Peliculas Sari Sa v. Minister of National Revenue, [1980] CTC 2864, 80 DTC 1766

Guy Tremblay:—This case was heard in Montreal, Quebec, on September 9, 1980.

1. Point at Issue

The problem is whether the appellant, a non-resident company, is correct in contending it is not taxable under Part XIII of the Income Tax Act during the years 1973, 1974 and 1975.

The respondent contends it [the appellant] is taxable under subsection 212(5) of the Income Tax Act because it was paid by ten Canadian residents for rights in a motion picture film. Those Canadians paid the appellant $450,000 for the motion picture. Before paying the appellant, the residents deducted 10% of the payment made.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

The same court also stated that the assumptions of fact on which the Minister of National Revenue relies in assessing the taxpayer are deemed to be correct, at least until they are contradicted by the taxpayer.

3. Facts Assumed by the Respondent

In subparagraphs (a) and (c) of paragraph 6 of the reply to the notice of appeal, the respondent gives the facts which are the basis of the assessment. They read as follows:

(a) During each of the years 1973, 1974 and 1975, the persons resident in Canada mentioned hereinabove in paragraph 3, paid to the appellant certain amounts for a right in a motion picture film, ie “She Beast of Camp Nine’’ that has been or was to be used or reproduced in Canada;

(b) The amounts paid by the said resident persons amounted to $145,000 US for each of the years under appeal;

(c) The application made by the appellant for a refund of the non-resident tax paid by the said resident persons, was refused because the appellant has not established that he was not liable to pay any tax under Part XIII of the Act.

4. Facts of the Evidence

4.01 The appellant company is a corporation organized and existing since 1973 under the laws of the Republic of Panama. One of its main objects is to buy and sell films.

4.02 The appellant owned all rights and title to and interest in a motion picture entitled “She Beast of Camp Nine” (hereinafter referred to as the “motion picture”).

4.03 This motion picture was acquired by the appellant from a Liechtenstein company which had bought it from another one.

4.04 In October 1973, the appellant company sold to ten individual Canadian residents “all its right, title and interest” in the motion picture.

4.05 As Exhibit A-1, the appellant filed the agreement between itself and one of the ten Canadians, Mr William Liverman, who purchased 6.7% of the undivided interest in the motion picture. He paid $30,000. The total price of the film was $450,000.

4.06 It was admitted between the parties that the agreements of the other purchasers were similar to Exhibit A-1, except for the percentage in the undivided interest of the motion picture.

4.07 Paragraphs 2, 3, 6(i), 7 and 17 of the agreement read as follows:

2. The Vendor warrants and represents that it has the right to enter into this agreement and to grant, sell, assign and transfer to the Purchaser all its right, title and interest in the said motion picture, and that there are no outstanding claims, liens, encumbrances or rights of any nature to or in the said motion picture or any part thereof which can or will impair or interfere with the rights and title herein granted to the Purchaser.

3. The Vendor warrants and covenants that it is the sole owner to the motion picture throughout all territories of the world except the distribution rights in 35 MM theatrical and non-theatrical in the territory of the Union of Soviet Socialist Republic, Albania, Roumania and East Germany, which distribution rights are reserved by the producer.

6. The Vendor warrants and represents as follows:

(i) that the original negative of the motion picture shall be in good condition so that dupe negatives and/or other material of commercially acceptable quality can be manufactured therefrom;

7. The Vendor agrees to deliver or cause to be delivered to the Purchaser all prints and publicity or other material relating to the motion picuture at the Vendor’s sole cost and expense or to whatsoever the Purchaser may direct, it being clearly understood that the picture shall be substantially completed and delivered prior to December 31, 1973 unless prohibited from doing so by an act of God or other unforeseen event.

17. This agreement shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of the parties hereto; provided, however, that the Purchaser may not assign any rights hereunder without the written consent of the Vendor.

4.08 It was proved that the motion picture was delivered on time. ie, prior to December 31, 1973 (paragraph 7 of the Agreement).

4.09 It was admitted that the sum of $450,000 was paid by the purchasers, except for $45,000 which was withheld and paid to the Receiver General of Canada, according to assessments issued by the respondent on October 20, 1975.

4.10 According to Mr Steven Samos, President of International Service Company Inc which manages the appellant company, the latter:

(a) sold 100% of its interest in the motion picture and did not reserve any rights in the film;

(b) did not pass other agreements with the purchasers nor even with other Canadians; and,

(c) did not receive from the purchasers any other amount concerning the motion picture.

