A-322-79
The Queen (Appellant)
v.
Farmparts Distributing Ltd. (Respondent)
Court of Appeal, Heald and Ryan JJ. and Kerr
D.J.—Ottawa, February 5 and 28, 1980.
Income tax — Non-residents — Withholding tax —
Amount paid by Canadian distribution company to U.S. com
pany for exclusive right to buy machines for resale to sub-dis
tributors, their concept of merchandising, and trade name and
logos — Purchase price of machines not included in amounts
paid — Resale to sub-distributors of so-called "package" but
only machines came from U.S. company — Whether or not
payments made to U.S. company subject to 15% withholding
tax pursuant to s. 212(1)(d) of Income Tax Act and Article XI
of Canada-U.S. Tax Convention — Income Tax Act, S.C.
1970-71-72, c. 63, s. 212(1)(d) — The Canada-United States
of America Tax Convention Act, 1943, S.C. 1943-44, c. 21.
This is an appeal from a judgment of the Trial Division
wherein that Court allowed, with costs, the respondent's appeal
from an assessment for non-resident withholding tax and inter
est. Respondent, by notices of assessment, was levied tax
equivalent to 15% of two amounts paid by it to Wonder
International Ltd. of New Jersey, U.S.A., on the premise that
such amount should have been withheld and paid as income
tax. The amounts paid by the respondent were for the exclusive
right to purchase exhaust pipe bending machines for resale to
sub-distributors, the concept of merchandising replacement
muffler systems, and the use of trade name and logos but did
not include any of the purchase price of any machines bought.
On resale to its sub-distributors, respondent sold not only the
machine, but also an advertising programme, a sign, decals and
opening inventory: only the machine came from the U.S.
company. The issue is whether the payments made by the
respondent to the U.S. company pursuant to the contracts are
subject to the 15% tax imposed by section 212(1)(d) of the
Income Tax Act and Article XI of The Canada-United States
of America Tax Convention Act, 1943, in the 1976 taxation
year.
Held, the appeal is dismissed with costs. Firstly, certain use
of the "Wonder Muffler" trade name and logos of Wonder
International represents a use of a trade name and is thus
clearly caught by the charging provisions of section
212(1)(d)(i). Secondly, likewise, the concept or technique of
merchandising replacement muffler systems also clearly comes
within the charging provisions of section 212(1)(d)(i). This
concept can be said to be a "plan" or perhaps a "process" as
those words are used in section 212(1)(d)(i). Also the word
"property" as used in section 212(1)(d)(i) and as defined by
section 248(1) can be said to include such a merchandising
concept. Thirdly, however, the exclusive right to purchase the
"Wonder Matic" machine for resale, under no circumstances,
can be said to constitute the use or the right to use the machine.
The "right" conferred on the respondent does not come within
the provisions of section 212(1)(d)(i) in that the payments
cannot be considered to be payments for "rent, royalties or
similar payments". The payments were "one-time" payments
for the duration of the agreements; the payments were made
irrespective of the extent of use by the respondent under the
agreements and were unrelated to the profits made by the
respondent as the result of any use. Based on the findings of
fact of the Trial Judge, the Minister had not succeeded in
establishing what part of the payments were for "things" within
the meaning of the charging provisions of section 212(1)(d)(i)
and the assessment must therefore fail.
Minister of National Revenue v. Pillsbury
Holdings Ltd. [1965] 1 Ex.C.R. 676, applied.
Conway v. Minister of National Revenue
[1966] Ex.C.R. 64, applied.
APPEAL.
COUNSEL:
J. R. Power, Q.C. and Miss D. Olsen for
appellant.
D. H. Wright, Q.C. and G. Chad for
respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
MacDermid & Company, Saskatoon, for
respondent.
The following are the reasons for judgment
rendered in English by
HEALD J.: This is an appeal from a judgment of
the Trial Division [[1979] 2 F.C. 506] wherein
that Court allowed, with costs, the respondent's
appeal from an assessment for non-resident with
holding tax and interest, said assessment being
dated April 29, 1976.
The sole issue in the appeal is whether payments
totalling $115,000 (U.S.) made by the respondent,
a Canadian resident, to an American resident,
Wonder International Ltd. (hereinafter Wonder),
are subject to the 15% tax imposed by section
212(1)(d) of the Income Tax Act, R.S.C. 1952, c.
148, as amended by section 1 of S.C. 1970-71-72,
c. 63 and by Article XI of The Canada-United
States of America Tax Convention Act, 1943, S.C.
1943-44, c. 21'.
The companion appeal (A-323-79) involves
exactly the same issue and involves payments
totalling $75,000 by the respondent to Wonder.
The hearing in the Trial Division was based on
common evidence respecting the appeals from both
assessments since the issues in each case are identi
cal. Likewise, at the hearing before us, the appeals
were argued together.
