MacKay J.:—In these four actions, consolidated for trial together on similar facts and raising the same issues, the plaintiff appeals from assessments as modified by reassessments of income tax for the taxation years from 1978 to 1981. Each of the actions relates to a particular taxation year, T-2607-87 to 1978, T-2608-87 to 1979, T-2609-87 to 1980 and T-2610-87 to 1981.
The appeals were initiated by actions in this Court pursuant to then subsection 175(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") by the filing of similar statements of claim in December 1987 following reassessments, dated September 18, 1987, by the Minister of National Revenue ("the Minister") which modified assessments originally made June 15, 1984 to which the plaintiff had filed notices of objection.
At issue in each appeal is the application of then subsection 212(5) of the Act, and the application of then article XIIIC of the Canada—United States Income Tax Convention, 1942 as amended in 1950, an amendment implemented for Canada by the Canada—United States of America Tax Convention Act, 1943, Amendment Act, S.C. 1951 (2nd Sess.), c. 5.
In reassessing the plaintiff, and in applying the Act and the tax convention, the Minister relied upon certain assumptions of fact, two of which are here challenged by the plaintiff. These challenged assumptions are as follows.
I. M.C.A. International, B.V., a Netherlands company, was a licensee of the plaintiff that licensed “television product" to television stations and networks in Canada but the plaintiff's share of the royalty payments received by M.C.A. International, B.V., from the television stations and networks were received as collection agent of the plaintiff and not on M.C.A. International’s own account.
2. Television films and video tapes of motion picture films were motion picture films for the purposes of Article XIIIC of the Canada—U.S. Income Tax Convention, 1942.
Effects of reassessments by the Minister
The assessments by the Minister in 1984 for the years in question, addressed jointly to Universal City Studios Inc. and to the plaintiff, each included the notation:
15 per cent non resident tax payable under the Income Tax Act. M.C.A. International B.V. Canadian Branch has failed to deduct and remit a tax of $[a specified amount] on $[a specified amount] paid or credited to you, a non resident of Canada.
That notation does not specify that the tax assessed related to royalties paid in relation to the exhibition of theatrical product and of television product, but following the separate notices of objection filed by each of Universal and Limited the notices of reassessment for each year, again addressed jointly to the two corporations, resulted in reduced assessments for tax, plus interest claimed, for each year. The plaintiff understands, and this is admitted by the defence filed in each action, that the reduction in the tax assessed resulted from
(a) the elimination of tax on the amounts remitted by B.V. to Universal, and
(b) the elimination of tax pursuant to article XIIIC of the Canada—United States Income Tax Convention, 1942 as amended on amounts remitted by B.V. to the plaintiff in respect of royalties for use of video tapes other than video tapes of motion picture films.
Thus the tax imposed by the reassessments in 1987 related to amounts remitted by B.V. to the plaintiff in respect of television product consisting of motion picture films, video tapes of motion picture films, television films and trailers.
As I understand the evidence, the tax related to royalties paid by television networks and broadcasters for use of all television product produced on film, including motion pictures originally made for theatrical distribution and subsequently modified on film for television, or other film product made for television, or trailers (i.e., advertising excerpts) produced on film, and video tape product made from motion pictures originally made for theatrical distribution. In essence, the reassessments resulted in a claim for taxes on the plaintiff's share of royalties paid by Canadian users of television product supplied under contracts negotiated by a Dutch company to which the payments were made if that product was originally produced on film even where that was subsequently transferred to video tape for television use, but no tax was applicable where the television product was originally produced on video tape for exhibition on television.
Relevant statutory and treaty provisions
The Minister relied upon certain statutory and treaty provisions applicable for the years in question. Subsection 212(5) of the Income Tax Act, R.S.C. 1952, c. 148 as amended, for the years in question provided:
212(5) Every non-resident person shall pay an income tax of 25 per cent on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of
(a) a motion picture film, or
(b) a film or video tape for use in connection with television that has been or is to be used or reproduced in Canada.
Reference was also made in argument to subsection 215(3) of the Income Tax Act, then applicable, which provided:
215(3) Where an amount on which an income tax is payable under this Part was paid or credited to an agent or other person for or on behalf of the person entitled to payment without the tax having been withheld or deducted under subsection (1), the agent or other person shall, notwithstanding any agreement or law to the contrary, deduct or withhold therefrom the amount of the tax and forthwith remit that amount to the Receiver General of Canada on behalf of the person entitled to payment in payment of the tax and shall submit therewith a statement in prescribed form, and he shall thereupon, for purposes of accounting to the person entitled to payment, be deemed to have paid or credited that amount to him.
Article XIIIC of the Canada— United States Income Tax Convention, 1942, as amended in 1950, provided:
Article XIIIC. Royalties.
Royalties for the right to use copyrights or in respect of the right to produce or reproduce any literary, dramatic, musical, or artistic work (but not inclusive of rents or royalties in respect of motion picture films) derived from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not engaged in trade or business in the former State through a permanent establishment shall be exempt from tax imposed by such former State.
Article IX of the Canada—Netherlands Income Tax Agreement (1957), is also relevant in this case, in respect of the submissions of the plaintiff. It provides:
Article IX
1. Royalties — other than royalties to which article Ill ofthis Convention applies —— derived from one of the states by a resident of the other state shall be subject to tax only in the latter state.
2. Where one of the states by way of deduction at the source levies a tax on royalties the right to levy such tax on royalties derived from sources within that state by a resident of the other state, is not affected by the first paragraph of this article, but the rate of tax shall in that case not exceed 15 per cent.
3. Paragraph 2 of this article does not apply to copyright royalties and other like payments made in respect of the production or reproduction of any literary, dramatic, musical or artistic work.
The issues
The plaintiff claims that it is not subject to tax under subsection 212(5). It does not carry on business in Canada. The “television product" for which it holds a license for world-wide distribution, is licensed by the plaintiff, for distribution in Canada, to a Dutch corporation, referred to in the Minister's assumptions as “M.C.A. International, B.V.” and in these reasons as "B.V.". The plaintiff maintains that payments of royalties by Canadian licensees for exhibition of the television product were made to the Dutch company on B.V.'s own account, and were not subject to tax under the Canada—Netherlands Income Tax Agreement (1957). As earlier noted, the Minister’s assumption is that a share of royalty payments by Canadian licensees was received by the Dutch company as collection agent of the plaintiff and not on B.V.'s own account.
In the alternative, the plaintiff claims that if a share of the royalty payments by Canadian exhibitors to B.V. was subject to tax under subsection 212(5), it was exempt from tax under article XIIIC of the Canada—United States Income Tax Convention. As the text of that article, earlier quoted, provides, royalties of the general sort here paid are exempt from tax on non-residents, except for royalties in respect of "motion picture films". The plaintiff urges that the television product, for which the tax on royalties is here claimed, is not within the meaning of "motion picture films” within that article. The Minister's assumption, as we have seen, is that a substantial portion of the television product, that comprised of material produced on film or on video tape from motion picture film, constitutes “motion picture film" within article XIIIC, and thus is not included in the general exemption of royalties from tax provided by that article.
Put shortly in other words, the Minister's position is that the plaintiff is taxable, though it is a non-resident, for a share of royalties paid by Canadian exhibitors for television product licensed for use by B.V., pursuant to subsection 212(5) (with the rate of tax modified in accord with the Canada—U.S.treaty), and the royalties in question are in respect of motion picture films and thus not included within the general exemption from tax on royalties under article XIIIC of the tax treaty.
General licensing arrangements for universal's products, and for their use in Canada in the years 1978 to 1981
The plaintiff M.C.A. Television Limited, ("Limited"), is a corporation incorporated under the laws of Delaware, in the United States of America, and is a wholly-owned subsidiary of M.C.A. Inc., then a public corporation also incorporated under the laws of Delaware. The plaintiff carries on business in the United States distributing films and video tapes for television, and related activities. It is not resident in Canada and has no office in this country.
