work, while the British approach insisted that effort would suffice.[1] However, in the recent Supreme Court of Canada decision of CCH Canadian Ltd. v. Law Society of Upper Canada, [2004] S.C.J. No. 12 Chief Justice McLachlin, writing for an unanimous Court, settled the debate and determined that an analysis should be grounded on the skill and effort required.
[29] At paragraph 16, of the CCH Canadian Ltd. decision, Chief Justice McLachlin stated:
For a work to be "original" within the meaning of the Copyright Act, it must be more than a mere copy of another work. At the same time, it need not be creative, in the sense of being novel or unique. What is required to attract copyright protection in the expression of an idea is an exercise of skill and judgment. By skill, I mean the use of one's knowledge, developed aptitude or practiced ability in producing the work. By judgment, I mean the use of one's capacity for discernment or ability to form an opinion or evaluation by comparing different possible options in producing the work. This exercise of skill and judgment will necessarily involve intellectual effort. ...
[30] At paragraph 20, the Court concluded:
... I conclude that an "original" work under the Copyright Act is one that originates from an author and is not copied from another work. That alone, however, is not sufficient to find that something is original. In addition, an original work must be the product of an author's exercise of skill and judgment. The exercise of skill and judgment required to produce the work must not be so trivial that it could be characterized as a purely mechanical exercise. While creative works will by definition be "original" and covered by copyright, creativity is not required to make a work "original".
[31] At page 53 of the transcript Counsel for the Respondent referred to what the Appellant provided to subscribers and said:
...that the supply is not of the copyright. It is of an item that is subject to copyright (see lines 15, 16 and 17).
[32] In making this comment I believe that Counsel for the Respondent is conceding that the Appellant held the copyright to the content of the Website. However, Counsel for the Respondent appears to ignore the following words in Section 10:
...or any right, licence, or privilege to use any such property.
[33] I also wish to note that at paragraph 6 of the Respondent's Reply to the Notice of Appeal the following comment is found:
6. ...
(a) he admits that the Appellant was entitled to claim a copyright in the original digital images and graphics it incorporated into the Website;
[34] From an analysis of the evidence I have concluded that the information contained in the Appellant's Website is intellectual property and is the subject of copyright that is owned by the Appellant. I am therefore satisfied that the Appellant has satisfied the First test contained in Section 10.
[35] We must next determine if the supply of the "right, licence or privilege" to use the "copyright" was made to non-residents.
[36] As noted above Counsel for the Appellant filed Exhibits A-4, A-5 and A-6 which indicate that more than 90% of the subscribers to the Website were non-residents of Canada. However, rather than selecting a number of 90% or 91% or some other number, I have concluded that officials of the Canada Revenue Agency ("CRA") should review the records of the Appellant to determine how many of the subscribers were residents of Canada and how many were non-residents of Canada. Officials of the CRA should also review the Appellant's records to determine if any of the subscribers were GST registrants.
[37] I have concluded that the persons who paid membership fees to the Appellant paid these fees for a limited use of the Appellant's copyright. It therefore follows that the Appellant comes within the meaning of Section 10 and therefore the supply by the Appellant of intellectual property to non-residents of Canada is zero-rated.
[38] The appeal is allowed, without costs, on the basis that the Appellant should be exempt from GST with respect to the fees paid by those subscribers as determined by the CRA who were not residents of Canada and those subscribers as determined by the CRA who were not registrants for GST purposes.
Signed at Ottawa, Canada, this 10th day of November 2005.
Little J.
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