Boosey and Hawkes (Canada) LTD v. Minister of National Revenue, [1984] CTC 2871, 84 DTC 1728

Sarchuk, TCJ:—This is an appeal by Boosey and Hawkes (Canada) Limited with regard to an assessment made upon it by the Minister of National Revenue for the taxation year 1978. The controversy in this case arises with respect to royalties of $29,596.53 received by the appellant from The Composers, Authors and Publishers Association of Canada Limited (CAPAC), on June 1, 1979, which amount was reported by the appellant in its income in the 1979 taxation year. The issue is whether the Minister, on the basis that this amount was a receivable of the appellant at the end of the 1978 taxation year, was correct in including it in the computation of the appellant’s income for that taxation year by virtue of sections 3 and 9 and paragraph 12(l)(b) of the Income Tax Act.

The Evidence

The appellant is in the music publishing business. In the course of its business it licenses the right to use musical works throughout the world. A major part of its operation is the licensing within Canada of works which have been created outside this country. To achieve the greatest possible revenue for its songwriters, composers and for itself it assigns certain of these rights, in this instance the performing rights, which are those rights to any composition permitting it to be played on the air, in theatres, on television, in concerts, in dancehalls and so forth. Because of the variety of users of musical compositions both in Canada and throughout the world it has become the custom of assigning those rights to a performing rights society which then goes about collecting the revenues from the various users on behalf of its members.

Mr John V Mills, the general manager and general counsel of CAPAC, testified that it was such an organization and that the appellant was a member of CAPAC. Mr Mills described CAPAC as being analogous to a cooperative owned and controlled by the members. In an agreement between a publisher member such as the appellant and CAPAC, the member assigns performing rights owned by it to CAPAC during the period of its contractual membership for administration on its behalf. Pursuant to the terms of the agreement CAPAC undertakes to distribute the totality of the royalties collected (over and above the cost of its operation) to its members in accordance with rules and procedures relating to distribution established from time to time by the elected representatives of the member composers, lyric writers and publishers under the distribution by-laws.

When composers, lyric writers and publishers choose to assign their rights to an association such as CAPAC, each year that association files with the Copyright Appeal Board (the Board) a list of the various tariffs which that association proposes to apply to users of music in the areas that the association has the lawful right of collection of revenue. The Board, after hearing all interested parties, has the power to set the fees, charges and royalties and does in fact do so on an annual basis.

The major users are private commercial radio, private commercial television and the CBC, while the minor users are places providing live entertainment such as night clubs and concert halls. There are no contracts between these users and CAPAC. Fees for use are not negotiated. Under the Copyright Act once the Board has approved the fees, charges and royalties, any user of music has only to tender the appropriate fee to CAPAC and as long as it is tendered the Copyright Act specifically provides that CAPAC (and/or the publisher, writer or performer) has no right to take any legal acton against the user for infringement of copyright or recovery of damages. The right to collect fees flows from the tariffs approved by the Board. Using a private commercial radio station as an example, Mr Mills stated that the payment it made to CAPAC is a percentage of the total amount paid by all persons contracting for and making use of that station’s services and facilities. Each station must file a monthly report with CAPAC setting forth the total amount paid by its clients (in effect the gross advertising revenue the station received) and this forms the basis of its payment to CAPAC. For example to calculate the payment for the January 1984 period the broadcasting station files with CAPAC a statement of its revenues for November 1983 and, applying the percentage rate to those revenues, sends CAPAC a cheque for that amount. This system carries on throughout the whole of the year. With minor differences the same procedure applies with respect to television.

In addition to those members in CAPAC who are Canadian composers, authors and publishers, CAPAC has reciprocal agreements with virtually every country in the world whereby pursuant to international copyright conventions there is reciprocal enforcement of copyright. As a result the repertoire administered by CAPAC contains in excess of two and one-half million copyrighted musical works from all over the world.

