The plaintiff (Unidisc) was in the business of purchasing master recordings of music (“masters”), i.e., the magnetic tapes containing the original recordings of the songs or other music, and making master copies of the masters for transmission to a studio for reproduction. Its revenues were principally derived from compilations which were sold as CDs or electronically. The agreements for the purchase of masters included an assignment of all the vendor’s rights such as intellectual property rights, copyright and the right to use, reproduce or license the masters.
The ARQ assessed on the basis that the cost to Unidisc of its purchased masters was predominantly intangible property including the copyright to the songs, and that since the value of the physical medium for the master recordings was minimal, such cost was for eligible capital property rather than Class 8(j) tangible capital property.
Gouin, J.C.Q. found that such vendors did not have the copyright of the song writers, performers and publishers to assign and that the only rights under the Copyright Act (“CA”) that were assigned to Unidisc were the rights to publish for the first time, reproduce and rent out the masters described in s. 18 thereof. Accordingly, whenever Unidisc wished to sell compilations, it was still necessary for it to pay royalties to the song creators and publishers.
In allowing Unidisc’s appeal on the basis that the masters were Class 8 property, Gouin, J.C.Q. stated (at paras. 70, 78, TaxInterpretations translation):
The quality of the sound recording had nothing to do with the rights protected under section 3, 13 and 15, or even 18, of the CA. In fact, the quality of the sound recording had everything to do with the quality of the physical medium, reflecting its preservation in optimal conditions, its protection against alterations and theft, and finally its handling by conscientious professionals in accordance with the art of making copies. ...
The evidence at trial demonstrated that the allocation of 100% of the price to the physical medium must be allowed. Unidisc acquired the best sound recording for the purpose of generating revenues from making copies.