4.11 Mr William Liverman, one of the purchasers, testified that he never paid more than $30,000 to the appellant (less $3,000 paid to the Receiver General for Canada) concerning the motion picture.

4.12 Mr Liverman explained that they made many prints of the original in Montreal. They were leased all over the world. It was a financial success.

4.13 Mr Samos explained that the original film was in a laboratory in California. It was possible for the owners, the purchasers, to obtain reprints from this laboratory. It was also up to the owners to transfer the original film to Canada and keep it themselves.

4.14 On August 31, 1977, the respondent issued notices of assessment according to which the appellant was taxed in the amounts of $14,498.47 in 1973; $14,846.12 in 1974; and $14,724.46 in 1975.

5. Law—Cases—Comments

5.1 Law

The main sections involved in the present case are subsections 212(5) and 227(7) of the Income Tax Act. They read as follows:

212.(5) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of

(a) a motion picture film, or

(b) a film or video tape for use in connection with television

that has been or is to be used or reproduced in Canada.

227.(7) Where, upon application by or on behalf of a person to the Minister pursuant to subsection (6) in respect of an amount paid to the Receiver General of Canada that was deducted or withheld under Part XIII, the Minister is not satisfied

(a) that the person was not liable to pay any tax under that Part, or

(b) that the amount paid to the Receiver General of Canada was in excess of the tax that the person was liable to pay

the Minister shall assess that person for any amount payable to him under Part XIII and send a notice of assessment to that person, whereupon Divisions I and J of Part I are applicable mutatis mutandis.

5.2 Cases

The parties referred to the following cases:

A. Concerning films:

1. Vauban Productions v The Queen, [1979] CTC 262; 79 DTC 5186;

2. Société Nouvelle de Cinématographie Inc v MNR, [1979] CTC 3006; 79 DTC 802;

3. MNR v Paris Canada Films Ltd, [1962] CTC 538; 62 DTC 1338;

B. Concerning use of French version of a statute:

4. MNR v 79 Wellington West, Ltd, [1953] CTC 227; 53 DTC 1149;

5. Composers, Authors and Publishers Association Ltd v Western Fair Association, [1951] SCR 596;

6. The King v Dubois, [1935] SCR 378;

7. The Queen v George R McLaughlin, [1978] CTC 602; 78 DTC 6406;

8. The Queen v Compagnie Immobilière BCN Limitée, [1979] CTC 71; 79 DTC 5068.

5.3 Comments

A. Interpretation of subsection 212(5)

5.3.1 The first point is to determine the sense of subsection 212(5) cited above. According to the appellant it must apply only in the case of payment for the use of a film or for a right of a similar nature. According to the respondent, however, it also applies to payment for right of property.

5.3.2 The provision 212(5) is in Part XIII of the Act which is entitled “Tax on Income From Canada of Non-Resident Persons”.

However, there are other provisions in the Act which provide for taxation of non-resident persons; mainly subsection 2(3) of Part I. The section reads as follows:

Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada,

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property,

at any time in the year or a previous year, an income tax shall be paid as hereinafter required upon his taxable income earned in Canada for the year determined in accordance with Division D.

Division D, to which provision 2(3) refers, comprises sections 115 and 116, which are also in Part I of the Act. Part XIII does not tax the same income as Part I. Hence, Part XIII does not tax income from employment, from business and from disposition of taxable Canadian property. In general, it is said that Part XIII taxes income from property such as:

(Interest—212(1)(b); Estate or trust income—212(1)(c); Rent, royalties, etc— 212(1)(d); Timber royalties—212(1 )(e); Pension benefits—212(1)(h); and Dividends—212(2)).

I said that it is “in general” because sometimes it cannot be called “income from property”, as in the case of Alimony—212(1)(f). Can it be said that provision 212(5) is also an income from property?

5.3.4 It is known that the general intent of the provision is to impose tax on the income earned by the owner of a motion picture film where the owner is a non-resident of Canada. For a better understanding of the meaning of subsection 212(5) it would be useful to compare the two official texts, in English and French:

Subsection 212(5)—English

212.(5) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of

(a) a motion picture film, or

(b) a film or video tape for use in connection with television

that has been or is to be used or reproduced in Canada.

Paragraphe 212(5)—Français

212.(5) Toute personne non résidante doit payer un impôt sur le revenu de 25% sur toute somme qu’une personne résidant au Canada lui verse ou porte à son crédit, ou est réputée, en vertu de la Partie I, lui verser ou porter à son crédit au titre ou en paiement intégral ou partiel d’un droit d'utilisation ou autre sur

(a) un film cinématographique, ou

(b) un film ou une bande magnétoscopique pour la télévision,

que a été utilisé ou reproduit au Canada, ou doit l’être.

