Société Nouvelle De Cinématographie Inc v. Minister of National Revenue, [1979] CTC 3006, 79 DTC 801

Delmer E Taylor [TRANSLATION]:—This appeal was heard in Montreal, Quebec on April 10, 1979 and was brought as a consequence of assessments for 1972, 1973, 1974 and 1975 in which the Minister of National Revenue added various amounts to the income of the appellant and imposed penalties for “failing to deduct and remit a 10% tax on films of various values paid for by or credited to persons not resident in Canada’’ during the years in question.

In his amended reply to the notice of appeal the respondent relied, inter alia, on paragraph 212(1)(d), subsections 212(5), 214(1), 215(1), 215(3), 227(8), 227(9) and 227(10) of the Income Tax Act (SC 1970-71-72, c 63, as amended), on subsection 10(2) of the Income Tax Application Rules (ITAR), on Article Vlll(1) and (3) of the Tax Convention between Canada and the Federal Republic of Germany, and on Article XIII(3) and (4) of the Tax Convention between Canada and France applicable to the years on appeal.

Facts

The appellant has its head office in Montreal and is a company which handles the distribution of motion picture films. The films in question are all produced abroad. There was no dispute concerning the payments which were made to these foreign companies:

No evidence was filed by the parties, but copies of the contracts in question were submitted to the Board.

Argument

The essence of counsel for the appellant’s pleading was that since the contracts lacked certain aspects which he associated with the idea of “royalties” or “rental”, these contracts were either contracts of sale or contracts for services rendered. This position is well summarized by counsel as follows:

Both (contracts) were concluded with a German company, Trans Ocean International.

In these 2 contracts, there were the following common features: first, a company which is selling and which is incorporated in Germany. My learned friend admitted, for purposes of the case, and in fact it is logical, that this company had no permanent establishment here, and accordingly is not doing business through a permanent establishment in Canada. Secondly, in both cases transfers in perpetuity were made dating from the signature of the contract. Thirdly, in both cases these transfers were made in consideration of a lump sum. In the first contract, a single royalty payment of $20,000 was made; and in the second case the payment was $40,000.

The position of the department, of the Minister, appears to be that these contracts are the equivalent of what in English would be called—the term has never really been correctly translated into French—contracts of rental, of “royalties”. We submit that in light of the contracts themselves, of the Act and the interpretation that must be given to it, these are all practical purposes sales, transfers, sales, as the notice of appeal states, “stock in trade”.

I come now to what I might call the second head of the argument, namely that all the contracts—although the films are of different origins and the sellers are not all the same—we are dealing in all cases with contracts which strongly resemble each other and have points in common. I refer here to contracts 3, 4 et seq, which are filed in that order.

In all cases, unless I am mistaken, these are contracts in perpetuity. Unlike the first series of contracts, however these are not made for lump sums. Naturally, therefore, the question arises as to the kind of contracts these are.

The position of the respondent, of the Minister of course, is that these are rental contracts, “royalties”. Our position, in light of an examination of these contracts, is that in all cases, in every case, the transferor, that is the seller, is conferring a mandate, not making a rental. This is not—and the wording of the contract is quite explicit—these are not contracts in which they say: “I am leasing you rights to the film for such and such a percentage”, which is the position of the department; rather these are contracts which state, and I will give you the exact wording, the precise language: ‘‘we appoint you, a Canadian company having the necessary contacts and relationships on the spot, to carry out the mandate of distributing or exploiting for us, the foreign seller, the film in question; for us”—and this is underlined—“and we will pay you for performing this mandate. First. we will reimburse to you certain expenses you will incur in performing this mandate, and second, we will permit you to retain as salary, as remuneration, in general half of your sales”.

This interpretation may appear to be contrary to what the legislator, and even more the Minister, would like to see. It may be asked why, when the question is one of rental for a limited period, it is taxable in Canada, but as soon as one has the foresight not to make a rental contract but to make a contract in perpetuity or tor a lump sum, it is not taxable; argument might continue indefinitely on the legislator’s reasons; his oversights, his errors; your function, our function, is not to reword the Act. We are here to interpret the Act. If the Act contains loopholes, we will perhaps be rendering a service by pointing out to the authorities, by showing them, the mistake so they can correct the Act. However, we are confronted with an Act and a treaty which is quite categorical.

