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Citation:2004TCC527
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Date: 20040727
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Docket: 2003-3229(IT)I
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BETWEEN:
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ZAINUL AND SHAZMA HOLDINGS LTD.,
O/A HOLIDAY INN HINTON,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.
[1] The issue in this appeal is
whether the Appellant in the taxation year ended December 31,
1998 is liable for a payment of non-resident taxes of $7,871.17
plus interest of $3,491.60 and a penalty of $787.17 all in
respect to a payment of $78,717.60 CDN paid to a U.S. Corporation
named Holiday Hospitality Franchising, Inc., said $78,717.60
being the total amount of a "One-Time License Fee" paid
by the Appellant in relation to the Appellant's application
to acquire a Holiday Inn franchise for its existing lodge named
The Greentree Lodge in Hinton, Alberta. The sections of the
Income Tax Act which are in play are paragraph 212(1)(d)
and subparagraph 212(1)(d)(i).
[2] The following are the most
relevant facts which I have extracted from the Written
Submissions of the Appellant:
5. The
following is a list of the facts which have been pleaded and
admitted by the parties. Where the facts pleaded in the Notice of
Appeal were not initially admitted by the Respondent, those facts
as modified or restated by the Respondent are now admitted by the
Appellant below. The numbers preceding the paragraphs below
correspond to the paragraphs in the Notice of Appeal, and the
numbers following the paragraphs below correspond to the
paragraphs in the Reply.
[1] The Appellant
was incorporated pursuant to the laws of Alberta on October 1,
1997 and operates various hotels throughout Alberta [paragraph
1].
[2] All of the
issued and outstanding shares of the Appellant were owned by
Afzal Rajan at all times material to this Notice of Appeal
[paragraph 1].
[3] The Appellant
carried on business as the Greentree Lodge, a hotel in Hinton,
from July 3, 1998 until November 11, 1999, at which time The
Greentree Lodge began operating as a Holiday Inn (this hotel is
referred to herein as the "Holiday Inn Hinton")
[paragraph 1].
[4] In early August,
1998, the Appellant applied to Holiday Hospitality Franchising
Inc. ("Franchising Inc.") to acquire a Holiday Inn
franchise for the Holiday Inn Hinton. Franchising Inc. is an
entity based in the United States which carries on a business of
granting Holiday Inn franchises [paragraph 2].
[5] As part of its
application to Franchising Inc., the Appellant was required to
pay Franchising Inc. a one-time, initial license fee (the
"One-Time License Fee") of $78,717.60 CDN ($52,000
USD). The License Fee was calculated based on the flat rate of
$500 USD per room in the Holiday Inn Hinton [paragraph 2].
[6] The Appellant
did not withhold or remit any amounts to the Canada Customs and
Revenue Agency (the "CCRA") with respect to the
One-Time License Fee [paragraph 1].
[7] The
Appellant's application was successful, and the Holiday Inn
Hinton commenced operations on November 11, 1999 [paragraph
1].
[8] As part of its
franchise agreement with Franchising Inc., the Appellant is
required to pay Franchising Inc. franchise fees (the
"Franchise Fees") calculated as 10% of the Holiday Inn
Hinton's monthly room sales [paragraph 1].
[9] The Franchise
Fees are paid approximately every month and the Appellant has
always withheld and remitted to the CCRA, 10% of the amounts paid
to Franchising Inc. pursuant to paragraph 212(1)(d) and
subsection 215(1) of the Income Tax Act (Canada) (the
"Act") and Article XII of the Canada-U.S. Tax
Convention (the "Treaty") by the 15th day of
the month following the month of payment [paragraph 1].
[10] By Non-Resident Notice of
Assessment No. 6200958 (the "1998 Assessment") dated
December 12, 2002, the Minister of National Revenue (the
"Minister") assessed the Appellant for its taxation
year ended December 31, 1998 for non-resident tax of $7,871.76
(the "1998 Assessment Amount") [paragraph 1].
[11] The 1998 Assessment also
included "Failure to Deduct" penalties of $787.17 and
interest of $3,491.60 [paragraph 1].
[12] In arriving at the 1998
Assessment Amount, the Minister took the position that the
One-Time License Fee was a "rent, royalty or similar
amount" and therefore subject to a 10% withholding tax
pursuant to paragraph 212(1)(d) and subsection 215(1) of the Act
and Article XII of the Treaty [paragraph 1].
...