5.3.5 According to the English version (“. . . payment for a right in or to the use of . . .”) it seems, at first glance, that because of the word “right” construed in its broadest sense one could conclude that it includes a “right of ownership”, and hence the sale of a motion picture. This is the contention of the respondent. However, it seems that if the drafter had intended to include an ownership right, he would have used different wording and instead of referring to a right in a motion picture film he would have simply worded the provision to apply to “a payment for a motion picture . . . that has been or is to be used or reproduced in Canada”.

It seems that the provision is restricted to payment for rights in a picture only, the effect of drafting being to exclude an outright sale of the motion picture itself.

5.3.6 The French text (“... en paiement intégral ou partiel d’un droit d’utilisation ou autre sur . . .”) seems, at first glance, to arrive at the former conclusion.

The French version indeed seems more restrictive because it first uses the expression “d’un droit d’utilisation”. The words “ou autre”, used after, cannot easily be construed as having a sense broader than the first expression. Hence, it cannot easily be construed as having the sense of “right of ownership”.

In the case of Compagnie Immobilière BCN Limitée v HMQ, [1976] CTC 282 at 284; 76 DTC 6153 at 6155, the Federal Court of Appeal has stipulated, in sum, that when the two texts (English and French) do not express exactly the same thing they must be read together “in the sole relevant sense” that the two have in common. This means, in effect, that the most restrictive sense must be accepted. In the present case, the most restrictive sense would be “the right of use”.

5.3./ Let us not forget that in the present case the section involved is a charging provision. Hence, the obligation which must be charged is the only one which is clearly expressed. The one which is clearly expressed is “the right of use” and not “the right of ownership”.

5.3.8 The Supreme Court of Canada, in the same case of HMQ v Companie Immobilière BCN Limitée, made the following comments concerning the restrictive interpretation:

Respondent favours a more restrictive interpretation; it supports the view of Jackett CJ who, speaking for the Federal Court of Appeal, held that the meaning of the expression “disposed of” in the Regulation should be controlled by the narrower meaning of the French word “aliénés” used in the French version of the same Regulation, he said at p 436 (76 DTC 6155):

. . . Regardless of whether the expression “disposed of” would have been given some other sense if the English version were read alone, in my view, when the two versions are read together, “disposed of” must be read in the sole relevant sense that that expression has in common with the French word “aliénés”. In my view, this sense would include any transfer, by way of sale, gift or otherwise, of legal title, to some other person but would not include the bringing about of the destruction or extinguishment of the property.

In support of the judgment of the Federal Court of Appeal that the expression “disposed of” should be given the restrictive meaning of “aliénés”, Respondent has referred us to s 8 of the Official Languages Act, (RSC 1970, c 0-2) which reads in part as follows:

8.(1) In constructing an enactment, both its versions in the official languages are equally authentic.

(2) In applying subsection (1) to the construction of an enactment,

(b) subject to paragraph (c), where in the enactment there is a reference to a concept, matter or thing the reference shall, in its expression in each version of the enactment, be construed as a reference to the concept, matter or thing to which in its expression in both versions of the enactment the reference is apt;

I do not believe that s 8(2)(b) of the Official Languages Act is of much assistance to Respondent. The rule therein expressed is a guide; it is one of serveral aids to be used in the construction of a statute so as to arrive at the meaning which, “according to the true spirit, intent and meaning of an enactment, best ensures the attainment of its objects” (s 8(2)(d)). The rule of s 8(2)(b) should not be given such an absolute effect that it would necessarily override all other canons of construction. in my view therefore the narrower meaning of one of the two versions should not be preferred where such meaning would clearly run contrary to the intent of the Legislation and would consequently tend to defeat rather than assist the attainment of its objects.

One of the most important rules to be followed in the interpretation of a particular provision of a statute was expressed as follows by Lord Herschell in Col- quhoun v Brooks (1889), 14 AC 493 at p 506:

It is beyond dispute, too, that we are entitled and indeed bound when construing the terms of any provision found in a statute to consider any other parts of the Act which throw light upon the intention of the legislature and which may serve to shew that the particular provision ought not to be construed as it would be if considered alone and apart from the rest of the Act.

And, in Canada Sugar Refining Company, Limited v the Queen, [1898] AC 735, Lord Davey said at p 741:

. . . Every clause of a statute should be construed with reference to the context and the other clauses of the Act, so as, so far as possible, to make a consistent enactment of the whole statute or series of statutes relating to the subject- matter.