Revenues from these sources once collected are distributed to CAPAC’s members on what was described as a pool system. In this system CAPAC takes the total amount of revenue received, for example from the radio broadcasting industry, and after the overhead and other expenses are paid what is left is known as a distribution fund or the distribution pool. In order to ascertain how that pool is to be distributed to CAPAC’s members and to members of the affiliated societies abroad CAPAC performs a continuing analysis of radio station reports received from every station in Canada throughout the year. These reports consist of a sample program covering one week out of every six-month period from each private commercial radio station which program sets out all the music played during the reporting period. These returns reflect thousands of performances of music and song, and each song can have several different interested parties such as a composer, a lyric writer, the original publisher, a sub-publisher and a translator, all of whom would have a right in copyright in the collected fees. CAPAC’s staff, in analysing the various reports received, identifies each song reflected therein. Every song is then credited with a number of points and that information is fed into a computer which is programmed to individually credit the composer, the lyric writer, the publishing company and so on with the appropriate point allocation and is programmed as well to apply the agreed upon distribution formula. The same analysis is conducted with respect to programs submitted by television and theatre.

There are two distribution periods in each year (January-June and July- December) and at the appropriate time the total points allocated are divided into the revenue received in that period to produce a point value. In that way the total fund available in each period is utilized and a statement is produced for every person in the world whose works have shown up in the analysis. Each party with an interest in each of those songs is provided with a statement showing the title of the song, the party’s interest, the amount of money the song earned and the amount that interest has earned.

According to Mr Mills to do the analysis properly a substantial period of time is required. For the January 1-June 30 distribution period he stated that the analysis could not be completed and the moneys distributed to the members prior to December 15. It was his evidence that CAPAC is as efficient as any other similar society in the world but that nonetheless it needed the six-month delay to produce the statements and make the payments to its members. The July 1-December 31 distribution period was no different, Mr Mills stating that it was impossible to complete the analysis and to make the remittances prior to the end of May of the following year. The royalties at issue in this case were earned in the July 1-December 31, 1978, period but were not paid until June 1, 1979.

Mr Mills further explained that although the distribution for the January I- June 30 period related to the pool of money received by CAPAC in that period of time from the users, the distribution to the members of CAPAC for that same period was calculated on an analysis of radio performances that took place the preceding November to April period and in the case of television performances the October to March period. Mr Mills’ explanation of this apparent inconsistency was lengthy, but what it came down to was that the credit (points) that a member of the CAPAC would receive in any period (eg January 1-June 30) was based upon an analysis of six months of programming which was two months behind. He said that this was necessary in order to be able to function properly given the mass of material received and to give CAPAC the necessary leeway to complete a proper analysis of all programming. The methods used, although involved, appear to operate to the satisfaction of CAPAC’s members.

An agreement is concluded between the member and CAPAC and provides the manner in which the member will be compensated for the use of his music. The distribution formula referred to therein is determined by the Board of Directors of CAPAC and the result is a complex distribution formula book including, inter alia, distribution formulas for radio and television, for motion pictures, for performances of extended music in concerts and even for AM and FM radio. In 1978, the rights of CAPAC’s members were governed by paragraph 3 of Ex R-2, which reads as follows:

3. CAPAC agrees that its gross revenue from all sources, shall after deduction of its expenses of and incidental to the collection and distribution of its revenue and the carrying out and administration of its business and operations (without any apportionment of such expenses in respect of or amongst individual works) be distributed among the Associate Member and any other parties from whom CAPAC may hold similar assignments or licensing agreements. CAPAC further agrees that distributions shall be made promptly following the calculation of the members’ shares it being the intention that insofar as it is possible distributions shall be made annually. Each distribution shall be effected having regard to the total amount of money available in any distribution period, such distribution period to be determined by the Board of Directors, and the total number of credits attained by the Associate Member and such other parties, such credits to be calculated according to the distribution formula approved by the Board of Directors and in effect at the time of such distribution.

The royalties received by the appellant in 1979 which are in issue were distributed to it pursuant to this clause. Arthur Mawson, the secretary-treasurer and vice-president of the appellant, stated that in accounting to its parent company the appellant reported its income on a cash basis while expenses were reported on an accrual basis. This method of accounting for revenue had not changed during the course of the eleven years that he had been with the company and, to the best of his knowledge, the appellant had never been reassessed by the Minister with respect to its performing rights income which had been reported in all of its tax returns as having been received on a cash basis.