M.C.A. Inc., the parent company, has numerous other subsidiary corporations. Among them is Universal City Studios, Inc., ("Universal"), another Delaware corporation, wholly owned by M.C.A. Inc., which carries on business in the United States producing feature motion picture films, short films, trailers, television films and video tapes and related activities. Its product includes films intended, at least initially, for “theatrical exhibition”, that is, for exhibition in theatres, and it also produces, by a separate internal division, film and video tapes intended for exhibition by television broadcasters. The former is recognized in the industry as theatrical product, and the latter as television product. Universal itself distributes its theatrical product throughout the United States, but its television product is distributed throughout the world, under a licensing agreement, by the plaintiff. Limited, the plaintiff, does distribute the television product in the United States.
M.C.A. International, B.V., ("B.V."), another wholly-owned subsidiary of M.C.A. Inc., is a corporation incorporated under the laws of the Netherlands. Its principal business is the distribution and related activities, throughout the world, except for the United States and a few other designated areas, of motion picture films, short films, trailers, television films and video tapes, that is, both theatrical product of Universal under license from Universal, and television product of Universal, and possibly others, licensed for distribution by the plaintiff and by it in turn, for distribution outside the United States, by B.V. These arrangements are the result of licensing agreements between B.V. and each of Universal and Limited. B.V. in turn licenses theatrical product of Universal to another Dutch company, Cinema International Corp. N.V., ("C.I.C."), a corporation owned jointly by M.C.A. Inc. and Paramount Pictures Corp., another United States producer of theatrical product. C.I.C. distributes theatrical product produced by Universal and by Paramount in all countries except the United States and Canada.
As a result of its agreements, B.V. is the distributor for Canada of theatrical product and television product produced by Universal. B.V. carries on its Cana- dian activities from its office in the Netherlands and through a branch office in Canada. Its Canadian branch operates through two divisions, "M.C.A. T.V. (Canada)", and “Universal Films (Canada)”, which have offices in a number of cities in Canada, employing a total of approximately 60 full-time employees. It is registered to carry on business under the laws of various provinces, under the trade names of its two divisions. Its business involves promotion and licensing for exhibition of the television product and of the theatrical product. Under licensing agreements with operators of television stations and networks, and with operators of theatres and theatre chains, the exhibitors paid royalties to B.V.’s Canadian branch, which remitted to the head office in the Netherlands the revenues received in excess of the costs of operating the Canadian branch.
Arrangements for B.V.'s operations in Canada, at least in part, antedate an agreement of January 1, 1976, between the plaintiff, Universal and B.V., but that agreement is the basis of its operations in the years 1978 to 1981. So far as it relates to Canada, that agreement provides that B.V. has the rights, granted by license from Universal, to distribute feature motion picture films, snort subjects and trailers, that is, theatrical product of Universal, for theatrical and other exhibition, except for television and other specified uses. Further, under the same agreement B.V. also has the rights, granted by license from the plaintiff, to distribute motion picture films, television films, video tapes and trailers, that is, the television product of Universal, for exhibition on television in Canada, except for a designated television station in Windsor, Ontario.
More detailed examination of the arrangements for licensing use of the television product in Canada and for the payment of royalties for that use is appropriate in considering the first issue raised which concerns the nature of B.V.'s operations in Canada and the liability of the plaintiff for tax under subsection 212(5) of the Act.
B.V.'s operations in Canada and subsection 212(5) of the Act
B.V.’s operations in Canada for the years in question were governed by the agreement dated January 1, 1976 between it and the plaintiff and Universal. The perception of the plaintiff is that these operations were carried on by B.V. on its own account. Thus any liability for tax was governed by the Canada— Netherlands Income Tax Agreement (1957), and the payments received by B.V. from Canadian exhibitors of television product supplied under sublicensing agreements with B.V. were exempt from tax in accord with Article IX, of that agreement. The agreement of 1976 between B.V. and the plaintiff and Universal was said to be a licensing agreement for distribution of television product and theatrical product and not an agency agreement. That perception is not shared by the defendant, who contends that B.V. was, at least in relation to a share of royalties paid for use of television product, a collection agent of the plaintiff, or was the agent of the plaintiff in a broader context. On this perception the defendant says the plaintiff was liable for tax under subsection 212(5) of the Act, subject to the Canada—United States Income Tax Convention, 1942 as amended.
Resolution of the differences in perceptions of B.V.’s operations requires examination of the 1976 agreement, a limited review of pre-existing arrangements, and consideration of B.V.'s operations after 1976 in the years 1978 to 1981. Before undertaking that review, I note that for the plaintiff it was argued that the reassessments by the Minister in 1987, resulting in reductions of the taxes assessed, were apparently related to the Minister’s reliance on the description of B.V. in the 1976 agreement as “collection agent” of the plaintiff in relation to a share of payments received for television product licensed for use in Canada, which term provided the basis for the taxes as reassessed. That term was not included in the agreement in relation to payments received for theatrical product licensed for use in Canada, and this, the plaintiff believes, provided the basis for a substantial portion of the reductions in the amounts of tax originally assessed. That was not accepted or agreed to by counsel for the defendant. As I have earlier noted, however, by the defence filed in these actions it is admitted that the reductions in taxes claimed by the reassessments were the result in part of the elimination of taxes on amounts received by B.V., and remitted to Universal, for theatrical product licensed for use in Canada. Thus, while there is no agreement on the specific reasons for the Minister’s different treatment of payments received by B.V. for use of television product and payments received by B.V. for use of theatrical product, that difference is admitted.
Yet that difference, and specific reasons for it, are not directly relevant to the issue of the plaintiff’s liability for tax under subsection 212(5) of the Act. That issue is to be resolved by construction of the Act as it applies to the situation of the plaintiff. The key factor in assessing the plaintiff's situation is whether B.V.'s operations in Canada, in the sublicensing of television product for use in Canada, and receipt of revenues for that, were carried on as an agent of the plaintiff or on B.V.'s own account. In mv view that depends upon assessment of the relationship between the plaintiff and B.V., and between Canadian sublicensees of B.V. wit B.V. and with the plaintiff, since under subsection 212(5) tax is assessed on every amount that "a person resident in Canada pays or credits ... to him [a nonresident person] as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of (a) a motion picture film, or (b) a film or video tape for use in connection with television that has been or is to be used or reproduced in Canada”.
Much of the argument concerning this issue related to the relationship of B.V. to the plaintiff under the agreement of January 1, 1976 between Universal, Limited and B.V. Its preambles refer to earlier agreements, first between Universal and B.V. granting distribution rights to B.V., until 1983, for theatrical product throughout the world excluding the United States and Canada, and second, between Limited and B.V. granting B.V. distribution rights for television product outside the United States and Puerto Rico except for two television stations, one in Mexico and another in Windsor, Canada. The preambles also refer to the desire of the parties to reaffirm and restate the existing rights and relationships and to make certain modifications to them.
The agreement sets out in part B the terms for foreign theatrical distribution by B.V. It refers to a 1970 agreement between Universal and B.V. under which B.V. had the rights to distribute theatrical product throughout the world, excluding the United States and Canada, which rights B.V. had in turn granted by agreement to C. I.C. That earlier agreement is then extended, to a term ending with 1986, and to all “foreign areas”, defined as the entire world excluding the United States and Puerto Rico. Thus by the 1976 agreement B.V. acquired the rights to distribution of theatrical product in Canada. B.V. was entitled to retain 50 per cent of “Theatrical Gross Receipts” as defined in the agreement. Under clause B.2.(a), for funds received from C.I.C. in excess of those to which B.V. was entitled, B.V. is described as receiving them "as a collection agent” for Universal, but that description is not applied to any funds received by B.V. from its distribution of theatrical product in Canada.
