Dussault
J.T.C.C.:
-
These
appeals
are
from
four
different
assessments,
the
notices
of
which,
for
the
appellant’s
1989
taxation
year,
are
number
A186999
dated
December
7,
1990,
and
number
B200744
dated
March
10,
1993,
and
for
the
appellant’s
1990
taxation
year,
numbers
B136493
and
Bl36497
dated
June
17,
1991.
Issue
As
stated
in
section
10
of
the
Reply
to
the
Notice
of
Appeal,
the
only
issue
is
“to
determine
whether
the
cost
mark-up
provided
for
in
the
Appellant’s
franchise
contract
with
its
Franchisees
in
Canada
is
a
payment
to
which
section
212(l)d)
of
the
Income
Tax
Act,
applies”.
The
assumptions
of
fact
made
by
the
Minister
of
National
Revenue
(the
“Minister”)
in
issuing
these
assessments,
as
stated
in
paragraphs
a)
to
h)
of
section
9
of
the
Reply
to
the
Notice
of
Appeal,
are
as
follows:
a)
prior
to
1989,
Entré
Computer
(the
franchisor)
entered
into
a
written
franchise
agreement
(the
original
franchise
agreement)
with
its
Franchisees
in
Canada;
b)
section
IV)A)3)
of
the
original
franchise
agreement
provided
as
follows:
IV.
FEES
A.
In
consideration
of
the
franchise
granted
herein,
Franchisee
shall
pay
to
Franchisor
the
following
fees:
(...)
3.
A
continuing
monthly
royalty
fee
during
the
term
of
this
Agreement
in
an
amount
equal
to
eight
percent
(8
per
cent)
of
Franchisee’s
gross
sales,
as
defined
herein,
of
all
products
and
services
related
to
the
franchised
business.
c)
effective
April
1,
1989,
the
Franchisor
and
Canadian
Franchisees
amended
the
original
franchise
agreement;
d)
section
E
of
the
recitals
portion
of
the
amended
franchise
agreement
reads
as
follows:
RECITALS
(.
.
.)
E.
The
parties,
in
general,
wish
this
revised
commercial
relationship
between
them
to
reflect
three
principal
elements:
(i)
Continued
ability
by
Franchisee
to
use
the
Proprietary
Marks
(as
defined
in
the
Franchise
Agreement)
in
connection
with
Franchisee’s
Entré
Computer
Center
at
the
Center
Location,
as
currently
provided
by
the
Franchise
Agreement;
(ii)
An
opportunity
on
the
part
of
Franchisee
to
purchase
personal
computer
hardware
and
software
products
(herein
called
“Product”)
as
carried
by
Entré
or
its
parent
company,
Intelligent
Electronics,
Inc.
at
Product
Cost
(as
defined
in
this
Amendment)
plus
a
percentage
markup,
which
percentage
mark-up
shall
be
deemed
a
license
fee
for
use
of
the
Proprietary
Marks,
plus
outbound
freight
or
transportation
costs;
and
(iii)
An
opportunity
on
the
part
of
Franchisee
to
obtain
such
services
as
Entré
from
time
to
time
may
offer,
on
an
a
la
carte
or
fee-for-service
basis.
e)
section
2)a)
of
the
amendment
portion
of
the
amending
franchise
agreement
provided
as
follows:
AMENDMENT
NOW
THEREFORE,
for
good
and
valuable
consideration,
the
receipt
of
which
is
acknowledged,
the
parties
agree
to
amend
and
modify
the
Franchise
Agreement
as
follows:
(...)
2.
“Cost-Plus”
Agreement
a.
Deletion
of
Royalty
Section
IV.A.3
of
the
Franchise
Agreement,
which
provides
for
the
payment
of
Royalty,
is
deleted
from
the
Franchise
Agreement.
f)
section
2)c)
of
the
amendment
portion
of
the
amending
franchise
agreement
also
added
section
IV)F)
to
the
original
agreement
and
reads
as
follows:
c.
Addition
of
Provisions
Describing
“Cost-Plus”
Section
IV
of
the
Franchise
Agreement
is
amended
to
add
the
following
new
Paragraphs
F.
through
J.:
F.
Product
Purchases
—
To
Be
Invoiced
at
Product
Cost
Plus
Mark-Up
Plus
Freight
Costs.