[3] The following facts were also
established:
6. The
Appellant obtained its license to operate the Holiday Inn Hinton
as follows:
(a) On August 4,
1998, the Appellant applied to Franchising Inc. to obtain a
license for the purpose of operating a Holiday Inn (the
"Application"). Franchising Inc. knew of the Appellant
since the Appellant had applied for, and obtained a Holiday Inn
franchise in 1994 for property owned in south Edmonton,
Alberta.
(b) An
"Application Letter", included at page 16 of the
Application, indicates that the Appellant acknowledged and agreed
with Franchising Inc., on the following points:
(i) that the
Appellant would execute and comply with the License Agreement if
the Application was approved [paragraph 3];
(ii) that
Franchising Inc. did not enter into oral agreements with respect
to licenses or matters pertaining to licenses, that any proposed
license would come into affect only upon the execution of the
License Agreement, and that there were no oral agreements between
the Appellant and Franchising Inc. with respect to any proposed
license [paragraphs 4(a) and 4(c)];
(iii) that an
"Application Fee" (the One-Time License Fee) had been
paid to Franchising Inc. to be used at the discretion of
[Franchising] Inc. subject to a refund only if the Application
was refused, less an "Application Processing Fee" which
would not be refunded [paragraph 4(e)]; and
(iv) Franchising Inc. had
no liability to the Appellant under the Application other than to
return the Application Fee less the "Application Processing
Fee" [paragraph 4(f)].
(c) ...
(d) After receiving
the Application during August [of] 1998, Franchising Inc.
conducted an inspection of the then "Greentree Inn"
pursuant to its Property Improvement Program ("PIP").
The purpose of the PIP was to ensure that a particular property
satisfied the standards of Franchising Inc. In particular, the
PIP identified "deficiencies" or other areas where the
existing hotel was required to upgrade its property or
services.
(e) During the
course of the PIP, the Appellant and Franchising Inc. negotiated
the requested upgrades. After the PIP was completed, the
Appellant was presented with the PIP report and could either have
accepted the terms of the PIP and continued with the application
process, or could have rejected the PIP and stopped the process
altogether. The Appellant decided to continue with the
application process.
(f) After
reviewing and accepting the PIP report, the Appellant forwarded
its acceptance of the PIP report to Franchising Inc. together
with payment of the One-Time License Fee of $52,000 USD
($78,717.60 CDN.). The Appellant understood that Franchising Inc.
was entitled to retain the One-Time License Fee immediately upon
receipt, subject only to rejecting the Application. In that
event, a portion of the One-Time License Fee would be refunded to
the Appellant.
(g) Upon receiving
the One-Time License Fee, a committee of Franchising Inc. (the
"Franchise Committee") considered the Application. The
role of the Franchise Committee was as follows:
(i) to review
the PIP report which had been negotiated between the parties, and
to further determine whether Franchising Inc. was prepared to
grant the Appellant a waiver with respect to any of Franchising
Inc.'s standards;
(ii) to review the
Appellant to determine whether the Appellant was capable of
operating a Holiday Inn Franchise; and
(iii) to examine the
location of the proposed Holiday Inn hotel and determine whether
granting the franchise would adversely affect any existing
Holiday Inns. In particular, Franchising Inc. would solicit and
review comments or "objections" from existing
franchisees.
(h) The Franchise
Committee then advised the Appellant that the Appellant's
Application had been accepted.
(i) After the
Application was accepted, the Appellant and Franchising Inc.
negotiated and entered into a "Holiday Inn Conversion
License Agreement" (the "License Agreement") dated
September 30, 1998.
7. The
provisions of the License Agreement which are relevant to this
Appeal included the following:
(a) Grant of
License (Article 2) - "Licensor hereby grants to
Licensee a non-exclusive license to use the System only at the
Hotel, but only in accordance with this License and only during
the "License Term" beginning with the date hereof and
terminating under paragraph 12 hereof."...
(b) Fees (Article
3.C.1, as amended) - "For each month (or part of a
month) during the License Term, Licensee will pay to Licensor by
the 15th of the following month:
(i) a royalty
of 4.5%, of the Gross Rooms Revenue attributable to or payable
for rental of guest rooms at the Hotel with deduction for sales
and room taxes only ("Gross Rooms Revenue")...