Mr John Peacock, a chartered accountant, testified that he has been responsible for the preparation of the appellant’s annual financial statements and tax returns for a number of years. It was his evidence that cash basis has consistently been used in reporting the appellant’s mechanical licence and performing rights revenue. The Minister of National Revenue had never disputed the manner in which that revenue was calculated with the exception of the year currently under appeal.

It was Mr Peacock’s opinion that, recognizing the nature and source of this revenue, there was no other practical method of reporting it. The method utilized by the appellant was in accordance with the practice established and followed by the music industry in Canada. He did not dispute that the principal if not the sole reason why revenue from performing rights was reported on a cash basis was because of the practical administrative difficulties which, according to him, would occur if the income were to be determined on an accrual basis.

The Appellant*s Position

The appellant’s position is that the royalties of $29,596.53 collected for it by CAPAC and which formed part of the 1978 distribution pool, were not an amount receivable in 1978 and were properly included by the appellant in its income for 1979, the year in which they were in fact received by it from CAPAC. The appellant submitted that the Minister erred in applying paragraph 12(l)(b) of the Income Tax Act to include the royalties in computing its income for the 1978 taxation year because the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this part (of the Act) did not require it to include any amount receivable in computing its income for a taxation year unless it has been received in that year. The appellant contends that the Minister has accepted cash basis as the method adopted by it (and the music industry at large) in reporting such income.

Counsel argued that there was no receivable in existence on December 31, 1978, since the appellant did not have any right to payment whatsoever. There could not be a receivable in the absence of quantification or of some method of determining at that date the amount of money that should be taken into that income. This is not possible because there is a serious practical difficulty in determining with any degree of exactitude the amount of royalties due to the appellant until the actual time of distribution.

The appellant cited two cases in support of its propositions: Don Palethorpe v MNR, [1982] CTC 2632; 82 DTC 1641 at 2633 [1642], and Publishers Guild of Canada Limited v MNR, [1957] CTC 1; 57 DTC 1017.

The Respondent’s Position

Counsel submitted that the appellant was legally entitled to its revenues for the taxation year in question and that all that remained was to determine the quantum. The terms of the contractual arrangement between CAPAC and the appellant as well as CAPAC’s financial statements established that CAPAC members were entitled to have the royalties distributed to them at the end of the 1978 taxation year, and that it was only as a result of the complex system adopted by CAPAC that the precise amount could not be ascertained until a later date. The alleged administrative difficulty which, according to the appellant, forced it into the position of taking this income into account on a cash basis is irrelevent to the legal issue. The royalties received by the appellant from CAPAC in 1979 were referrable to 1978 performances and in consequence such royalties were receivables of the appellant at the end of its 1978 taxation year even though they could not be quantified with any degree of reasonableness until well after the end of the taxation year in question.

Counsel cited:

1. Commissioners of Inland Revenue v Gardner Mountain & D’Ambrumenil Ltd, (1947) 29 TC 69

2. Ken Steeves Sales Limited v MNR, [1955] CTC 47; 55 DTC 1044 (Exch Ct)

3. MNR v John Coif ord Contracting Company Limited, [1960] CTC 178; 60 DTC 1131 (Exch Ct)

4. Willow Manufacturing Company Limited v MNR, [1967] Tax ABC 406; 67 DTC 304.

The issues to be decided are whether the Minister was correct in treating the royalties as a receivable of the appellant on December 31, 1978, and if so, was the appellant in these circumstances, entitled to the benefit of the exception contained in paragraph 12(l)(b) of the Act.

The term “amount receivable” or “receivable” is not defined in the Act. These words were construed by Mr Justice Kearney in MNR v Colford Contracting Company Limited, [1960] CTC 178; 60 DTC 1131 at 187 [1135] as follows:

In the absence of a statutory definition to the contrary, I think it is not enough that the so-called recipient have a precarious right to receive the amount in question, but he must have a clearly legal, though not necessarily immediate, right to receive it. A second meaning, as mentioned by Cameron J, is “to be received”, and Eric L Kohler, in A Dictionary for Accountants, 1957 edition, p 408, defines it as “collectible, whether or not due”. These two definitions, I think, connote entitlement.