Franchisee’s
purchases
of
Product
from
Entré,
or
from
Entré’s
parent
company
IE,
as
the
case
may
be,
will
be
invoiced
to
Franchisee
on
the
following
basis:
(i)
The
Product
invoice
will
reflect
the
Product
Cost
(as
hereinbelow
defined)
of
the
Product(s)
being
invoiced;
to
which
will
be
added
(ii)
a
percentage
mark-up
applied
to
the
Product
Cost
(the
“License
Fee
Mark-
Up”
or
“Mark-Up”),
determined
in
accordance
with
Entré’s
Mark-Up
Schedule
and
the
policies
and
procedures
pertaining
thereto,
as
such
may
be
established
and
published
from
time
to
time,
which
Mark-Up
shall
be
deemed
and
considered
a
license
fee
charged
for
the
license
granted
by
the
Franchise
Agreement
to
Franchisee
to
use
the
Proprietary
Marks
in
connection
with
Franchisee’s
operation
of
an
Entré
Computer
Center
at
the
Center
Location.
In
addition
to
being
responsible
for
paying
the
Product
Cost
and
the
Mark-
Up,
Franchisee
will
also
be
responsible
for
paying
the
costs
of
shipping
the
Product
to
Franchisee’s
Centre
Location
or
other
designated
delivery
point,
the
cost
of
insuring
the
Product
while
in
transit
and
other
outgoing
transportation-related
costs
(herein
collectively
called
“Freight
Costs”).
g)
the
tax
levied
by
the
assessments
represents
10
per
cent
of
the
cost
mark-up
received
by
the
Appellant
(which
is
a
non
resident
of
Canada)
in
1989
and
1990
from
two
of
its
Canadian
Franchisees
namely
from
592351
Ontario
Limited
(also
known
as
the
“Cal
Jones”
franchise
situated
at
155
University
Avenue
in
Toronto)
and
from
Renaissance
Investments
Ltd.
(also
known
as
the
“Renaissance”
franchise
situated
at
118
Eglington
Avenue
West
in
Toronto);
h)
the
above
mentioned
mark-up
is
a
rent,
royalty
or
similar
payment
for
the
use
of
or
for
the
right
to
use
in
Canada
any
property,
invention,
trade
name,
patent,
trade
mark,
design
or
model,
plan,
secret,
formula,
process
or
other
thing
whatever.
The
appellant
claims
that
the
mark-up
is
essentially
part
of
the
purchase
price
despite
the
deeming
clause
in
the
amendment
to
the
original
franchise
agreement,
so
that
paragraph
212(
1
)(d)
of
the
Income
Tax
Act
(the
“Act”)
would
be
inapplicable
to
the
payments
made
by
its
Canadian
franchisees.
The
respondent
contends
that
the
mark-up
is
precisely
what
it
is
called
in
the
amendment,
namely
a
“license
fee”
so
that
the
payments
made
were
subject
to
the
Part
XIII
tax
on
non-resident
persons
as
provided
for
in
paragraph
212(1)(d)
of
the
Act.
Summary
of
Evidence
By
agreement,
counsel
for
both
parties
filed
a
book
of
evidence
containing
the
original
franchise
agreement
and
the
amendment
as
well
as
various
memoranda
and
letters
by
officers
and
employees
of
the
appellant,
Entré
Computer
Centers
Inc.
(“Entré”),
and
its
parent
company,
Intelligent
Electronics
Inc.
(“IE”),
concerning
the
mark-up
system
implemented
by
Entré
and
its
franchisees
after
IE
gained
control
of
Entré
in
December
1988.
Two
witnesses
testified
on
behalf
of
the
appellant,
Mr.
Edward
Meltzer,
former
treasurer
of
Entré
and
subsequently
treasurer
of
IE,
and
Mr.
Alex
Mile,
who
in
the
years
in
issue
operated
with
his
wife
an
Entré
franchised
computer
store
in
Toronto.
Mr.
Meltzer
first
testified
on
Entré
operations
before
the
takeover
by
IE.
Prior
to
the
takeover,
Entré,
a
United
States
public
company
with
its
headquarters
in
northern
Virginia,
had
sold
some
200
franchises
for
computer
products
retail
stores,
10
of
which
were
in
Canada.
Typically,
franchises
granted
by
Entré
would
be
start-up
operations
and
the
franchisee
would
have
had
no
previous
experience.
Entré
would
provide
initial
training
for
the
franchisee
and
his
staff
regarding
the
operation
of
the
store,
supply
technical
support
with
respect
to
the
equipment
and
hire
a
field
sales
team
to
help
the
franchisee
with
various
aspects
of
his
operations.
The
original
franchise
agreement
provided
that
the
following
fees
were
payable
by
the
franchisee
to
Entre:
—
An
Initial
Franchise
Fee
of
$30,000
US.
—
A
Store
Design
and
Implementation
Package
Fee
of
$10,000
US.
This
fee
was
payable
to
ensure
that
all
Entré’s
franchised
stores
had
a
uniform
design
so
as
to
create
a
national
image.
—
An
Ongoing
Royalty
of
8
per
cent
of
gross
sales
exclusive
of
sales
tax.
This
fee
was
charged
on
all
goods
and
services
sold
by
the
franchisee
whether
or
not
they
had
been
obtained
from
Entré.