(ii) a
"Services Contribution" equal to 2.5% of Gross Rooms
Revenue to be used by Licensor for marketing, reservations, and
other related activities which, in Licensor's sole business
judgment as to the long-term interests of the System support
marketing, reservations and other related functions. Costs which
a Licensee incurs in the acquisition, installation or maintenance
of reservations services, equipment or training, or in its own
marketing activities, do not constitute payment of the
"Services Contribution"...
(iii) a monthly
Reservations System Fee of $6.43 for each guest room at the Hotel
plus such increases as Licensor may judge reasonable;
(iv) all fee due for
Travel Agent Commission Programs and Hotel Marketing Association
and Field Marketing Co-op Programs attributable to the Hotel; and
but in no case exceeding in any calendar year 10% of the fee in
effect at the beginning of that year; and
(v) an amount equal
to any sales, gross receipts or similar tax imposed on Licensor
and calculated solely on payments required hereunder, unless the
tax is an optional alternative to an income tax otherwise payable
by Licensor.
Licensee will operate the Hotel so as to maximize gross rooms
revenues of the Hotel consistent with sound marketing and
industry practice and will not engage in any conduct which
reduces gross rooms revenues of the Hotel in order to further
other business activities."
(c) Fees (Article
3.C.2) - "A standard initial fee as set forth in
Licensor's then current Offering Circular for Prospective
Franchisees will be charged upon application for any guest rooms
to be added to the Hotel."
(d) Fees (Article
3.C.5) - "Each payment under this paragraph 3.C, except
the standard initial fee, shall be accompanied by the monthly
statement referred to in paragraph 8.A...."
(e) Change of
Ownership ...
(f) Change
of Ownership ...
(g) Payment of
Liquidated Damages ...
(h) Performance
of Work ...
...
Appellant's Written Submissions
[4] Counsel for the Appellants
submitted several arguments. In my opinion the most relevant are
found at paragraphs 19 and following of counsel's Written
Submissions. These paragraphs read as follows:
...
19. If it is accepted that
paragraph 212(1)(d) is not to be given an expansive reading, then
it is submitted that the Minister's assessment must fail
because the One-Time License Fee does not fall within any
accepted definition of "rent" or "royalty".
In H.M.Q. v. Saint John Shipbuilding, the Federal Court of
Appeal held that a fee paid for the indefinite and unrestricted
use of tapes containing technical data, including user and
programming manuals, was not either rent or a royalty. The same
conclusion was reached in Farmparts on this narrow
issue.
H.M.Q. v. Saint John Shipbuilding, 1980 CarswellNat
257, [1980] C.T.C. 352 (F.C.A.), paragraphs 14 and 15, Tab 9.
H.M.Q. v. Farmparts Distributing Ltd., paragraphs 23
and the cases cited therein, Tab 2
20. To conclude on this
point, we adopt the reasoning of Duncan Osborne in his article
"Revisiting Royalties in the Age of Electronic
Commerce" where, at page 440 he makes the following
comments with respect to the Canada Revenue Agency's policy
on lump sum "royalties", which parallel the comments
made by the Federal Court of Appeal in Farmparts, discussed
above:
Revenue Canada's administrative position is that the
opening words "including, but not so as to restrict the
generality of the foregoing, any payment" has the effect of
bringing within the scope of the provision any payment described
in subparagraphs 212(1)(d)(i) through (v), which need not be a
rent, royalty, or similar payment. In effect, Revenue Canada
extends the application of subparagraphs 212(1)(d)(i) to include
any payment, including a single or lump-sum payment, for the
right to use, in Canada, any property, etc., whether or not the
amount would be considered a rent, royalty, or similar
payment.
This interpretation cannot possibly be correct. If any payment
for the use of, or the right to use, property is subject to
withholding under subparagraph 212(1)(d)(i), there is no purpose
behind the inclusion of the words "rent, royalty or similar
payment." Furthermore, the language of the provision does
not support Revenue Canada's interpretation. The words
"including, but not so as to restrict the generality of the
foregoing, any payment" suggest that the payments in
subparagraph 212(1)(d)(i) cannot be broader than those implied by
the opening words. Revenue Canada's interpretation has the
opposite result [footnotes omitted].
Revisiting Royalties in the Age of Electronic Commerce,
(supra), page 440, Tab 4
The Use Of, Or The Right to Use, Any Property -
Subparagraph 12(1)(d)(i)
21. If this Court
concludes that the One-Time License Fee is not a payment in the
nature of rent, royalty or similar payment for the purposes of
paragraph 212(1)(d), but also concludes that the payment is in
respect of "any property, invention, trade-name, patent,
trade-mark, design or model, plan, secret formula, process or
other thing whatever", for the purposes of subparagraph
212(1)(d)(i), then it is submitted that the One-Time License Fee
was not paid by the Appellant "for the use of or for the
right to use in Canada" the property set out above.
