Unidisc – Court of Quebec effectively agrees with CRA's view that master recordings are tangible rather than intangible property

Unidisc bought master recordings of music (“masters”), i.e., the magnetic tapes containing the original recordings of the songs or other music for the purpose of having them reproduced in order to make and sell song compilations in CD or electronic form.

The CRA position (e.g., in 2007-0240691I7) appears to be that masters are Class 8(j) tangible capital property. However, the ARQ reassessed Unidisc on the basis that the masters instead were eligible capital property (now Class 14.1). It apparently was thrown off track by the agreements for the purchase of masters, which included an assignment of all the vendors’ rights such as intellectual property rights, copyright and the right to use, reproduce or license the masters.

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 more limited rights (albeit, still expressed in misleadingly broad terms) 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 depreciable property, she stated:

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 … .

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.

The distinction between tangible and intangible property also can be significant for GST/HST purposes, e.g., under the place-of-supply rules – and also for the Part XIII distinction between royalties and purchases of goods.

Neal Armstrong. Summary of Unidisc Musique Inc.v. Agence du revenu du Québec, 2019 QCCQ 1818 under Schedule II – Class 8(j).