The
royalty
would
also
apply
to
services
and
training
designed
and
provided
by
the
franchisee
for
its
own
customers.
Mr.
Meltzer
stated
that
about
15
per
cent
of
the
franchisee’s
sales
were
of
products
obtained
from
other
suppliers
as
there
was
no
restriction
or
limitation
in
that
regard.
He
also
said
that
the
8
per
cent
royalty
was
meant
to
cover
all
the
services
rendered
by
Entré
to
its
franchisee
by
way
of
training
and
technical
support
as
well
as
advice
provided
by
the
members
of
the
field
team
who
were
constantly
visiting
franchisees.
-
An
Advertising
Fee
of
one
per
cent
of
gross
sales
to
maintain
a
national
advertising
fund
to
promote
Entré’s
name.
In
fact,
two
separate
funds
were
maintained
one
for
the
United
States
and
one
for
Canada.
Mr.
Meltzer
testified
that
near
the
time
of
the
takeover
by
IE
in
December
1988
the
franchisees
were
generally
dissatisfied
with
the
agreement
in
that
they
felt
then
that
they
had
learned
about
the
computer
retail
business
and
that
they
no
longer
wanted
to
pay
for
services
they
no
longer
needed.
They
wanted
only
a
reliable
supplier.
In
essence,
they
wanted
to
replace
the
8
per
cent
royalty
that
covered
all
the
services
rendered
by
Entré
with
a
system
consisting
of
a
specific
fee
for
each
service
whereby
they
would
pay
on
an
“à
la
carte”
basis
and
only
for
what
they
wanted.
Moreover,
they
felt
that
they
should
not
have
been
obligated
to
pay
a
royalty
on
sales
of
goods
supplied
to
them
by
third
parties
or
on
services,
such
as
consulting,
they
themselves
designed
and
provided
for
their
own
customers.
At
the
time
of
the
takeover
IE
was
located
in
Pennsylvania.
It
operated
as
a
distributor
of
computer
products
to
stores
called
Today’s
Computers
Business
Centers
(“TCBC”).
Essentially,
IE
was
in
the
same
business
as
Entré.
But,
unlike
Entré,
it
was
not
providing
any
services
for
the
TCBC
stores
and
there
was
no
royalty
payable
to
IE
on
the
stores’
sales.
IE
was
buying
products
in
large
quantities,
obtaining
discounts
that
individual
dealers
could
not
get.
It
was
reselling
those
products
to
the
stores
strictly
on
a
straight
sale
basis
at
cost
plus
a
mark-up.
After
the
takeover
of
Entré
by
IE
in
December
1988,
the
operations
of
the
two
companies
were
consolidated
in
Pennsylvania.
In
January
1989,
at
the
annual
convention
of
Entré’s
franchisees,
Mr.
Richard
D.
Sanford,
then
Chairman
of
the
Board
and
Chief
Executive
Officer
of
IE
announced,
without
going
into
details,
that
he
intended
to
abandon
Entré’s
royalty
system
and
replace
it
by
a
cost-plus
or
a
mark-up
system
and
that
a
task
force
comprising
employees
of
both
companies
as
well
as
representatives
of
the
franchisees
would
be
formed
to
work
out
the
details
of
implementation.
Mr.
Meltzer
as
well
as
Mr.
Alex
Mile,
who
was
acting
as
a
representative
of
the
Canadian
franchisees,
were
members
of
the
task
force.
Many
issues
had
to
be
dealt
with
in
order
to
finalize
the
change.
One
issue
was
whether
the
new
fee
based
on
the
purchase
of
products
would
be
a
flat
fee,
i.e.
one
set
at
the
same
rate
for
everybody,
or
a
sliding
scale
fee,
i.e.
one
based
on
volume
and
decreasing
as
volume
increased,
as
it
in
fact
turned
out
to
be.
Moreover,
the
appropriate
percentage
had
to
be
determined.
Another
concern
had
to
do
with
the
value
of
Entré’s
name
and
whether
or
not
the
advertising
fund
was
to
be
maintained
to
finance
national
advertising.
Mr.
Meltzer
said
that
the
franchisees
were
really
divided
on
that
issue.
Another
issue
was
the
credit
that
Entré
had
provided
for
its
franchisees
but
that
IE
had
not
provided
for
the
TCBC
dealers.
Other
questions
discussed
included
the
proper
treatment
of
freight
costs
in
the
new
cost-plus
or
mark-up
system,
the
continuation
of
technical
services,
training
and
marketing
programs,
and
the
fees
that
would
be
payable
for
same.
After
lengthy
discussions,
the
implementation
of
the
new
system
or
program
was
announced
on
April
10,
1989
and
was
to
apply
retroactively
to
April
1,
1989.