The 1976 agreement then provides in part C for distribution of television product. Limited and B.V. confirm that pursuant to earlier agreements Limited had granted to B.V. the rights to distribute the product under a sole and exclusive license for television for all areas of the world outside the United States, except Puerto Rico and the two television stations earlier referred to, in Mexico and in Windsor. The term of the agreement is confirmed to extend to 1986. The agreement provided that B.V. was entitled to 30 per cent of the “Television Gross Receipts" as defined, and by clause C. 3.(a) the balance, in excess of its share and of all costs incurred for prints used on television, is received by B.V. “as a collection agency for the account of Limited or the owner of the television product as may be determined under the agreements existing between Limited and such owners". All distribution expenses, including advertising, publicity and B.V.'s administrative and operating expenses, excluding expenses for prints for television, are borne under the agreement by B.V. and are not deducted from television gross receipts. Those receipts are defined to include any and all sums which accrue to or to the order of B.V. with respect to the distribution or televising of any or all of the television product, less bad debts, and all sums accruing to B.V. from infringement or interference by third parties with the television product, net of legal expenses for recovery, and less bad debts. B.V. is entitled to recover any costs it incurred for prints used on television from the balance of gross receipts to which Limited is entitled, for all costs of such prints are to be borne by Limited. Excluded from gross receipts are any amounts that cannot be remitted to B.V. in the Netherlands so long as they are unremittable and also excluded are amounts accruing to B.V. for use of trailers (advertising product for use on television) that it produces. A provision for bad debts stipulates that B.V. shall use sound judgment and due diligence in granting credit to any television exhibitor, shall collect all unpaid amounts and shall retain, at its expense, collection agencies and lawyers to collect and sue for recovery of any unpaid amounts, which, as noted, are television gross receipts when collected.
Under part D of the agreement general terms are set out. A number of these concern preservation of copyright, trade mark and trade name interests, in relation to production credits, prints and film duplicating materials, legal proceedings and the cutting of film. B.V. undertakes diligently in accord with sound business practice to distribute the product "at such times and in such places as it deems est and to advertise and issue publicity ... in such media as it may deem desirable, all with a view of using reasonable efforts to maximize the amount of Theatrical and Television Gross Receipts over the entire distribution term". Further, "the prices and terms at which any product is licensed shall in each instance be at the sole discretion of B.V.". At its option B.V. may grant to one or more subdistributors all or part of its distribution rights in any portion of its territory. B.V. is required to maintain books and records, to render accounting statements to Limited and Universal monthly or otherwise as those other parties might direct. If taxes are applicable to amounts of gross receipts to be received by Universal or by Limited, B.V. is required to deliver tax receipts to the respective party in which event the amount of taxes withheld should be deemed to nave been received by either Universal or Limited. Finally, under clause D.14 the agreement expressly provides that it “shall create no partnership, joint venture or agency relationship (except to the extent that B.V. is constituted a collection agent under the provisions of paragraphs B.2.(a) or C.3.(a) as between the parties hereto, and no party shall make or permit to be made any such representations".
I repeat the references in the text of the agreement that refer to an agency relationship in regard to distribution of television product. B.V. is expressly described by paragraph C.3(a) as the “collection agent" for the plaintiff in respect of the latter's share of television gross receipts as defined. That relationship is expressly excepted from the general clause D.14 which negates creation of an agency relationship under the agreement, except for the provisions constituting B.V. a collection agent for either of the other parties in relation to gross revenues received in excess of its own shares.
For the plaintiff it is urged that including revenues derived from distribution of television product in Canada, within the terms describing B.V. as collection agent for the plaintiff, was inadvertent; it was not intended by the parties to be so included and it was an oversight that this resulted. Moreover, it is urged that B.V.'s operations in Canada, when examined, demonstrate that it was not an agent of the plaintiff.
Mr. George Smith, a lawyer and vice-president of the parent company, M.C.A. Inc., responsible for tax matters of the parent and its subsidiary companies, and an officer of several subsidiaries as well, who signed the 1976 agreement on behalf of Universal, testified in support of the plaintiffs submissions. The description, “as a collection agency” for the function of some subsidiaries had been used in earlier agreements with a view to persuading tax authorities in the United States to approve an accounting process that would match receipts by the U.S. companies with time periods at which revenues were accrued in order to also match taxes withheld, particularly abroad, with tax years applicable under the United States law. It was for this reason these words had been used in the 1970 agreement between Universal and B.V. and in a sublicensing agreement between B.V. and C.I.C. relating to distribution of theatrical product outside the U.S. and Canada. Similarly the description was used in a 1971 agreement between the predecessor of Limited and B.V. under which the latter obtained world wide distribution rights to television product outside the United States, Puerto Rico, Canada and designated television stations. But in that same year, 1971, a comparable agreement, between the predecessor of Limited and B.V. for distribution by B.V. of television product in Canada, had excluded the description of B.V. as a collection agency, because under the Canada—Netherlands Income Tax Treaty withholding tax was not applicable to the receipts of B.V. from Canadian exhibitors of television product. Those arrangements under rior agreements were intended to be continued under the 1976 agreement. The previous description of the relationship between B.V. and Universal was reflected in the 1976 agreement in relation to receipts for exhibition of theatrical product, and for receipts from Canada. B.V. was not described as a collection agency, though it was so described in relation to receipts from C.I.C. for distribution and exhibition of theatrical product in other countries. By oversight, a parallel exclusion of receipts from Canadian exhibitors of television product was not made, though that is what the parties had intended.
In cross-examination Mr. Smith affirmed that the various terms, including those referring to the relationship of B.V. as collection agent for the plaintiff's share of television gross receipts, were in the agreement which he had read before signing it in 1976. That agreement had not subsequently been amended in this regard for any of the years in question.
While it is now clear to the plaintiff that the description of the relationship of B.V. to the plaintiff, as a collection agent, ought not to have included receipts from Canadian exhibitors under agreements with B.V., the words included in agreements made for sophisticated business operations by knowledgeable persons acting freely in their own interests must be deemed to express the intention of the parties. In this case striking out the provision in paragraph C.3.(a) that refers to B.V.'s role as a collection agent for Limited in relation to funds received in excess of B.V.’s own share of gross television receipts would not serve the interests of the parties to the agreement. Here, for example, there was no suggestion that it was really intended that paragraph C.3.(a) should not apply to receipts by B.V. from distribution of television product in all countries other than Canada, for the arrangement set out in the 1976 agreement simply reaffirmed the terms of the 1971 agreement between B.V. and the plaintiff's predecessor concerning distribution of television product in those other countries.
In these circumstances, I am not persuaded that the Court should ignore the terms, written, considered and signed by the parties, as the plaintiff urges be done. In my view the terms of the agreement have a plain meaning and cannot be said to be ambiguous or obscure. It is well settled that in these circumstances the Court can only apply the terms agreed upon by the parties; it cannot ignore them. (See North Eastern Railway Co. v. Lord Hastings, [1900] A.C. 260 at page 263 (H.L.); Perrault v. The Queen, [1978] C.T.C. 395, 78 D.T.C. 6272 at 6276 (F.C.A.).) Nor can the Court redraft the agreement concluded by the parties.
In Friedberg v. Canada, [1992] 1 C.T.C. 1, 92 D.T.C. 6031 at page 2 (D.T.C. 6032) (F.C.A.), Mr. Justice Linden, speaking for the Court of Appeal, in dealing with the nature of a transaction, in light of the construction of documents and the testimony of the intent of the parties concerning it, said in part:
In tax law, form matters. A mere subjective intention ... is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax [citation omitted]. . . . if a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the courts on occasion to clarify dealin s, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.
That principle was applied by my colleague Mr. Justice Dubé in Inshore Investments Ltd. v. Canada, [1992] 1 C.T.C. 189, 92 D.T.C. 6162 (F.C.T.D.), where he concluded that the express terms of an agreement, concerning sale of a company, should be given effect despite evidence offered that the intent of the parties was otherwise than expressed in one of its terms.