At the trial, the parties' pleadings were amend
ed to raise the issue of whether or not the payment
in question was exempt from taxability by virtue of
the terms of Articles I and II of The Canada-
United States of America Tax Convention Act,
' The relevant portion of section 212(1)(d) of the Act and
Article XI of The Canada-United States Tax Convention read
as follows:
212. (1) 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,
(d) rent, royalty or a similar payment including, but not so
as to restrict the generality of the foregoing, any payment
(i) 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
ARTICLE XI
1. The rate of income tax imposed by one of the contracting
States, in respect of income (other than earned income)
derived from sources therein, upon individuals residing in, or
corporations organized under the laws of, the other contract
ing State, and not having a permanent establishment in the
former State, shall not exceed 15 percent for each taxable
year.
1943 2 and section 6 of the Protocol 3 .
The respondent was incorporated under the laws
of Saskatchewan on December 9, 1974. The
respondent's business included the distribution of
automotive products and parts, farm machinery
and parts and the operation of garages and filling
stations for the sale of automotive supplies and
repairs. Wonder is a corporation incorporated in
New Jersey, U.S.A. which manufactured and sold
a machine called "Wonder Matic". This machine
was an exhaust pipe bending machine which
enables an operator to make universal exhaust
pipes fit the exhaust systems of any American
automobile.
The respondent entered into 2 agreements
(Exhibits 1 and 2) with Wonder and pursuant to
2 Said Articles I and II read as follows:
ARTICLE I
An enterprise of one of the contracting States is not
subject to taxation by the other contracting State in respect
of its industrial and commercial profits except in respect of
such profits allocable in accordance with the Articles of this
Convention to its permanent establishment in the latter
State.
No account shall be taken in determining the tax in one of
the contracting States, of the mere purchase of merchandise
effected therein by an enterprise of the other State.
ARTICLE II
For the purposes of this Convention, the term "industrial
and commercial profits" shall not include income in the form
of rentals and royalties, interest, dividends, management
charges, or gains derived from the sale or exchange of capital
assets.
Subject to the provisions of this Convention such items of
income shall be taxed separately or together with industrial
and commercial profits in accordance with the laws of the
contracting States.
3 The relevant portion of the Protocol reads as follows:
PROTOCOL
At the moment of signing the Convention for the avoid
ance of double taxation, and the establishment of rules of
reciprocal administrative assistance in the case of income
taxes, this day concluded between Canada and the United
States of America, the undersigned plenipotentiaries have
agreed upon the following provisions and definitions:
6. (a) The term "rental and royalties" referred to in
Article II of this Convention shall include rentals or
royalties arising from leasing real or immovable, or person
al or movable property or from any interest in such
property, including rentals or royalties for the use of, or for
the privilege of using, patents, copyrights, secret processes
and formulae, good will, trade marks, trade brands, fran
chises and other like property:
these agreements paid to Wonder the $115,000
(the subject matter of appeal A-322-79) and the
$75,000 (the subject matter of appeal A-323-79).
The learned Trial Judge made the following
findings in respect of these agreements [at pages
508-509] (A.B. pp. 19-21):
What Farmparts obtained from Wonder International pursu
ant to the agreements Exhibit 1 and Exhibit 2 was:
1. the exclusive right to purchase from Wonder International
its "Wonder Matic" pipe bending machine (to bend stock or
universal exhaust pipes for replacement of exhaust systems for
American automobiles) for re-sale to others by Farmparts in
Manitoba, Saskatchewan, Alberta, British Columbia, North
west Territories, Yukon and Alaska;
2. the concept or technique of merchandising these replace
ment muffler systems using this "Wonder Matic" machine; and
3. certain use of the "Wonder Muffler" trade name and logos
of Wonder International.
The payments made pursuant to Exhibits I and 2 did not
entitle Farmparts to receive without charge any "Wonder
Matic" machines. Instead Farmparts had to buy each machine
from Wonder International and pay for each. These machines
in turn Farmparts re-sold to its sub-distributors. Farmparts,
however, did not purchase anything else from Wonder Interna
tional except the machines and was not required to do so.
Farmparts in re-selling to its sub-distributors sold them not
only a machine but also a so-called "package" it devised on its
own and for which these sub-distributors paid $17,950. These
sub-distributors obtained with their "package":
1. one "Wonder Matic" pipe bending machine with all the
dies, etc., to enable them to make universal exhaust pipes fit the
exhaust systems of all American cars, together with a card deck
showing the various degrees of bend required to enable the
exhaust pipes to be bent to fit these cars;
2. an opening advertising programme (prepared by the adver
tising agency of Farmparts);
3. an inventory of certain business forms;
4. "Wonder" decals of its logo;
5. a sign; and
6. an opening inventory of exhaust pipes, shackles and other
parts necessary to complete the installation replacement muf
fler systems in cars.
Of all the parts of this "package", only the exhaust pipe
bending "Wonder Matic" machine came from Wonder
International.
These sub-distributors who were sold the so-called "package"
by Farmparts were permitted to use the trade mark "Wonder
Muffler" and logos of Wonder International apparently with
out objection by Wonder International. No effective control of
such use was required by Wonder International. But according
to clause 17 in each of the agreements, Exhibits I and 2, which
are entitled "Procedures Upon Termination" (of the agree
ments), the only matter or thing that is mentioned is the trade
name "Wonder Muffler" and logo and labels relating to
Wonder International. This clause in each of the agreements
requires Farmparts to cease to use the trade name and to return
to Wonder International any forms of advertising matter or
manuals and bulletins. (It is not necessary for the purpose of
these appeals to express any opinion as to what would be "left"
to "return" to Wonder International in so far as the trade mark
"Wonder Muffler" is concerned in view of the use made of the
trade mark by Farmparts and its sub-distributors apparently
with the tacit consent of Wonder International.)