It
was
patterned
on
the
system
IE
already
had
with
the
TCBC
dealers
but
included
certain
aspects
of
the
agreement
between
Entré
and
its
franchisees.
The
“best
of
both
worlds”,
as
commented
by
Mr.
Bill
Alvis,
President
of
the
Reseller
Division
of
IE,
in
making
the
announcement.
The
main
features
of
the
new
system
were
the
following:
-
The
eight
per
cent
royalty
on
gross
sales
was
eliminated.
-
The
one
per
cent
advertising
fee
was
eliminated.
-
Training
and
other
support
services
were
retained
but
the
franchisees
had
to
pay
only
for
those
they
chose
to
take
advantage
of
on
an
“à
la
carte”
basis.
—
The
price
charged
to
franchisees
for
products
depended
on
the
volume
purchased
on
a
monthly
basis
with
a
mark-up
over
cost
(exclusive
of
freight
cost
to
the
franchisees),
varying
from
a
high
of
8.7
per
cent
to
a
low
of
4.95
per
cent
with
12
different
brackets.
Franchisees
were
also
responsible
for
freight
costs.
The
new
system
was
designed
to
be
on
average
20
per
cent
less
costly
to
Entré’s
dealers
than
the
royalty
system
had
been.
It
would
entail
an
average
mark-up
of
7.4
per
cent
while
the
royalty
system
was
estimated
to
have
been
the
equivalent
of
an
average
mark-up
of
9.32
per
cent
when
one
takes
into
account
not
only
the
8
per
cent
royalty
but
also
the
handling
fee
formerly
charged
to
franchisees
as
well
as
the
1
per
cent
advertising
fee.
The
Entré
dealers
could
choose
to
operate
under
the
royalty
system
or
change
to
the
new
cost-plus
system.
All
of
them,
including
the
Canadian
franchisees,
made
the
change.
Before
implementation,
much
thought
had
been
given
to
the
pricing
scheme.
According
to
Mr.
Meltzer,
counsel
for
Entré,
Mr.
Peter
Johnsen,
was
concerned
with
the
application
of
the
Robinson
Patman
Act,
which
is
an
American
legislation
prohibiting
discriminatory
pricing
practices
in
sales
of
commodities
unless
they
can
be
justified
by
a
cost
differential
for
different
purchasers.
Violation
of
this
anti-trust
legislation
could
entail
not
only
criminal
proceedings
but
also
civil
liability
as
it
provides
for
a
private
right
of
action
for
treble
damages.
As
the
legislation
apparently
applies
only
to
sales
of
goods
and
not
to
licence
fees
or
royalties,
Mr.
Johnsen
urged
as
one
potential
line
of
defence
that
the
mark-up
be
deemed
a
licence
fee
in
the
amendment
to
the
agreement
between
Entré
and
its
franchisees.
According
to
Mr.
Meltzer,
this
is
the
reason
why
the
original
franchise
agreement
was
amended
the
way
it
was.
The
same
concern
also
led
Mr.
Johnsen
to
suggest
that
in
order
to
strengthen
the
defence
against
potential
liability,
the
cost
of
the
product
and
the
mark-up
should
be
stated
as
two
separate
amounts
on
invoices
and
that
the
mark-up
should
be
referred
to
on
the
invoices
and
other
company
documents
as
a
licence
fee.
The
important
thing
here
was
that
the
mark-up
would
not
be
seen
as
part
of
product
cost.
It
is
clear
from
Mr.
Meltzer’s
testimony
and
various
documents
entered
in
evidence
that
the
Robinson
Patman
exposure
had
not
been
taken
lightly.
Canadian
tax
considerations
with
respect
to
the
new
system
were
dealt
with
by
Ms.
Vicki
Thomas,
then
tax
manager
of
Entré.
Besides
the
question
of
whether
to
set
up
a
Canadian
subsidiary
or
simply
a
branch
operation
in
Canada,
options
which
were
both
finally
discarded,
she
addressed
the
issue
concerning
the
application
of
customs
duties
(referred
to
as
“customs
fees”)
and
the
federal
sales
tax
to
the
new
mark-up.
She
concluded
that
the
fees
and
the
tax
could
not
be
avoided
on
the
total
price
charged
including
the
mark-
up,
referred
to
as
“the
selling
price”,
unless,
as
she
said,
“IE
goes
back
to
the
concept
of
a
license
fee”.
As
she
said
in
her
memorandum
this
in
turn
would
create
another
problem
because
such
a
fee
would
then
be
viewed
as
a
royalty
subject
to
the
10
per
cent
withholding
tax.
Ms.
Thomas
also
clearly
stated
her
view
that
the
new
cost-plus
arrangement
would
not
be
subject
to
the
Canadian
10
per
cent
withholding
tax.
Mr.