The plaintiff urges the agreement is a licensing agreement, not an agreement creating an agency of any kind. The defendant urges that even apart from the use of the words "collection agent", by the various terms of the 1976 agreement B.V. was a general agent of the plaintiff with authority to act on its behalf as a collection agent. I am not persuaded that either perception is appropriate.
Insofar as the relationship of the parties depends upon the terms of their written agreement, in my opinion, aside from the particular relationship as collection agent in relation to funds received in excess of its share of television gross receipts, B.V. was not an agent in any sense of the plaintiff. Rather, in all other aspects of its operations B.V. operated on its own account. That conclusion is consistent with the arrangements agreed upon by the parties under clause 14, which I find defines the parties’ relationship, not merely in regard to B.V.’s role as a collection agent, but in all other respects as well, subject to specific terms of the agreement itself. The defendant argues that many of those terms are consistent with a general agency relationship between B.V. and the plaintiff, but in my view, they are just as consistent with a licensing relationship for distribution of television product which is expressly not intended to create a general agency relationship.
Here, certain clauses of the 1976 agreement significantly limited authority of B.V., particularly in regard to changing the television product and the representations drawn from it. Those provisions, in my view, simply reflect the desire to protect the multitude of intellectual property interests, trade marks, copyrights and performing rights, in the product owned by the plaintiff and others than the parties to the 1976 agreement. Certain other clauses of the agreement clearly support the plaintiff's view that subject to its obligations to perform with due diligence and to maximize the television gross receipts from licensing the product within its agreed territory, and to accounting ex post facto, B.V. was to operate quite independently in all phases of the promotion and licensing of television product, including determination of the price, or license fee, to be charged to users of the product, and determination whether to sublicense to others its distribution rights in relation to parts of its territory.
I find that under the agreement, except for its role as collection agent for Limited or the owner of the television product in relation to revenues received in excess of that to which it was entitled, B.V. was independent from Limited and was not a general agent of Limited.
That conclusion, that B.V. was not an agent of the plaintiff in any general sense, is supported by the evidence of its operations in Canada. Those operations are carried on, as earlier noted, through two separate divisions, concerned respectively with promotion and distribution of theatrical product, in the case of Universal Films Canada, and promotion and distribution of television product in the case of M.C.A. T.V. (Canada). Both operate in essentially similar fashion. In the case of the latter, its documents and bank accounts represent it as M.C.A. T.V. (Canada), a Division of M.C.A. International B.V. It operates independently, negotiating with Canadian television networks and stations for exhibition of television product, at prices or fees determined by negotiation. Copies of field order forms completed in Canada, listing the items of television product to be exhibited, the number of times of exhibition and the term for which the sublicense is to be valid, the prices negotiated, and any other terms particular to the sublicense agreement, are transmitted to B.V. in Amsterdam, and also to various offices of the plaintiff in the United States. The latter copies, sent to the plaintiff, are intended to ensure that legal obligations owed by the plaintiff to other parties are not compromised and that accounting for performing rights can be maintained, and also that the product will be available when scheduled for exhibition in Canada. It appears that the only other direct communications between the plaintiff Limited and M.C.A. T.V. (Canada) are that the former supplies the Canadian division with information on anticipated scheduling of major television productions in the United States, a matter of interest to Canadian exhibitors for their own scheduling, and the plaintiff ships product to B.V. in Canada, as it does to other countries.
The field order for television product exhibition in Canada results in preparation in Amsterdam of a sublicensing agreement between "M.C.A. Canada, a Division of M.C.A. International B.V.” and a Canadian network or television station. Copies of this are forwarded to the Canadian branch for signature by the Canadian contracting exhibitor, then returned to Amsterdam where the agreement is signed on behalf of B.V. and then returned through M.C.A. T.V. (Canada) to the Canadian exhibitor, so that all contracts are concluded in Holland and subject to Dutch law.
For the most part B.V.'s sublicensing agreements with Canadian television networks and stations are standard form agreements, the terms of which are uniform, printed on the contract form, except where modified by special terms that may be inserted, and the terms that are particular for the product licensed. The agreements make no reference to the plaintiff or its relations to B.V. The latter is clearly the contracting party with whom the Canadian exhibitor deals, to whom the exhibitor's obligations are owed, and to whom the exhibitor looks for performance.
B.V.'s minutes record decisions about its Canadian operations including banking resolutions concerning its Canadian bank accounts, reports concerning registrations for carrying on business under provincial legislation, major appointments and salary adjustments for senior staff of the Canadian branch, and the appointment of the senior Canadian staff member as a director of B.V.
Payments of license fees by Canadian television exhibitors are made to the Canadian division concerned and all receipts are deposited in its deposit account. From that account transfers are made, on authorization from B.V.'s head office in Amsterdam, to an operating account in Canada for the division’s expenses in its Canadian operations, and the balance is transferred, from the Canadian deposit accounts, of both M.C.A. T.V. (Canada) and Universal Films (Canada), to a single B.V. account in Amsterdam, which is maintained for deposit of all receipts from the various countries in which B.V. operates, and receipts from C.I.C. for its operations in sublicensing theatrical product throughout the world except in the U.S. and Canada.
From its one account in Amsterdam, B.V. funds its own operations. In the years in question those operations, in addition to activities arising in promotion and distribution of T.V. product and theatrical product, included the provision of television signal by early long distance transmission to oil companies operating in the Near East and to some military bases, its investments in properties in various countries to support B.V.'s operations, investments in a major German theatre chain, and investments in production of theatrical or television product in various countries. B.V. also manages the funds deposited in its account for short term investment purposes. It accounts to the plaintiff and to Universal on a regular basis and transfers funds to them in accord with the 1976 agreement, based on its accounting for receipts.
The only evidence offered at trial, aside from the documents entered by agreement, was provided by witnesses for the plaintiff. Their evidence emphasized the independence from the plaintiff, particularly of the Canadian branch, of B.V. in its operations. The defendant's primary argument concerning an agency relationship between B.V. and the plaintiff was based on the 1976 agreement but, as indicated, I find no agency relationship except for the express term of the agreement describing B.V. as a collection agent for Limited in regard to certain receipts in excess of B.V.'s share. The defendant also submits that many of B.V.'s Operations, under the agreement and as described by witnesses for the plaintiff, were consistent with an agency relationship. In my view, those operations were more indicative of independence of B.V. in its Canadian operations.
The defendant submits that the doctrine of the undisclosed principal supports its position, as does the concept that payment to an agent constitutes payment to the principal. That doctrine, and that concept, relate to the relationship between the Canadian exhibitor and the plaintiff once an agency relationship between B.V. and the plaintiff is established. If there be no agency relationship, as I find, except as provided in one particular sense by the agreement, then the doctrine of the undisclosed principal, and the concept that the principal is paid by payment to the agent, simply have no application in this case.
I am not persuaded that, aside from its role as collection agent for the plaintiff in relation to a share of gross television receipts, B.V. was an agent for the plaintiff. In my opinion, the 1976 agreement and B.V.’s operations in Canada point to the independence from the plaintiff of B.V. in all of its operations in Canada, with the exception of its role as collection agent for Limited in relation to the latter’s share of "gross television receipts”, as defined in the agreement. In my opinion B.V. was not a general agent of the plaintiff under the agreement, or in the manner of its operations. It carried on its operations on its own account. It had a responsibility to account to the plaintiff and to pay funds to it, but that is not in itself evidence of an agency relationship.
Finally, the defendant submits that aside from any agency relationship, a portion of payments by Canadian television licensees should be considered as paid or credited to the plaintiff, because the arrangements provided by the 1976 agreement simply provided for funds to funnel through B.V. to the plaintiff on the basis of accounting for receipts, maintained by B.V. Moreover, it is urged that Canadian exhibitors must have been aware that B.V. was not entirely independent and indeed was dependent upon Universal and the plaintiff for supply of the product licensed. Yet, there was no evidence offered about any understanding Canadian exhibitors may have had about relationships of M.C.A. T.V. (Canada) (i.e. B.V.) and the plaintiff or Universal Films (Canada) (i.e. B.V.) and Universal. In the absence of any evidence I infer that Canadian exhibitors paying license fees to M.C.A. T.V. (Canada) a division of B.V. under their agreements with B.V. would be ignorant of any financial or other arrangements between B.V. and the plaintiff. They would not know what share, if any, of license fees paid would ultimately be transferred by B.V. to the plaintiff. There was no basis upon which a Canadian exhibitor could determine what portion of license fees paid should be withheld as tax.