Counsel for the respondent summarized the Minister’s position as follows:

I submit that these limitations in the contract concluded between Société Nouvelle and Trans Ocean, the German resident—as I say, these limitations are so strong and so specific that essentially one cannot speak of a sale.

The first thing that strikes one in looking at the contract, one of the two contracts—they are identical for all practical purposes—is that it is quite clear that they relate to exploitation and screening rights, in one case for television and video-cassette, to the exclusion of cinema screening rights, and in the other case, rights of screening and exploitation for the cinema and not for television.

It will be seen, therefore, that the rights are already limited: we are talking about a part of a right. Now, to return to the idea that—this was the first thing that struck one—namely that the contract clearly provided—it stated $20,000, but before that, it is a lump sum royalty payment, a “royalty”.

It is difficult to arrive at this point and then conclude that it was a royalty, when the parties wrote “royalty”, especially as one can then see that there were so many limitations that this couldnot have been a sale. What remains is a right of use in return for a royalty.

Looking at the contracts concluded in by SNC with Euro-International we find in all cases, unless there is a mistake, on page 2 of the contract, at the top of the page:

In the French and English version and any and all other versions which may become available during the licence permit.

Also when the rest of the contract is examined, it can be seen that it really is a licence, a right to use these films in a limited area known as French Canada.

Clause 11 is interesting in that it deals, in other terms, with the method of payment for these rights acquired by the Canadian resident. Clause 11 speaks of a minimum guaranteed amount. With regard to this minimum guaranteed amount, it is specifically provided that in the event that receipts from showing the film in Canada are not sufficient or do not allow this minimum guarantee to be met, well, it is clear that SNC will lose its money at that point. In this sense, it can be said that this is a form of payment for the acquisition of a right.

Clause 13 states that there are no other contracts concluded respecting rights to this film, except the present contract, which means that there are rights which are granted or transferred—something of that kind—within this contract.

Clause 14 provides that SNC may assign its exclusive rights to third parties—in other words, if as my colleague contends they were acting solely as a mandatary—and I submit that even there they were liable—once again it is difficult to come to this conclusion because they state: “you may assign something”. Well, if something can be assigned, obviously something has been acquired. Accordingly, it is a right of licence that has been acquired.

If I may be permitted certain liberties, if one can say—in order to give a relatively precise legal classification to the SNC role in this case—it is that at first sight these contracts appear to be ambiguous, in the sense that one cannot exactly tell whether the company is a mandatary as such, acting on its own behalf, or just exactly what.

However, in giving it a specific legal context, it can be seen that in the final analysis SNC was acting as a factor or commission agent in the sense of French law. In any case, whether it is described as a mandatary or more specifically as a factor does not change the fact that the money, the amounts which were sent to France, came from rental income, contracts which the mandatary had concluded for the mandator, and this rental income was sent to France.

In this sense, the Convention applies. A non-resident is taxable on film rental income—because this involved income for the rental of films—and Société Nouvelle de Cinématographie had an obligation to withhold the tax, because the non-resident is taxable, but also as a result of subsection 215(3), which requires the mandatary to make withholdings in such cases.

.. .I would simply conclude by saying, despite the fact that there are many contracts in these cases, despite the fact that studying them may seem tedious and burdensome in certain respects, the fact remains that in the final analysis the position of the department has always been clear, and that in our opinion, the nonresidents were taxable, and accordingly Société Nouvelle de Cinématographie should have withheld the tax required.

Findings

In the two Trans Ocean International contracts, neither the aspect of time “in perpetuity’’ nor the lump sums (single royalty payments) in themselves make the transactions into sales, with the result that the appellant has a right of complete ownership.

Turning to the second proposition of counsel for the appellant regarding the other contracts, once again the question of perpetuity does not serve the interests of the appellant. Furthermore, the interpretation that the contracts are “contracts of service” rather than “contracts of rental” or royalties was not established. Additionally, the funds in question in the case at bar are those remitted to non-resident persons, and not the funds withheld by the appellant.

The evidence did not show that the appellant had purchased rights to screen and distribute the films in question, or that it simply administered the distribution of the latter on behalf of non-resident owners. The appellant operated in accordance with certain rights specified in the contracts, and the Minister’s decision that the payments in question are “rent, royalty or a similar payment” in keeping with paragraph 212(1 )(d) of the Income Tax Act is correct.

Decision

The appeal is dismissed.

Appeal dismissed.