Alex
Mile
testified
that
he
was
quite
satisfied
with
the
change
because
at
that
time
he
felt
that
he
understood
the
retail
computer
business
well
and
that
the
training
was
no
longer
necessary.
He
commented
on
the
change
in
the
following
manner:
A.
Well
it
had
a
tremendous
impact,
because
all
of
a
sudden
we
were
able
to
get
products
from
Intelligent
Electronics
at
a
much
less
price
on
the
grid.
Secondly,
if
we
sourced
from
somewhere
else
for
the
products,
we
wouldn’t
have
to
pay
any
royalty
on
it.
Thirdly,
when
we
sold
our
services
to
our
customers,
like
the
service
contracts
and
so
on,
we
didn’t
have
to
pay
any
royalty
on
it.
And
fourthly,
we,
they
were
not
as
insistent
on
using
the
name
Entre.
When
it
was
just
Entre
Computer
Center,
they
were
very
insistent
on
using
the
name
and
we
had
been
for
about
a
year
or
two
(2)
years
starting
to
use
another
name
and
we
were
using
a
name
called
Renaissance
Canex.
Moreover,
according
to
him,
the
value
of
the
Entré
name
was
negligible
in
Canada
and
the
advertising
fund
in
Canada,
kept
separate
from
the
United
States
fund,
was
not
very
big
and
was
not
really
being
used.
Beginning
in
1988,
Mr.
Mile
had
even
carried
on
his
business
under
two
names,
Renaissance
Canex
and
Entré
Computer
Center.
This
was
done
in
order
to
create
an
image
distinct
from
that
of
being
only
a
franchisee
which
was
not
very
highly
regarded
in
the
business
community.
In
the
summer
of
1989,
Mr.
Mile
even
stopped
using
the
Entré
name
altogether
because
nobody
at
IE
cared
about
that,
unlike
Entré
who
had
been
insisting
on
its
use
during
the
previous
years.
According
to
him,
even
with
the
mark-up,
the
prices
were
usually
cheaper
than
those
offered
by
other
companies.
However,
if
these
companies
had
better
prices
he
would
buy
from
them.
As
he
said,
he
began
to
look
at
IE
as
just
“another
distributor”,
“another
source
of
product”.
It
is
clear
from
Mr.
Mile’s
testimony
that
he
was
not
concerned
with
the
legal
aspects
of
the
changes
made
to
the
original
agreement.
He
was
not
given
a
chance
to
comment
on
those
changes
and
did
not
seek
independent
legal
advice
before
signing
the
amendment.
He
was
simply
told
not
to
withhold
tax
because
royalties
were
no
longer
due
to
Entré.
Appellant's
Submissions
Counsel
for
the
appellant
submits
first
that,
leaving
aside
the
characterisation
made
in
the
amendment,
the
mark-up
on
cost
paid
by
the
Canadian
franchisees
to
the
appellant
is
in
essence
part
of
the
purchase
price
of
products
bought
from
the
appellant
and
not
a
royalty
or
a
similar
payment
made
for
the
use
of
a
trade
name
or
other
right
or
property
as
those
payments
were
defined
by
the
Federal
Court
of
Appeal
in
Saint
John
Shipbuilding
&
Dry
Dock
Co.
Ltd.
Second,
he
submits
that
the
Court
should
look
at
what
has
actually
taken
place
between
the
parties,
at
the
commercial
reality
of
their
relationship
and
decide
whether
or
not
the
mark-up
is
a
“license
fee”
not
according
to
the
characterisation
given
in
the
deeming
clause
of
the
amendment
to
the
franchise
agreement,
but
on
the
basis
of
the
true
nature
of
the
payments
as
disclosed
by
the
evidence.
Counsel
for
the
appellant
stresses
that
the
Court
should
look
at
the
substance
of
the
transaction
and
not
at
the
label
given
to
it
by
the
parties.
In
that
sense,
he
contends
that
he
is
not
seeking
a
restructuring
of
the
transaction
but
merely
a
different
characterisation
than
that
given
by
the
deeming
clause.
In
support
of
his
arguments
counsel
for
the
appellant
relied
on
numerous
decisions
and
notably
on
the
judgment
of
the
House
of
Lords
in
Wesleyan
and
General
Assurance
Society?
on
the
decision
of
the
Supreme
Court
of
Canada
in
Bronfman
Trust,
on
the
decisions
of
the
Federal
Court
of
Appeal
in
Friedberg^
Urichuk,
Hudson
Bay
Mining
and
Smelting
Co.
Ltd.
and
Brault-Clément
Inc.^
as
well
as
on
the
decisions
of
the
Tax
Court
of
Canada
in
Farm
Business
Consultants^
and
Continental
Bank
of
Canada.