Counsel for the defendant referred to subsection 215(3) of the Act as supporting of the liability of the plaintiff for tax, urging that this provision creates a liability to withhold tax from payments of royalties even in the case of those who are not agents, for that subsection does require "the agent or other person” to whom an amount, on which income tax is payable, was paid or credited without tax being withheld, to deduct or withhold the amount of tax and remit it to the Crown on behalf of the person entitled to payment. That provision also sets out that the amount in question on which tax is payable must have been "paid or credited to an agent or other person for or on behalf of the person entitled to payment. . . ." Here there was no suggestion that the agreements concluded between Canadian exhibitors and B.V. created any direct legal relationship between those exhibitors and the plaintiff. The agreements for licensing television product made no reference at all to the plaintiff; they created legal relations only between the exhibitors and B.V. Any debts owed by commitments to pay license fees were owed solely to B.V. and it was not suggested that the plaintiff could have acted against Canadian exhibitors for violation of the terms of the agreements concluded by them with B.V. In my opinion the words “for or on behalf of the person entitled to payment” in subsection 215(3), modifying the verbs “paid or credited" relate to the purpose for which the payor, in this case the Canadian exhibitor, has made payment, not to the intent or purpose of the payee, B.V., on receipt of the payment.
I summarize my conclusions about the relationship of B.V. and the plaintiff. Under the 1976 agreement B.V. is the collection agent for the plaintiff for the latter's share of gross television receipts as defined by the agreement. B.V. is not the agent of the plaintiff in any other sense, and in all other respects it operated on its own account. If the agreement resulted in funds being funnelled through B.V. to the plaintiff, as the defendant contends, that has no legal significance for tax purposes unless the words of the statute provide for tax to be assessed in those circumstances. There are a variety of possible arrangements, through corporate relations, by agency, by branch operations, by licensing or sales agreements whereby funds may be channelled through one agency to another. That in itself creates no tax liability unless the arrangement selected is one included within the statute for taxing purposes.
In my view, on the basis of the 1976 agreement, the plaintiff has not disproved the Minister's assumption that "the plaintiff's share of royalty payments received by M.C.A. International, B.V., from the television stations and networks were received as collection agent of the plaintiff and not on M.C.A. International’s own account". However, that assumption describes B.V.'s relationship to the plaintiff without regard for the realities of B.V.’s relationship to Canadian television exhibitors and the lack of any legal relationship between those exhibitors and the plaintiff.
The Minister’s implied assumption appears to be that if B.V. receives a portion of royalty payments as a collection agent for the plaintiff, liability for tax arises under subsection 212(5). The plaintiff disputes the latter conclusion, arguing that even if, under its agreement with the plaintiff, B.V. as a receiver of license fees is a collection agent for Limited’s share of gross television receipts, it is not liable for tax under subsection 212(5). In essence, the argument is that since the sublicensing agreements between B.V. and Canadian exhibitors created no relationship of debtor and creditor as between those exhibitorsand the plaintiff, the payments were made to B.V. on B.V.'s own account. Whatever the description of “collection agent” as used in the agreement might mean it did not make B.V. the plaintiff’s agent in dealings with Canadian exhibitors. Thus payments to B.V. did not constitute payment to the plaintiff.
I turn to consider the interpretation of subsection 212(5), the taxing section in issue in this case. Counsel for the parties discussed its interpretation primarily in regard to the relationship between the parties created by licensing agreements and B.V.'s operations. For the plaintiff, discussion centred on the relationship between B.V. and the plaintiff and the relationships between each of them and Canadian exhibitors under sublicensing agreements with B.V. For the defendant, discussion centred on the relationship between B.V. and the plaintiff. In my view, the words of the Act require review directly. For convenience, I repeat subsection 212(5).
212(5) Every non-resident person shall pay an income tax of 25 per cent on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of
(a) a motion picture film, or
(b) a film, video tape or other means of reproduction for use in connection with television (other than solely in connection with and as part of a news program produced in Canada),
that has been or is to be used or reproduced in Canada.
I note no argument was addressed to the qualifying phrase "or is deemed by Part I to pay or credit" and I infer that Part I of the Act has no particular significance in relation to the facts of this case. In my view, the Act must be read as requiring payment of income tax by every non-resident person on every amount that a Canadian resident pays or credits to the non-resident as or in satisfaction of payment for a right in or to the use of. . . a film or videotape for use in connection with television that has been or is to be used in Canada.
Here, as I have found, there was no payment by a Canadian resident to the plaintiff for use of the television product in Canada, payment was only made to B.V. While B.V. was a non-resident it was not taxable under subsection 212(5) because such payments were exempt from tax under the tax convention between Canada and the Netherlands. The fact that B.V. had contractual obligations to the plaintiff under its licensing agreement, including the obligation to act as collection agent for the plaintiff in relation to the latter’s share of television gross receipts as defined, did not, in my opinion, change the nature of the relationship between B.V. and Canadian exhibitors or create any legal relationship between those exhibitors and the plaintiff. The payments by Canadian exhibitors were to B.V., not to the plaintiff, and the description of B.V. as the plaintiff's collection agent does not change that. In my opinion, B.V. was the sole payee of amounts paid by Canadian exhibitors for television exhibition of licensed television product. B.V.'s responsibilities to the plaintiff under the 1976 agreement do not change that nor do they constitute the plaintiff as payee of funds paid for those exhibitions in Canada.
If Canadian exhibitors did not pay or credit to the plaintiff any amount for a right to use of the television product, the plaintiff cannot, in my opinion, be liable for income tax under subsection 212(5). Moreover, any liability B.V. may have had for payment to the plaintiff of funds received, or any portion of them, did not result in payment by Canadian exhibitors being made, in regard to any payments or portion of any payment, to the plaintiff.
On this issue I conclude that, despite the Minister's assumption that B.V. was a collection agent in relation to the laintiff’s share of funds received from Canadian exhibitors of television product, the plaintiff was not liable for income tax under subsection 212(5) of the Act.
Liability for tax and the Canada—United States Tax Convention, 1942
On the basis of my conclusion concerning the application of subsection 212(5) in the case of B.V.'s operations in Canada in the years in question, there is no need to deal with the alternative issue raised by the plaintiff, for no tax liability for the plaintiff arises. Nevertheless, in the event that it should be held on appeal that I am in error in that conclusion, I turn to the alternative raised by the plaintiff as a ground upon which it was not liable for the tax assessed.
The plaintiff Limited urges that if it is otherwise liable for tax under subsection 212(5), it is exempt from tax because of Article XIIIC of the Tax Convention between Canada and the United States as modified in 1950. As we have seen that provision read:
Royalties for the right to use copyrights or in respect of the right to produce or reproduce any literary, dramatic, musical, or artistic work (but not inclusive of rents or royalties in respect of motion picture films) derived from sources within one of the contracting states by a resident or corporation or other entity of the other contracting state not engaged in trade or business in the former state through a permanent establishment shall be exempt from tax imposed by such former state.
The plaintiff contends that the royalties or license fees paid for use of television product were not “rents or royalties in respect of motion picture films” as that phrase is used in the exclusion from the general exemption from tax under Article XIIIC. The Minister's assumption on which reassessments were based, which is disputed by the plaintiff's claim, was that television films and video tapes of motion picture films were motion picture films for purposes of Article XIIIC of the Canada—U.S. Income Tax Convention, 1942.