On the evidence before me I am satisfied that the appellant’s entitlement to the royalties in question arose in 1978 and that CAPAC’s liability to pay arose in that same year. The financial statements attached to CAPAC’s 1978 income tax return (Ex R-l) clearly established that CAPAC itself treated the amounts as a payable. The operating statement sets out the royalties collected by CAPAC as at December 31, 1978, and shows that administrative and general expenses, executive remuneration and so forth, were deducted strictly in accordance with paragraph 3 of the Agreement between the appellant and CAPAC (Ex R-2). The balance remaining was transferred to the distribution fund and was treated as a payable by CAPAC. In fact the distribution fund statement which forms part of the financial statement of CAPAC shows the royalties as a liability and describes them as a “distribution fund payable to members and associated societies”.

In my view all liability with respect to the royalties had been established by December 3, 1978, and all that remained was to determine the amount of that liability with respect to each individual member of CAPAC. On the evidence before me I have no hesitation in finding that at year end the appellant had “performed the work” and had the legal right to receive the amount which was ultimately paid to it. There was no element of contingency remaining, no condition precedent to the liability of CAPAC to pay the royalties to its members and to the appellant. Only the time allowed for payment by virtue of the system of analysis utilized by CAPAC (and approbated by CAPAC’s members) precluded the appellant from receiving the royalties in the taxation year.

Since I have concluded that the royalties were a receivable in 1978 it becomes necessary to consider whether or not the exception in paragraph 12(l)(b) of the Income Tax Act applies to the appellant. The relevant provision is:

Sec 12. Amounts to be included as income from business or property.

(1) There shall be included in computing the income of the taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(b) Amounts receivable in respect of services, etc, rendered — any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year, unless the method adopted by the taxpayer for computing income from the business and accepted for the purpose of this Part does not require him to include any amount receivable in computing his income for a taxation year unless it has been received in the year and for the purposes of this paragraph, an amount shall be deemed to have become receivable in respect of services rendered in the course of a business on the day that is the earlier of

(i) the day upon which the account in respect of services was rendered, and

(ii) the day upon which the account in respect of those services would have been rendered had there been no undue delay in rendering the account in respect of the services. [Emphasis added]

The appellant has since at least 1958 consistently adopted the same method of reporting its income, that is always treating income from mechanical licences and performing rights on a cash basis. The Minister never reassessed prior to 1978 and this, the appellant submitted was sufficient to establish that its method had been “accepted for the purpose of this part”. No authority was cited for this proposition.

The Minister’s position was, and I quote:

My friend has suggested that the appellant is not caught under paragraph 12(l)(b) because the Minister has accepted the method in the past. There is no authority for that at all. It has long been law before this Court that the Minister is not bound by prior assessments.

That is precisely in this case what is not accepted. The Minister does not accept that in these circumstances that the cash method of accounting is acceptable.

While it is not disputed that an assessment is conclusive as between the parties in relation to the assessment for the year in which it was made several cases appear to suggest an important qualification to that bare assertion. In MNR v British and American Motors Toronto Limited, [1953] CTC 177; 53 DTC 1113, Cameron J, stated at 179 [1115]:

In my view, the mere fact that a concession of this nature has been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking another view of the facts in a later year when he has more complete data on the subject matter. The provisions of s 42(4) of the Income Tax Act empowering the Minister to reassess or make additional assessments in certain cases within six years from the day of the original assessment, would seem to be a fair indication that a previous assessment is not in all cases final and conclusive, but may be reconsidered in the light of subsequent evidence. [Emphasis added]

In Admiral Investments Ltd v MNR, [1967] CTC 165; 67 DTC 5114, Cattanach J, stated at 174 [5120]:

There is nothing inconsistent with the Minister altering his decision according to the facts as he finds them from time to time. [Emphasis added]

When a similar issue was considered in relation to subsection 14(1) of the Income Tax Act RSC 1952, in Ken Steeves Sales Limited v MNR, [1955] Ex CR 108; [1955] CTC 47; 55 DTC 1044, Mr Justice Cameron found that the appellant’s method would give a completely inaccurate picture of the year’s operations; would fail to reflect the true profit or loss of the business and further found that there was no evidence of acceptance by the Minister of the appellant’s accounting method. He stated at 65 [1052]:

It is inconceivable that the Minister should have full power by a reassessment to correct an error made in the original assessment in order that the full tax liability should be collected, and still be bound by the methods said to have been used in the tax return on which the original assessment was made. [Emphasis added]