Finally,
counsel
for
the
appellant
argues
that
the
evidence
submitted,
both
oral
and
documentary,
is
strong
and
meets
the
degree
of
proof
required
by
the
Tax
Court
of
Canada
in
its
decisions
in
Pallan^
and
Privitera'
for
situations
where
one
is
seeking
to
repudiate
the
terms
of
an
agreement.
Respondent's
Submissions
Counsel
for
the
respondent
submits
that
when
there
is
no
ambiguity
in
a
contract,
there
is
no
valid
purpose
to
going
beyond
what
the
parties
have
agreed
upon.
He
insists
that
the
appellant
cannot
take
contrary
positions
in
the
United
States
and
in
Canada.
As
the
intention
was
that
the
mark-up
be
considered
a
“license
fee”
in
the
United
States,
consistency
would
require
that
the
legal
form
relied
on
in
the
United
States
also
prevail
in
Canada.
He
contends
that
the
appellant
cannot
now
invoke
the
commercial
reality
and
ask
the
Court
to
rewrite
the
contract
by
removing
words
from
it.
Several
decisions
were
referred
to,
particularly
the
judgment
of
the
Supreme
Court
of
Canada
in
Stubart
Investments
Limited^
the
decision
of
the
Federal
Court
of
Appeal
in
Gurd’s
Products
Company
Limited
as
well
as
the
decision
of
the
Tax
Court
of
Canada
in
Continental
Bank
of
Canada
(supra).
However,
counsel
also
stresses
the
fact
that
the
original
franchise
agreement
was
still
in
place
despite
the
amendment
and
that
rights
and
obligations
under
that
agreement
such
as,
for
example,
a
non-competition
clause
went
beyond
those
that
would
normally
be
found
in
a
straight
sale
contract.
Analysis
The
amendment
to
the
original
franchise
agreement
had
the
effect
of
replacing
the
8
per
cent
royalty
and
the
1
per
cent
advertising
fee,
both
computed
on
gross
sales
by
a
system
whereby
franchisees
would
pay
for
products
at
cost
plus
a
variable
mark-up,
depending
on
the
volume
purchased
in
a
given
month,
as
well
as
freight
costs.
In
particular,
the
change
was
effected
by
inserting
the
following
clause
in
the
franchise
agreement:
F.
Product
Purchases
-
To
Be
Invoiced
at
Product
Cost
Plus
Mark-
Up
Plus
Freight
Costs.
Franchisee’s
purchases
of
Product
from
Entré,
or
from
Entré’s
parent
company
IE,
as
the
case
may
be,
will
be
invoiced
to
Franchisee
on
the
following
basis:
(i)
The
Product
invoice
will
reflect
the
Product
Cost
(as
hereinbelow
defined)
of
the
Product(s)
being
invoiced;
to
which
will
be
added
(ii)
a
percentage
mark-up
applied
to
the
Product
Cost
(the
“License
Fee
Mark-
Up”
or
“Mark-Up”),
determined
in
accordance
with
Entré’s
Mark-Up
Schedule
and
the
policies
and
procedures
pertaining
thereto,
as
such
may
be
established
and
published
from
time
to
time,
which
Mark-Up
shall
be
deemed
and
considered
a
license
fee
charged
for
the
license
granted
by
the
Franchise
Agreement
to
Franchisee
to
use
the
Proprietary
Marks
in
connection
with
Franchisee’s
operation
of
an
Entré
Computer
Center
at
the
Center
Location.
In
addition
to
being
responsible
for
paying
the
Product
Cost
and
the
Mark-Up,
Franchisee
will
also
be
responsible
for
paying
the
costs
of
shipping
the
Product
to
Franchisee’s
Center
Location
or
other
designated
delivery
point,
the
cost
of
insuring
the
Product
while
in
transit
and
other
outgoing
transportation-related
costs
(herein
collectively
called
“Freight
Costs’’).
^
Proprietary
Marks
are
defined
in
the
original
franchise
agreement
as
covering
certain
trademarks,
logos,
emblems,
and
indicia
of
origin
including,
but
not
limited
to,
the
mark
“Entré
Computer
Center”
and
such
other
trade
names,
service
marks
and
trademarks
as
may
be
designated
by
the
franchisor
for
use
in
connection
with
the
system.
There
is
little
doubt
that
what
is
contemplated
above
all
is
the
purchase
of
a
product
at
product
cost
plus
a
percentage
mark-up
and
that
both
components
are
reflected
on
the
product
invoice.
The
franchisee
is
also
responsible
for
paying
freight
costs
including
shipping
costs
and
the
cost
of
insuring
the
product
while
in
transit,
which
is
an
indication
he
is
to
assume
the
risks
of
ownership
from
the
moment
of
shipping.
The
transaction
is
essentially
a
sale
and
the
payment
of
the
amount
stated
on
the
invoice
is
the
price
paid
to
become
owner
of
the
product.