For purposes of trial the parties were agreed that the television product licensed by Canadian exhibitors should be classified in four categories, based on B.V.’s accounting records, and that taxes in relation to three of those were here in issue. The four categories are:
1. theatrical features on 35 mm. or 16 mm. film,
2. theatrical features on video tape,
3. “made for television" productions on 35 mm. or 16 mm. film, and
4. "made for television” productions on video tape.
On the reassessment by the Minister, tax equivalent to that applicable to royalties on category 4 was eliminated, and the parties were agreed that, in the reassessment, product originally produced and retained on video tape for television exhibition was exempt from tax. The defendant's position is that categories 1, 2 and 3 are motion picture films, within Article XIIIC of the Canada—United States Treaty and royalties paid for use of product in those categories were excluded from the general exemption under that Article, and thus were taxable.
In argument, the parties dealt with the issue of tax liability under the treaty in part from the historical perspective, in light of the history of tax treaty arrangements between Canada and the United States, the history of evolving tax legislation in Canada, and the history of the development of the television industry in Canada. Before turning to that history and other arguments raised, it is useful to refer to evidence presented concerning the differences between theatrical and television product.
That evidence was presented by Mr. Daniel Slusser, the general manager of Universal City Studios in Los Angeles and by Mr. Gordon Keeble, long-time leading figure in radio and television broadcasting in Canada, former president and chief executive officer of C.T.V., who was accepted as an expert witness, with expertise on the use of film in Canadian television and the history of the industry in Canada. From their evidence I conclude that television product is very different from theatrical product in several respects. From their evidence it is clear that those involved in the entertainment industr in the production of material for exhibition consider that “motion picture films” is a term used in relation to theatrical product, i.e., materials produced for theatrical exhibition, and it is not used in relation to television product. Mr. Keeble’s statement as an expert witness expressed his opinion, in part, as follows:
It is my opinion that in general usage the term "motion picture films” means films produced to be shown cinematographically in theatres. Historically motion picture films ave also been referred to as "movies". Such a film might subsequently be broadcast on television. . . . There is a clear distinction between a motion picture film and a television program. In my experience no one in the television industry would ever refer to television productions recorded on film as "motion picture films”.
Within the past 15 years a practice has developed of producing programs of a certain length and format, which have become known as "made for T.V. movies”. Some of them are made on videotape. In my opinion, a “made-for-T.V. movie" —— regardless of the media used — is a television program and not a motion picture film.
That distinction is reflected within Universal’s operations, where two quite separate divisions have responsibilities respectively for theatrical product and for television product, in all phases from pre-production to post-production stages, including distribution. It is reflected as well in distinct professional guilds of those involved in either theatrical or television production and in distinct awards for excellence, the "Oscars" for theatrical works and the "Emmys" for television works. Production costs are significantly higher for theatrical product, which is, for the most part, drama. Even "made for television movies” so-called, perhaps the nearest parallel to theatrical product, have significantly lower budgets, and are produced in tight time constraints with different market conditions which affect the nature of their production. Principal market conditions are the requirements for television product to meet tight time limits for exhibition, both the total exhibition time and the requirement for cut-aways for advertising at regular periodic intervals. The latter requires that television drama, if it is to retain an audience, must build to minor climax points at intervals of perhaps ten minutes, with story line, action and music all developed with that in mind.
These market considerations mean that even when theatrical productions on film are to be exhibited by television they are substantially modified, shortened, or lengthened from archival film, with music often re-recorded, and dialogue often altered, to fit the requirements for television. Interestingly, Mr. Keeble indicated that television product for exhibition in Canada is modified, or cut, differently from that in the United States to meet different advertising time standards.
Finally, in a technical sense theatrical and television product is significantly different and this generally results in changes in any theatrical product before it is exhibited on television. Theatrical product is produced on film, primarily 35mm., at least initially. The film process is a chemical process with approximately 2,000 lines of resolution permitting fine colour composition and with a wide rectangular shaped picture resulting. Video tape is an electronic process with some 525 lines of resolution in North America with less fine colour composition than film product, and television product produces a picture that is more square in screen dimensions than product for theatrical distribution. The different dimensions mean that product made for theatrical exhibition requires substantial technical modification for television exhibition, reducing the broad scene provided on film, and because of the different processes and frames per second involved, special conversion equipment is required, a telecine machine, for film to be exhibited for television. Most film for television is 16 mm., particularly in Canada where expensive equipment for handling 35 mm. film is not generally available. Mr. Keeble described the technical differences between film and television exhibition in this way.
Film technology requires 24 picture (“frames”) per second for both recording and projection, whereas television requires 30 frames per second. Film can be used in a theatre or elsewhere by projecting it on a screen. It cannot be used for television unless the images are first run through special telecine equipment which converts 24 frames to the television standard of 30, and also converts the optical images previously recorded on film into electronic television signals suitable for broadcasting.
Much television product produced on film is simply not intended for and has no market in theatrical exhibition, for example, so-called sit-coms or game shows, or episodic productions to run in series. The choice of film or video tape as the medium for the product may depend upon a variety of factors, technical and artistic. Early video tape was limited by lack of mobility of the substantial equipment originally required, especially camera equipment, and by technical limitations on its use, particularly out of doors, where lighting and other natural conditions are not readily controlled. For a variety of reasons film, rather than videotape, has continued to be the major medium for television product after recorded programming began to replace live programming in television production in the late 1950s, especially for prime time viewing in the evening hours.
All of the evidence presented supports the conclusion that, except for the early days of television in the 1950s when so-called B-grade movies and cartoons were early products originally made for theatrical distribution and later made available for exhibition on television, by the late 1970s and the years here in issue television product was very different from theatrical product. Even in the case of theatrical product, feature films, made available for exhibition on television, whether on film or on video tape (categories 1 and 2 as classified by the parties) were a qualitatively different product when modified for television presentation. Yet I infer that it was substantially similar in theme and overall dramatic purpose to the theatrical product upon which modifications, depending upon the particular product, were made.
Against this background the evolution of the Canadian television industry may be seen from the evidence of Mr. Keeble. While some limited concepts of television emerged in the late 1930s, it was only after the establishment of the industry in the United States in the 1940s, that the first Canadian television broadcasting services, under the auspices of the CBC, then the principal national radio broadcasting and regulating agency, were begun in Montreal and later in Toronto in the fall of 1952. Commercial broadcasting commenced by others only in the 19605. Much of the early programming was live, carried any distance by microwave which was only developing as a communications device and did not then link the whole country. It relied for programming on live productions and on those films, B movies and short films, which could be obtained to fill off-peak hours. Through the 1950s and early 1960s films constituted only about 50 per cent of programs, the rest were live. Feature films original made for theatrical exhibition only became available in the 19605. Only from the mid-1970s were so- called made for T.V. movies available, though film had come to be the main medium for much television product of the sitcom variety, the episodic series of mini-dramas, and even of game shows. By the late 1970s satellite transmission began to play an increasing role in the delivery of television programming.
It was Mr. Keeble’s opinion, which I accept, that within the television industry the term “motion picture film” referred to a feature film produced initially for theatrical exhibition. In his view, in the television industry the purpose for which a particular product was produced was readily identifiable, and readily demonstrated whether it was for theatrical or television exhibition. Theatrical product might be adapted for television exhibition but product intended for television exhibition, presumably even a so-called made for T.V. movie, was not adapted for theatrical exhibition, at least for North American audiences, because by its original design it was unsuitable for the theatre market. The medium or form in which television programming was available, whether on 16 mm. film, on video tape, or I presume by satellite transmission, was unimportant, provided the television exhibitor had equipment to handle the product form. The matter of importance was the quality and nature of the product for its purposes for television.
The history of Canadian income tax legislation providing for tax on nonresidents in relation to payments made in Canada as royalties or fees for use of theatrical or television product was referred to by counsel for both parties. From 1935 payments “in respect of . . . any rights in and to use of any copyrighted work subsequently produced or reproduced in Canada by way of ... mechanical sound on or from . . . films or mechanical devices of any description” was subject to tax (S.C. 1935, c. 40, section 9). In the following year that provision was extended to include payments in relation to rights in and to the use of any work whether copyrighted or not, but in the case of motion picture films 60 per cent of such payments were not subject to tax (S.C. 1936, c. 38, section 8).