22. The One-Time License
Fee was made solely for the purpose of satisfying the Application
requirements of Franchising Inc. The only act that Franchising
Inc. was required to perform to earn the Fee was to accept the
Appellant as a franchisee. After accepting the Application and
thus receiving the legal entitlement to retain the Application
fee, Franchising Inc. and the Appellant were free to enter into
the License Agreement which would establish further legal
relations.
23. The License Agreement
sets out all of the terms which govern the relationship between
the Appellant and Franchising Inc. In return for the know-how and
other services that Franchising Inc. was to provide to the
Appellant, the Appellant agreed to pay a fee based upon, for the
most part, its sales from carrying on the hotel business.
24. It is submitted that
no portion of the One-Time License Fee was paid for any of the
services or rights to use Franchising Inc.'s property, all of
which was governed by the License Agreement.
25. In Brad-Lea Meadows
Ltd. v. M.N.R., the Tax Court of Canada found that a one-time
"affiliation fee", paid to offset the cost of certain
services provided by the franchisor to new franchisees such as
training, advertising, design and other matters, was not a
"royalty" because it was made up of many things,
including "fees for services". At paragraph 16, the
Court stated:
Counsel for the Minister stressed the words "any
payment" but one must read these words in conjunction with
the words that follow: "for the use of or for the right to
use in Canada etc.". Many of the items described in the fee
paid do not involve any "use" but are services which
the taxpayer may or may not take advantage of as needed or
wanted. Thus the so-called package does not consist of
all-inclusive items contemplated by subparagraph 212(1)(d)(i).
The result is that because no separation was made the taxpayer
must succeed. There is no need for the Court to decide what
items, if any, could be considered as royalty payments.
Brad-Lea Meadows Ltd. v. M.N.R., 1990 CarswellNat 285,
[1990] 1 C.T.C. 2306 (T.C.C.), paragraph 16, Tab 10
26. The issue in
Brad-Lae Meadows Ltd. was whether a payment for services
constituted a payment for the "right to use" property.
The Tax Court found that such a payment did not satisfy the test.
Likewise, it is submitted that before a payment can be said to be
"for the use of or the right to use... any property...or
other thing whatever", there must either be a
property of the non-resident which is capable of being
used by the resident in any particular case, or there must be
property over which the resident has a right of use.
27. The One-Time License
Fee was not paid for the "use" of any property since
there was neither property of the non-resident Franchising Inc.
that was being used by the Appellant at the time of the
Application, nor was there any property over which the Appellant
had a right of use.
28. The Appellant's
rights to use the Franchisor's property arose only after the
License Agreement was executed and only after all of the
Appellant's obligations under the License Agreement had been
satisfied or were to be satisfied within a stipulated period of
time. In particular, paragraphs 4(a) to (c) of the Application
and paragraph 14(I) of the License Agreement make it clear that
the ability to operate as a Holiday Inn is expressly reliant upon
execution of the License Agreement and performance of the
"Work", as defined.
29. As a result of the
above, it is submitted that no part of the One-Time License Fee
was paid for the use of, or right to use any property, and that
subparagraph 212(1)(d)(i) does not apply to tax the One-time
License Fee.
...
Respondent's Written Submissions
[5] The Respondent's Written
Submissions after reviewing the facts which generally are not in
dispute read as follows:
...
D.
Argument
I. The
Payment was an Initial Franchise Fee for the purposes of
obtaining a license
21. The Franchise Fee was
the consideration paid to obtain the Franchise Agreement. The
Franchise Agreement grants the right to use items enumerated in
s. 212(1)(d). As such, the payment is subject to withholding
pursuant to s. 215(1).
22. The Ontario Disclosure
document clearly indicates that the Fee is treated by the
Franchisor as an initial Franchise Fee.
23. The Franchisor is
required by the Alberta Franchises Act to disclose the Initial
Franchise Fee and Other Fees. The Franchisor specifically
discloses this payment as being such a payment along with the 5%
Royalty fee.