The
payment
does
not
exhibit
any
of
the
characteristics
usually
found
in
a
payment
of
rent,
royalty
or
similar
payment
for
the
use
of
or
the
right
to
use
property.
There
is
simply
no
link,
other
than
the
one
established
in
the
deeming
provision,
between
the
applicable
mark-up
and
the
actual
use
of
or
right
to
use
Entré
Proprietary
Marks.
The
mark-up
is
simply
dependent
upon
the
volume
of
products
purchased.
Under
the
original
franchise
agreement
all
franchisees
had
the
same
basic
rights
for
which
they
had
already
paid
numerous
fees
among
which
were
the
initial
franchise
fee
and
the
implementation
fee.
Under
the
amended
agreement
their
rights
to
use
Entré’s
Proprietary
Marks,
as
defined,
remained
essentially
unchanged,
but
it
was
agreed
that
Entré
or
IE
would
no
longer
provide
services
except
on
an
“à
la
carte
basis”
and
for
specific
fees
to
be
determined
by
Entré
or
IE.
The
8
per
cent
royalty
on
gross
sales
was
abandoned
as
was
the
I
per
cent
advertising
fee.
The
advertising
fund
was
relinquished.
The
evidence
clearly
points
to
the
fact
that
after
the
takeover
by
IE,
the
Entre
name
was
not
important
anymore.
One
wonders
what
value,
if
any,
it
would
have
had
in
Canada
before
the
takeover.
The
evidence
surely
indicates
that
it
had
none
thereafter.
What
was
important
for
the
franchisees
before
was
the
fact
that
Entré
was
providing
many
services.
The
need
for
such
services
seems
to
have
lessened
as
time
went
by,
for
at
least
a
good
number
of
franchisees.
Under
the
new
system,
these
services
were
not
abandoned
altogether
but
were
to
be
provided
only
for
those
requiring
them
and
for
specific
fees
to
be
determined
by
the
franchisor.
Above
all,
the
amendment
to
the
agreement,
by
focusing
on
the
purchase
of
products
instead
of
on
royalties
for
services,
moves
away
from
what
can
be
viewed
as
a
classic
franchising
or
licensing
system
into
one
that
is
more
akin
to
a
distributor-dealer
system
in
which
the
basic
transaction
is
precisely
the
sale
of
a
product
for
a
set
price
based
on
the
level
of
monthly
purchases.
In
my
view,
this
is
the
commercial
reality
of
the
transaction.
The
truc
nature
of
the
mark-up
is
that
it
is
a
component
and
an
integral
part
of
the
purchase
price
of
a
product
purchased
at
a
given
time.
The
documentary
evidence
as
well
as
the
testimony
Of
Mr.
Meltzer
and
Mr.
Mile
support
that
conclusion.
This
being
said,
the
effect
of
the
deeming
provision
must
be
ascertained.
For
purposes
of
clarity
it
will
be
recalled
that
it
is
couched
in
the
following
terms:
...which
Mark-Up
shall
be
deemed
and
considered
a
license
fee
charged
for
the
license
granted
by
the
Franchise
Agreement
to
Franchisee
to
use
the
Proprietary
Marks
in
connection
with
Franchisee’s
operation
of
an
Entré
Computer
Center
at
the
Center
Location.
There
is
uncontradicted
evidence
as
to
why
this
deeming
clause
was
inserted
into
the
amendment
to
the
franchise
agreement:
it
was
in
order
to
develop
a
potential
line
of
defence
against
possible
liability
under
the
Robinson
Patman
Act.
In
fact,
the
intention
was
to
give
the
mark-up
the
colour
or
appearance
of
a
licence
fee
by
so
naming
it.
There
is
simply
no
evidence
that
after
the
takeover
IE
wanted
Entré’s
franchisees
to
pay
for
a
licence
to
use
Entré’s
Proprietary
Marks.
Much
has
been
said
on
the
subject
of
form
versus
substance.
I
do
not
think
it
would
serve
any
useful
purpose
to
restate
the
law
in
that
respect.
Higher
courts
have
laid
down
the
principle
that
substance
should
be
given
precedence
over
form
in
appropriate
circumstances.
That
is
not
to
say
that
form
never
matters.
It
does
in
many
cases
particularly
when
a
transaction
is
cast
in
such
a
way
as
to
require
that
formal
steps
be
taken.
However,
without
indulging
in
semantics,
there
is
a
difference
between
the
form
of
a
transaction
and
mere
nomenclature
or
labelling.
In
the
judgment
of
the
House
of
Lords
in
Wesleyan
and
General
Assurance
Society
(supra)
Viscount
Simon
specifically
addressed
the
point
in
the
following
manner:
It
may
be
well
to
repeat
two
propositions
which
are
well
established
in
the
application
of
the
law
relating
to
Income
Tax.