Commencing in 1949, a particular subsection of the Act, a forerunner to the current subsection 212(5) was enacted to provide for tax liability of a non-resident of ten per cent on every amount that a Canadian resident "pays or credits to him as . . . payment for a right in or to the use of motion picture films that have been or are to be produced or reproduced in Canada" (S.C. 1949 (2d Sess.) c. 25, section 38). In 1954 this provision was amended to provide, for the first time, specific reference to television use of films, by referring to payments made "for a right in or to the use of motion picture films (including films for use in connection with television) that have been or are to be used or reproduced in Canada" (S.C. 1953-54, c. 57, section 27). In 1962 a provision similar in wording to the later subsection 212(5), but with a tax rate of only ten per cent was enacted (S.C. 1962-63, c. 8, section 22). The tax rate was increased to 25 per cent in 1971 (S.C. 1970-71-72, c. 63, subsection 212(5)) and by later amendment the specific wording of subsection 212(5), as it applied to the years here in question was adopted (S.C. 1973-74, c.14, section 68). Thus, since 1962, the Act has provided liability for tax on payments for a right in or to the use of two different products “motion picture films or films or video tapes for use in connection with television".
That evolving legislative treatment for tax purposes of payments to nonresidents for use of theatrical product or television product in Canada has only been reflected periodically in Canada—United States tax conventions. The Convention of 1942 made no specific reference to taxes on such payments until it was later amended by protocol in 1950 in which Article XIIIC, in issue in this case, was included and was subsequently enacted by Parliament. That Convention clause remained in effect until replaced by Article XII, dealing with tax on royalties, in the Canada—United States Income Tax Convention (1980), enacted ana declared in force August 1984. The terms of the last agreement, currently in force, are more precise and specifically include reference to television in an exclusion clause from a general exemption from tax on copyright and similar royalties, in the phrase “royalties in respect of motion pictures and works on film, videotape or other means of reproduction for use in connection with television”. Obviously, the evolution of international tax treaty law lags behind developing technology and behind Parliament's legislative changes designed to have domestic tax law relate to social and commercial activity arising from developing technology.
The plaintiff implies the Court should infer a narrow meaning for the words "motion picture films” as used in the 1950 tax protocol and Article XIIIC in light of the later specificreference to television in the 1980 Convention. Implicitly the argument relates as well to the specific reference to television product, distinct from motion picture films, in the Income Tax Act commencing only in 1962.
That argument, so far as it relates to the history of the tax conventions, I do not find persuasive, nor is the reference to the guidelines issued within the Department of National Revenue in 1987 for assessing payments made for live transmission and film/video tapes for use in-connection with television, which relate to payments made under the Canada—U.S. Tax Conventions of 1942 and 1980. Finally, though both counsel urge, as supportive of their respective positions, reliance upon excerpts from United States reports, of the Department of State and of the Senate Foreign Relations Committee, both in 1950, concerning the amending protocol containing Article XIIIC, I do not find these do more than explain the reason for the absence of complete reciprocal exemption from tax on royalties paid to a non-resident in respect of the use of motion picture films. That reason, the reluctance of Canada to exempt payments for such films because of a substantial imbalance in international payments heavily favouring the United States, does not provide meaning for the term "motion picture films” as used in the 1950 protocol, and Article XIIIC.
The plaintiff's argument that the meaning of "motion picture films” as used in Article XIIIC can be derived from the history of Canadian tax legislation which made no specific reference to payments in respect of use of film or video tape for television until after the 1950 protocol is not by itself persuasive that prior statutory references to "motion picture films" should be restricted to theatrical product and that meaning ascribed to the words as used in Article XIIIC. It would find meaning in those words as used in pre-1950 tax statutes presuming from later amendments that Parliament intended to change the law, not merely to clarify it, contrary to subsection 45(2) of the Interpretation Act, R.S.C. 1985, c. 1-21, which provides:
45(2) The amendment of an enactment shall not be deemed to be or to involve a declaration that the law under that enactment was or was considered by Parliament or other body or person by whom the enactment was enacted to have been different from the law as it is under the enactment as amended.
That provision has been given effect in the case of income tax legislation, to preclude deriving meaning for words of an amended provision from its later amendments (Morch v. M.N.R. [1949] C.T.C. 250, 49 D.T.C. 649 at pages 260-61 (D.T.C. 654) (Ex.Ct.); The Queen v. Continental Air Photo Ltd., [1962] C.T.C. 495, 62 D.T.C. 1306 at pages 505-06 (D.T.C. 1312) (Ex. Ct.); French Shoes Ltd. v. The Queen, [1986] 2 C.T.C. 132, 86 D.T.C. 6359 at pages 138-39 6364 (F.C.T.D.)), unless there be external evidence supporting a conclusion that Parliament did intend to change the law (Woodward Stores Ltd. v. The Queen, [1991] 1 C.T.C. 233, 91 D.T.C. 5090 at pages 245-46 (D.T.C. 5100) (F.C.T.D.)).
For the defendant it was argued that the legislative history demonstrates Parliament's intent to tax payments made for use of intellectual property rights, copyrights. I am not persuaded that this is so since tax was applied to non-copyrighted works, including films, as early as 1936, and the relevant statutory provisions since 1962 have made reference only to motion picture films, films, and video tapes without reference to copyright in those works. Moreover, even if Parliament were intent on taxing payments for the use of the underlying rights in such works, that is not helpful in determining what the words “motion picture films” mean in Article XIIIC.
I turn to other aids to interpretation suggested by the parties. The first is dictionary definitions and the second is terminology as used in the industry. Definitions offered here included the following for the words "motion picture” and "film".
From Random House Dictionary of the English Language: The Unabridged Edition (Random House, New York, 1983):
motion icture: 1. A sequence of consecutive pictures of objects photographed in motion by a specially designed camera . . . and thrown on a screen by a projector . . . in such rapid succession as to give the illusion of natural movement. 2. a play, event, or the like, presented in this form;
film, n. 3. Photog. a. a cellulose nitrate or cellulose acetate
composition made in thin sheets or strips and coated with a sensitive emulsion for taking photographs. b. a strip or roll of this. . . 4. Motion pictures, a. the film strip containing the photographs exhibited in a motion picture machine. . . 5. films, a. motion pictures collectively. . . c. motion pictures, as a genre of art of entertainment;
And from Webster's New International Dictionary of the English Language, Second Edition, Unabridged (C. Merriam Company: Springfield, 1959):
motion picture. a. A series of pictures, usually photographs taken with a special machine, a motion picture camera . . . presented to the eye in very rapid succession, with some or all of the objects in the picture represented in successive positions slightly changed, and producing, because of the persistence of vision, the optical effect of a continuous picture in which the objects move. b. Specif. a photoplay. A machine for projecting and showing motion pictures on a screen is a motion picture machine. . .;
And from the Shorter Oxford English Dictionary (Clarendon Press: Oxford, 1973):
film 3. Photog. A thin pellicle or coating of collodion, gelatin, etc. spread on photographic paper or plates, or used by itself instead of a plate. . . b. A celluloid roll of film used for a cinema picture.
These definitions clearly relate “motion picture” and "film" to the chemical process of photography and to the display, in the case of motion picture films, by means of a projector and screen. Television is of course an electronic medium, by which electronic messages are broadcast through the air directly or via satellite, or carried wholly or partly in transmission by cable. Television does not involve a projector and a screen of the sort used in display of motion picture film product, though it does involve the use of other equipment which permits the use of film or video tape to create electronic signals which for the viewer are reconverted, by means of the receiving set, to visual moving objects on the television "screen".