Tab 2, Schedule 1, para 7
Disclosure Document, Exhibit 2, pg.7
24. The Franchisor is also
required to disclose his financial statements. The filed
Statement of Income indicates that "Initial Franchise
Fees" are reported as revenues". The Summary of
Significant Accounting Policies clearly indicates that these
"initial franchise fees are recognized as income when the
franchise agreements are executed...[and] until that time, any
initial fees received...[are held] as deposits". If there
was an ongoing "service" component to the initial fee,
the initial payment would not have been recognized as income in
1999, only the part that related to aspects of the contract that
had been performed. The part of the payment that related to the
future provision of services would have been credited to the
unearned revenue account of the Franchisor.
Tab 2, Schedule 1, para. 21
Exhibit 2, Exhibit B-6 & B-10
25. It is also important
to note that had the initial fee been simply an application fee
then it would have been recognized as income in 1998 when it was
received by the Franchisor. There would be no need to defer its
recognition as revenue until 1999.
26. Further, the
Franchisor clearly indicates the purpose of the fee is "for
standard Licence". The Franchisor also sets out separately
the fees for the services provided by the Franchisee.
Disclosure Document, Exhibit C-1 and pages 8-11
27. The Franchisee
attached the licence Agreement which clearly indicates that it is
for the purpose of the matters enumerated in subparagraph
212(1)(d)(i). For example the licence Agreement states:
a.
"Licensee desires to enter into this Licence in order to
obtain a licence to use the System in the operation of the
specific brand of hotel..."
b.
"Licensor hereby grants to the Licensee a non-exclusive
licence to use the System" and which defines the
"System"
c. "The
System is composed of all elements which are designed to identify
Holiday Inn hotels .....and all elements which identify or
reflect the quality standards and business practices of such
hotels,....the trade-marks.."
Disclosure Document, Exhibit G-5 & G-6
28. The initial payment is
excessive to cover administrative costs in connection with
processing a licence application. It is also questionable that
the fee represents an application fee considering the method (by
reference to the number of rooms) used to calculate the amount,
and how the amount varies depending on the type of hotel
franchise acquired with a stipulated minimum amount and the fact
the Franchise Fee is refundable.
29. The Licence
application indicates that the "Application Fee" is
returned if withdrawn or refused less the "Application
Processing Fee for expenses incurred by HHFI, as solely
determined by HHFI, in processing the
Application".
Appellant's Document, Licence Application para 4(e)
II.
Payment Included by Operation of Statute - s. 212(1)(d), s.
212(1)(d)(i)
30. A review of the
structure of paragraph 212(1)(d), shows a clear intention by
parliament to, through the operation of the statute,
include the items enumerated from (i) to (v) and to
exclude the items from (vi) to (xi) by definition
in the meaning of rent, royalty or similar payment.
The Queen v. Farmparts Distributing Ltd. (Respondent)
[1980] 2 F.C. 206 (F.C.A.) @ para 9 and para 11.
Hasbro CanadaInv. v.
Canada[1998] T.C.J. No. 948 @ para 16, 1998
CarswellNat 2082 @ 18 (Appellant's Cases) The Queen v.
Saint John Shipbuilding & Dry Dock Co. Ltd. 80 D.T.C.
6272(FCA) @ 6274
31. Paragraph 212(1)(d)
should be interpreted broadly. In United Geophysical
Thurlow J. commented in his decision:
It is, I think, apparent from the use in the section of the
wording which follows the words "rent" or
"royalty" that Parliament did not intend to limit the
type of income referred to in the subsection to either what could
strictly be called "rent" or "royalty"...It
seems to me, therefore, that [paragraph 212(1)(d)] includes any
payment which is similar to rent but which is payable in respect
of personal property.
32. In Farmparts
the Federal Court of Appeal agreed with the Crown's position
that the 1968 amendment to the section widened paragraph
212(1)(d). Now such a payment, whether single or lump-sum, is
subject to the charge of the section, whether or not it falls
within the categories of rent, royalty or a similar payment. This
is because of the words immediately following the introductory
words in paragraph 212(1)(d), namely, "...including, but not
so as to restrict the generality of the foregoing, any
payment."
The Queen v. Farmparts Distributing Ltd. (Respondent)
[1980] 2 F.C. 206 (F.C.A.) @ paras 10-12.
33. The OECD Model Tax
Convention on Income and Capital commentary on Article 12
clearly reflects that franchise fees are the type of payment
caught by the royalties' article.