From the foregoing it seems fair to conclude that the Minister is not bound either by a previous assessment or by a previous acceptance of a method in circumstances where new facts subsequently come to light or where it is necessary to correct an error made in the original assessment in order that the full tax liability can be collected, or if it is demonstrated by cogent evidence that the method in use by the appellant is one which does not accurately reflect the appellant’s true profit (income) for the year in accordance with the Income Tax Act applicable in that year. As Mr Justice Cameron stated in Canadian General Electric Co Ltd v MNR, [1959] CTC 350; 59 DTC 1217 at 374 [1229]:

If the method that has been used in previous years does not result in the ascertainment of the true gains as nearly as can be done it is not a method sanctioned by the law.

I do not understand the respondent to have contended that the method adopted by the appellant in computing its income in 1978 was in contravention of any of the provisions of the Income Tax Act nor that the method failed to truly reflect the appellant’s profit or loss for the year.

In fact on the evidence before me I can only reach the opposite conclusion. Most businesses and commercial enterprises file their returns of income on an accrual basis. That does not make that method mandatory. Mr Peacock’s evidence was that the method utilized by the appellant was, from an accounting point of view, proper and necessary and he was not challenged on this issue. The evidence is that it is a practice common to the music industry. There was no evidence before me that the method utilized is not acceptable either from the standpoint of accounting practice or commercially. No evidence was adduced to suggest that it did not accurately reflect the income of the appellant in the taxation year at issue and there was no evidence to explain or support the Minister’s position that the method was unacceptable.

I am mindful of the decision of Mr Justice Thorson in the Publishers Guild of Canada v MNR, [1957] CTC 1; 57 DTC 1017 in which he stated:

I cannot express too strongly the opinion of this Court that in the absence of statutory provision to the contrary, the validity of any particular system of accounting does not depend on whether the Department of National Revenue permits or refuses its use. What the Court is concerned with is the ascertainment of the taxpayer’s income tax liability. Thus, the prime consideration where there is a dispute about a system of accounting is, in the first place, whether it is appropriate to the business to which it is applied and tells the truth about the taxpayer’s income position, and if that condition is satisfied, whether there is any prohibition in the governing income tax law against its use.

The last issue to be considered is whether or not the cash method of computing income utilized by the appellant “has been accepted’’ within the meaning of paragraph 12(l)(b). The evidence is uncontradicted that the cash basis method was first used by the appellant prior to 1958 and that it has been consistently used since then without challenge. It is my view that the Minister’s course of conduct in failing to challenge the “method’’ extending as it did for over 20 years indicates an unqualified acceptance of the method by the Minister that leaves no room for doubt (see: No 320 v MNR, 14 Tax ABC 334; 56 DTC 100 at 101). I am further reinforced in this view by the comments of Gibson, J, in Isadore Weinstein v MNR; [1968] CTC 357; 68 DTC 5232. In this case one of the issues raised by the appellant was whether the Minister could set up a reserve under paragraph 85B(l)(b) when the appellant had taken no position as to whether he wished the profit to be computed on a cash or accrual basis. Mr Justice Gibson held at 359 [5234]:

The conclusion I reach firstly, is that on a true interpretation of section 85B(l)(b) of the Income Tax Act the adoption of a method for computing income from a business and the acceptance of it by the respondent for the purpose of that subsection of the Act does not have to follow that chronology, that is, adoption first by the taxpayer and acceptance by the Minister. The reverse may obtain.

He went on to say:

In this case the re-assessment by the respondent of the 1959 income of the appellant categorized this profit from this “business’’ as on income account and not on capital account and also used an accrual method of computing this income; and in the circumstances of this case, the appellant’s failure to challenge this was in my view an “adoption” of this method for the purpose of this subsection of the Act. [Emphasis added]

On the evidence before me I have concluded that:

(1) The royalties at issue were receivable in 1978.

(2) There was no evidence to suggest that the method used by the appellant was either commercially inappropriate or failed “to tell the truth about the taxpayer’s income position’’.

(3) That the Minister accepted the “method” for the purpose of this part. Accordingly, I find that the appellant was not required to include these royalties as a receivable in computing its income for the 1978 taxation year. The appeal is therefore allowed.

Appeal allowed.