More helpful is the evidence of terminology as used in the industry. From the plaintiff's annual reports it appears "motion picture film" or “feature film” are terms used only in relation to product originally intended for theatrical distribution, while product made for direct release on television was referred to as "made for television film” or “television film". In the 1976 agreement between B.V. and the plaintiff and Universal, the distinction is maintained in relation to television product, defined as “the various feature motion pictures initially released for theatrical exhibition which have become available for television distribution and television films initially released for free television distribution. . . ." Theatrical product is defined in that agreement as "All various feature motion picture, short subjects and trailers, initially released for theatrical exhibition, or which subsequently become available for foreign theatrical release which are produced, supplied and/or distributed by” [Universal]. In its sublicensing agreements with Canadian television exhibitors B.V. consistently used the words “motion picture films" with reference only to products originally produced for theatrical distribution, and other products on film were referred to generally as films for television. There is, in addition, the evidence of Mr. Slusser and Mr. Keeble that in the industry the words “motion picture films” would be used with reference only to product originally produced for theatrical distribution.
It is true that the Report of the Royal Commission on National Development in the Arts, Letters and Sciences (1951), (the Report of the Massey Commission) dealt briefly (at page 301-05) with television on the eve of its introduction in Canada, and anticipated extensive use of films in television programmes. That report estimated some 25 per cent of all broadcasting time in the United States was then occupied by use of films and it anticipated even greater use of film, particularly in any Canadian television market. Nevertheless, that Commission declined to make specific recommendations on the matter. In myview, it is unlikely that it could have anticipated how significant film would ultimately become as a medium for use in television. In the years here in question Mr. Slusser indicated that film was the medium for 70-80 per cent of recorded television productions.
There are several factors that lead me to conclude the words "motion picture films" in Article XIIIC, at the time of adoption of protocol in 1950, did not include all product produced for television using the medium or form of film. Rather, those words included only products, in whatever form they might later be delivered for television exhibition, which were originally created for theatrical exhibi- tion. Those factors include the use of the term "motion picture film” in the industry in 1950, which continues to this day; the fact that the 1950 protocol, obviously based on negotiations in previous years, antedated the introduction of television broadcasting in Canada; and the fact that in the early 1950s it would have been quite impossible to anticipate the significant role film would ultimately come to play in television broadcasting, either in recording product intended for television or in the use, by adaptation, of theatrical product. It may well be, as Mr. Gough, an officer of National Revenue who was examined in discovery as the witness for the defendant, indicated in his examination, that television broadcasters came to advertise made for television movies as "movies", but the evidence of Mr. Keeble, which I accept, is that those in the industry did not consider them to be "motion picture films", and moreover, that type of television product was not produced until the 19705.
In my opinion, the words "motion picture films" in Article XIIIC, must have been intended by the parties to the 1950 protocol to mean film product originally produced for theatrical distribution. That was the only “motion picture film” product then made or available for any purpose.
There is, of course, the principle of statutory interpretation urged by the defendant that words of a statute be given a contemporary meaning consistent with section 10 of the Interpretation Act, supra, that “ he law shall be considered as always speaking”. Thus, courts have interpreted the words of a statute to include technological innovations made after the enactment where that is not inconsistent with the ordinary meaning, in contemporary terms, of the words used (British Columbia Telephone Co. v. Canada, [1992] 1 C.T.C. 26, 92 D.T.C. 6129 at 31-32 (D.T.C. 6132), per MacGuigan J.A.(F.C.A.); Apple Computer Inc. v. Mackintosh Computers Ltd. (1986), 28 D.L.R. (4th) 178, [1987] 1 F.C. 173, per Reed J. at 205-06 (F.C. 190-92) (F.C.T.D.).). Further, it is urged that use of the words "in respect of" in the exclusionary phrase in Article XIIIC, i.e., the phrase "but not inclusive of rents or royalties in respect of motion picture films” should be interpreted so that "motion picture films” be given a broad meaning, as it was suggested was done by Dickson J., as he then was, in discussing the interpretation of the words “in respect of" for the Supreme Court of Canada in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, [1983] ETC. 20, 83 D.T.C. 5041 at 39 (C.T.C. 25, D.T.C. 5045). The latter suggestion does not directly assist; by giving the widest “connection between two related subject matters”, in the words of Dickson J., here "rents and royalties" and “motion picture films”, one cannot ascertain the meaning to be ascribed to “motion picture films” in the context of this case.
There is, moreover, the principle in interpretation of treaties, enunciated by Estey J. in R. v. Melford Developments Inc., [1982] 2 S.C.R. 504, [1982] C.T.C. 330, 82 D.T.C. 6281, that international treaties, in that case a tax treaty with Germany, are to be interpreted in accord with the meaning of the words at the time the agreement was adopted. Neither party to a treaty is free to unilaterally amend the treaty provisions as its domestic needs might dictate, unless of course the treaty itself recognizes such a course of action. In that case, as in this, the legislation enacting the treaty specifically underlined that principle. Here section 3 of the Canada—United States of America Tax Convention Act, 1942, as enacted by Parliament S.C. 1943-44, c.21, provides:
3. In the event of any inconsistency between the provisions of this Act or of the said Convention and Protocol and the operation of any other law, the provisions of this Act and of the Convention and Protocol shall, to the extent of such inconsistency, prevail.
In my opinion the words "motion picture films" in Article XIIIC of the Canada—U.S. Tax Convention are to be given the meaning intended by the parties to the Convention in 1950 when that Article was incorporated by the Protocol amending the Convention of 1942. That meaning as I have found, was limited to films originally produced for theatrical exhibition. The use of films produced for television purposes and not intended for theatrical distribution would not be included. Thus, the product here identified by the parties in category 3, “made for television" productions on 35 mm. or 16 mm. film, is not within the meaning of the words "motion picture films” in Article XIIIC.
On the other hand, the use of theatrical product, feature films produced for theatrical exhibition and subsequently modified for exhibition by television, though perhaps technically modified in many respects, is still basically the theatrical product and is, in my opinion, "motion picture film" within the meaning of those words in Article XIIIC. Similarly, I conclude that video tape form of the modified feature film produced for theatrical exhibition is also "motion picture film” within the meaning of those words in Article XIIIC. The form in this instance is not significant, as Mr. Keeble’s evidence made clear, it is the product that is significant and that product, though converted to video tape for presentation or exhibition on television, remains basically the theatrical product pro- ducedoriginally for theatrical exhibition, albeit modified technically and in some dramatic aspects for exhibition by television.
For these reasons, I conclude that on the alternate ground raised by the plaintiff, if it is liable for tax under subsection 212(5) of the Act, payments made in respect of the use of a major category of television product, that produced on film for exhibition on television and not intended for theatrical exhibition, is exempt from tax under Article XIIIC of the tax Convention of 1942.
Conclusion
As indicated, I find that despite the Minister’s assumption that the plaintiff’s share of royalty payments received by B.V. from television stations and networks was received as collection agent of the plaintiff and not on B.V.'s own account, those payments were not made by Canadian exhibitors to or for the plaintiff and they were not subject to tax under subsection 212(5) of the Income Tax Act. Thus, each of the plaintiff's actions is allowed, with costs, and the judgment so providing directs that the assessment made June 15, 1984 as varied by reassessment made September 18, 1987, is vacated insofar as it relates to the plaintiff.
If 1 am held to be in error in that judgment, in the alternative I find that only two of three categories of television product identified by the parties for this trial are "motion picture films” for the purposes of Article XIIIC of the Canada—U.S. Income Tax Convention, 1942. Those two categories are theatrical features on 35 mm. or 16 mm. film, and theatrical features on video tape. Thus, payments made for use of those categories of television product are not exempt from tax under Article XIIIC. The third category, made for television productions on 35 mm. or 16 mm. film are not “motion picture films” for the purposes of Article XIIIC and payments in relation to the use of those products are exempt from tax.
A separate judgment is entered on each of the Court's files for these actions and I direct that a copy of these reasons for judgment be filed on each of those files.
Appeal allowed.
Email this Content