First,
the
name
given
to
a
transaction
by
the
parties
concerned
does
not
necessarily
decide
the
nature
of
the
transaction.
To
call
a
payment
a
loan
if
it
is
really
an
annuity
does
not
assist
the
taxpayer,
any
more
than
to
call
an
item
a
capital
payment
would
prevent
it
from
being
regarded
as
an
income
payment
if
that
is
its
true
nature.
The
question
always
is
what
is
the
real
character
of
the
payment,
not
what
the
parties
call
it.
Secondly,
a
transaction
which,
on
its
true
construction,
is
a
of
a
kind
that
would
escape
tax,
is
not
taxable
on
the
ground
that
the
same
result
could
be
brought
about
by
a
transaction
in
another
form
which
would
attract
tax.
Obviously,
we
are
concerned
here
with
Viscount
Simon’s
first
proposition.
“Mere
use
of
the
words”
or
“mere
nomenclature”
had
already
been
rejected
years
before
in
the
Duke
of
Westminster’s
case.
That
principle
has
been
expressed
in
numerous
ways
in
more
recent
decisions.
Although
deeming
provisions
are
often
found
in
statutes
and
particularly
so
in
tax
statutes
their
use
in
private
agreements
is
less
customary.
In
Verrette?®
Beetz
J.
of
the
Supreme
Court
of
Canada
explained
in
the
following
terms,
the
meaning
of
such
a
provision
in
the
context
of
a
statute:
A
deeming
provision
is
a
statutory
fiction;
as
a
rule
it
implicitly
admits
that
a
thing
is
not
what
it
is
deemed
to
be
but
decrees
that
for
some
particular
purpose
it
shall
be
taken
as
if
it
were
that
thing
although
it
is
not
or
there
is
doubt
as
to
whether
it
is.
A
deeming
provision
artificially
imports
into
a
word
or
an
expression
an
additional
meaning
which
they
would
not
otherwise
convey
beside
the
normal
meaning
which
they
retain
where
they
are
used;...
In
Sutherland?
Dickson
J.
of
the
same
court
commented
on
the
purpose
of
a
deeming
clause
by
saying:
The
purpose
of
any
“deeming”
clause
is
to
impose
a
meaning,
to
cause
something
to
be
taken
to
be
different
from
that
which
it
might
have
been
in
the
absence
of
the
clause.
I
do
not
think
a
deeming
provision
has
a
different
purpose
when
used
in
the
context
of
a
private
agreement,
although
the
element
of
artificiality
is
somewhat
enhanced.
It
is
clear
that
third
parties
are
not
bound
by
such
a
provision
which
seems
to
me
to
be
a
very
unsophisticated
attempt
at
disguising
the
true
nature
of
a
transaction.
In
the
instant
case,
the
evidence
discloses
no
rational
way
in
which
the
variable
mark-up,
dependent
strictly
on
monthly
purchases
by
a
given
franchisee,
could
be
linked
to
the
licence
granted
to
use
the
franchisor’s
Proprietary
Marks
tn
connection
with
the
franchisee’s
operation.
On
the
one
hand,
as
franchisees
were
free
to
buy
from
any
other
distributor,
their
actual
purchases
from
Entré
did
not
bear
any
relation
to
their
actual
use
of
those
marks.
For
example,
a
small
franchisee
could
buy
all
his
products
from
Entré,
paying
a
high
mark-up,
while
a
large
franchised
operation
might
buy
only
a
fraction
of
its
products
from
Entré
but
in
a
volume
such
that
a
smaller
mark-up
would
be
applicable.
On
the
other
hand,
if
the
so-called
licence
fee
was
simply,
as
stated,
for
the
licence
to
use
those
Proprietary
Marks,
one
wonders
why
they
would
have
varied
with
different
franchisees
and
from
month
to
month.
I
simply
fail
to
see
any
commercial
purpose
other
than
the
one
explained
with
respect
to
the
Robinson
Patman
Act
for
labelling
the
mark-up
as
a
licence
fee
in
the
circumstances
at
bar.
The
use
of
the
deeming
provision
must
be
considered
to
be
an
attempt
to
distort
the
reality
of
the
relationship
between
the
parties
and
should
not,
as
such,
be
given
any
legal
effect,
just
as
it
should
not
in
the
circumstances
attract
any
adverse
tax
consequences.
Conclusion
On
the
evidence
presented
at
trial,
I
am
of
the
view
that
the
mark-
up
over
cost
is
part
of
the
price
of
the
products
purchased
from
Entré
by
its
Canadian
franchisees
and
as
such
is
not
covered
by
paragraph
212(1)(d)
of
the
Act.
The
appeals
are
allowed
and
the
assessments
are
vacated,
the
whole
with
costs
to
the
appellant.
Appeal
allowed.
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