Clearly, this basic rule of statutory construction is still in effect; it has not been repealed by the enactment of s 8 of the Official Languages Act.

The Supreme Court, in fact, did not have to apply the principle of the most restrictive sense because it arrived at the conclusion “that the French words “produit d’une aliénation’’ or “aliéné” that are sometimes used instead of “produit d’une disposition” or “dispose” should not be construed as to restrict the meaning of the English expressions”.

Mr Justice Pratte, who delivered the judgment in the name of the other Judges of the Supreme Court, stated that the English verb “to dispose” and the French verbs “disposer” and “aliéner” have the same meaning.

Hence, the principle of the most restrictive meaning when the English and French versions are different has no application because there was no actual difference.

If, in the present case, there is no actual difference the principle explained in paragraph 5.3.7 concerning the tax charging provision still applies.

5.3.9 Most of the cases referred to by the parties conclude that a payment for an outright sale of a film is not taxable, and a payment for a lease or royalties of a film is taxable. However, sometimes the decision was based, not on subsection 212(5), but on paragraph 212(1)(d) which taxes payment on “rent, royalties, or a smaller payment”—(La Société Nouvelle de Cinématographie Inc v MNR), or on the convention between Canada and the country of the non-resident taxpayer—(Vauban Productions v HMQ).

5.3.10 However, in the case of MNR v Paris Canada Films Ltd, Mr Justice Dumoulin wrote the following:

The sole question at issue is whether or not Paris Canada Films Ltd obtained from non-residents ‘‘a right in or to the use of motion picture films”, to be reproduced in Canada, even though such a right might be derived from an outright “purchase”.

This sentence, according to the respondent, is the confirmation that an outright purchase is taxable. This is the respondent’s contention.

At first glance the sentence is not clear. However, first let us notice that the word “purchase” in the sentence is between quotes. It was the contention of the taxpayer company that it was a purchase. The words “purchase of the films” were used in the agreements. After studying the agreements, however, for many reasons he arrived in sum at the conclusion that the substance of the agreements was not of a purchase, but a lease. There was a five year limit of exploitation in those agreements. At 541 [1341], Mr Justice Dumoulin says:

It seems a waste of time to underscore that each of those five contracts possessed all the elements attaching to a “right to the use of motion picture films . . . that are to be reproduced in Canada”, and none of the essential components of a “purchase”.

Mr Justice Dumoulin would not use the words “none of the essential components of a purchase” if, in the italicized sentence previously cited, his intention was to affirm that an outright purchase is taxed.

In other agreements in the same judicial case there was no time limit in the exploitation. At 543 [1342], Mr Justice Dumoulin says:

The only commercially profitable use to which motion picture films can be put consists in their reproduction on the theatrical screens of the land. Then, an assignment in perpetuity of all exploitation rights to those 59 films, listed in exhibit 11, by a non-resident company whose regular business it is to transact such deals, seems equivalent to a disposal, or sale, of so many “inventory or stock in trade goods”, producive of corresponding “industrial and commercial profits”.

The sale of those 59 films for the amount of $210,000 was not taxable. In the Board’s opinion, the sale of the ownership of the property is not taxed by subsection 212(5).

B. The Substance of the Agreement in the Present Case

5.3.11 In the present case the substance of the agreement is that the vendor sold to the purchaser all its right, title and interest in the said motion picture (para 2 of the agreement). As the evidence showed that the vendor formerly was the owner of the film (it had bought it from a Liechtenstein company) the Canadian purchasers acquired the ownership of the film.

5.3.12 From the restriction imposed in paragraph 17 of the agreement cited in paragraph 4.07 and the fact to the effect “that the Purchaser may not assign the rights hereunder without the written consent of the Vendor” it seems, at first glance, that the vendor has kept a substantial right so that one may conclude the agreement did not transfer the ownership of the motion picture film. The Board accepts, on that point, the explanation given by Mr Samos that this clause is to protect the vendor until the full payment of the film is given by the purchasers. This was an ordinary clause in an agreement of this nature to protect the payment but is is not a clause which is representative of the substance of the agreement.

5.3.13 It is also the Board’s opinion that subparagraph 6(1) of the agreement cited in paragraph 4.07 of the facts does not have the sense that the appellant company had retained a right of ownership on the original negative, as contended in the submission, of counsel for the respondent. The non-contradicted evidence given by Mr Liverman (para 4.12) and especially by Mr Samos (para 4.13) is conclusive on that point.

6. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.