OECD, OECD Model Tax Convention on Income and Capital,
Commentary on Article 12 Concerning the Taxation of Royalties,
para 11.6
34. Further, while the
Canada-US Income Tax Treaty specifically excludes from
withholding tax payments for the use of, or the right to use, any
patent or any information concerning industrial, commercial or
scientific experience, the treaty makes it clear that this
exclusion does not apply to any such information provided in
connection with a franchise agreement.
III. Lump sum
payments are contemplated by section 212(1)(d)
35. It is not relevant
whether or not the payment in issue is based on use or profits or
is periodic. It only matters that it is a payment included in (i)
through (v) and not excluded by paragraphs (vi) to (xi).
Queen v. Farmparts Distributing Ltd. 80 DTC 6157
(FCA)
36. In Vauban
Productions, the taxpayer paid a fixed flat amount per film for
distributorship rights irregardless of use. The court held that
because all of the rights had not been transferred, the payments
constituted lease payments and were subject to withholding tax.
The facts are directly comparable here.
Vauban v. R. [1975] C.T.C. 5111 (Fed T.D.); affirmed
[1979 C.T.C. 262 (Fed. C.A.)
37. Further, in
Drydock, the Federal Court of Appeal held that a rental or
royalty payment can be subject to withholding tax even if it is a
lump-sum amount provided that the payment is not for the use of
the property for an indefinite period. In this case, paragraph 12
of the Licence Agreement sets out a fixed term.
Disclosure Document, page G-27
The Queen v. Saint John Shipbuilding & Dry
Dock Co. Ltd.,[1981] 1 F.C. 334 (F.C.A.)
IV. Divisibility of the fee
38. In some cases the
courts have held that there is an onus on the Minister to
separate out elements of the payment that are for non-property
items, e.g. services, which are not subject to withholding
tax.
Queen v. Farmparts Distributing Ltd. 80 DTC 6157
(FCA)
39. In the present case,
however, the service elements of the Franchise Agreement are paid
for separately and are not included in the initial payment that
is at issue. In Farmparts the payment was primarily for
services. Further, in Farmparts the fee was not calculated
in reference to volume. It was a fixed fee. In the present case,
the fee is a per room fee.
Disclosure Document, page 8
40. It is clear that the
initial payment is just for the standard Licence.
Disclosure Document, Exhibit C-1
41. It is also clear that
the initial payment is not a straight application fee in that the
payment per room is reduced if the licence period is only 25-60
months. Further, the amount, less an administrative fee, is
refunded if the application is not accepted.
Disclosure Document, pages 7-8
42. It is further
submitted that even if there were service elements embedded in
the initial payment, which is denied, it is established
international law that with respect to franchise agreements, in
the royalty context, if one part of what is being provided
constitutes the principal purpose of the contract and the other
parts are only ancillary and largely unimportant, then the
treatment applicable to the principal part should generally be
applied to the whole amount of the compensation - there is no
need to apportion.
OECD, OECD Model Tax Convention on Income and
Capital,Commentary on Article 12 Concerning the Taxation of
Royalties, para 11.6
43. In any event, it is
not possible to separate the property elements of the initial fee
from the non-property elements, as the Appellant did not provide
the auditor or appeals officer with any information regarding the
purpose of the fee. The Amended Notice of Appeal also does not
raise any facts or issues relating to non-taxable uses of part of
the payment. It specifically identifies the argument as being
that the payment "was not in any way for the purposes
of paragraph 212(d)(i)".
Analysis and Conclusion
[6] In my opinion the submissions of
counsel for the Appellant are correct. The Application fee or
initial licence fee does not partake of the nature of a rent or
royalty or similar payment. A fee paid at the time of an
application for a franchise as opposed to a payment made after a
franchise has been granted, as in the present case after the
franchise was granted certain royalties were paid and these were
subject to the 10% withholding tax. In essence the application
fee is not a rent or royalty but rather some form of compensation
to Franchising Inc. to compensate it for the extensive PIP
review, detailed above. In other words considerable time and
effort and presumably monies were expended in analyzing the
situation of the applicant and only after that an analysis was
conclusive of allowing the granting of a licence, was the licence
actually granted and the on-going relationship between the
Holiday Inn and the Appellant began. The application fee was
simply that, an application fee, an initial fee, definitely not a
rent or royalty.
[7] I am also satisfied that the
position of counsel for the Appellant with respect to
subparagraph 212(1)(d)(i) is correct.
[8] For all of the above Reasons the
appeal is allowed with costs.
Signed at Ottawa, Canada, this 27th day of July, 2004.
O'Connor, J.
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