He then went on to apply to the factual situation
the applicable provisions of section 212(1)(d)(î)
supra stating as follows [at page 515] (A.B. p. 27):
Accordingly in considering the facts disclosed in the evidence
on these appeals and applying the meaning as indicated of this
subparagraph to such evidence, it appears that the only thing
that Farmparts obtained from Wonder International for these
payments which fits within the concept of this subparagraph,
namely, payments on income account (and therefore within the
charging provisions and as a consequence subject to income
tax) was the right to use the trade name "Wonder Muffler"
and logo together with whatever "other thing" Farmparts
obtained arising out of the apparent failure of Wonder Interna
tional to prohibit Farmparts from telling its sub-distributors
that they also could use such.
What part these payments should be allocated as being
payments for such "things" on income account is impossible to
determine on the evidence. The other part of these payments
however, should be allocated as payments for "things" on
capital account, and therefore not within the charging provi
sions of this paragraph. Again, what part should be so allocated
is impossible to determine.
In the result, the plaintiff in evidence has established that the
assumptions for the assessments are not correct in part. The
plaintiff is therefore entitled to relief. (See M.N.R. v. Pillsbury
Holdings Limited [[19651 1 Ex.C.R. 676]). Further, premised
on the particular facts in this case, on the assessments made
and on the pleadings, there was an onus of allocation on the
Minister to establish what part of the said payments were
payments for "things" within the meaning of the charging
provisions of subparagraph 212(1)(d)(î) of the Income Tax Act
and so subject to assessment for income tax which was not
discharged. The plaintiff therefore is entitled to succeed in full.
Accordingly, the appeals are allowed with costs.
I propose to deal initially with the appellant's
attack on the decision of the learned Trial Judge
relating to the proper construction to be given to
the provisions of said section 212(1)(d)(î) quoted
supra. The appellant submits that 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 ..." have the effect of including
within the scope of the section the payments
described in subparagraphs (i) to (v), including a
single or lump sum payment, and that such a
payment is subject to the charge of the section,
whether or not it falls within the category of rent,
royalty or a similar payment.
In support of this submission, the appellant sub
mits that the intent of Parliament to widen the
scope of section 212(1)(d) is evidenced by the fact
that section 106(1)(d), the predecessor to section
212(1)(d) was amended in 1968 by deleting the
words "any such a payment" and substituting
therefor the words "any payment". The appellant
further submits that the word "including" is used
in its extensory sense for the purpose of enlarging
the meaning of the preceding words and in support
of this submission, appellant's counsel relies on the
Verrette case 4 and the Robinson cases.
I have concluded that this submission by the
appellant's counsel is well founded. I agree with
him that the combination of the 1968 amendment
and the use of the word "including" is a clear
indication that Parliament intended that the pay
ments described in subparagraphs (i) to (v) be
subject to the charge of the section whether or not
those payments can be said to be ejusdem generis
with "rent, royalty, or a similar payment".
This, however, is not finally conclusive of the
matter since it still remains to consider whether
the payments in issue come within the letter of the
law 6 , that is, in this case, within the four corners of
section 212(1)(d)(î).
The learned Trial Judge, based on his interpre
tation of the agreements in question and on his
appreciation of the evidence at trial, found that the
respondent obtained from Wonder pursuant to the
agreements:
1. certain use of the "Wonder Muffler" trade
name and logos of Wonder International;
4 The Queen v. Verrette [ 1978] 2 S.C.R. 838 at 844 per
Beetz J.: "In definition provisions, the word `includes' is gener
ally used extensively in contradistinction to the restrictive word
`means'."
5 Robinson v. The Local Board for the District of Barton-
Eccles (1882-83) 8 App. Cas. 798 at 801 per Earl of Selborne
L.C.
6 See: Attorney General of Quebec v. Stonehouse [1978] 2
S.C.R. 1015 at 1025.
2. the concept or technique of merchandising
replacement muffler systems using the "Wonder
Matic" pipe bending machine; and
3. the exclusive right, within the two territories
referred to in Exhibits 1 and 2 (in the case of
Exhibit 1—the Provinces of Manitoba, Sas-
katchewan and Alberta; in the case of Exhibit
2—the Province of British Columbia and the
Northwest Territories, Yukon and Alaska), to
purchase from Wonder its "Wonder Matic"
pipe bending machine for resale by the respond
ent to others within the above described
jurisdictions.
In my view, the learned Trial Judge was justified,
on the evidence adduced, and on a consideration of
the agreements themselves, in so concluding. At
the hearing of the appeal, I understood counsel for
the appellant to agree that these findings were
open to the learned Trial Judge and were support
ed by the evidence, both oral and documentary.
I turn now to a consideration of the question as
to whether the three categories set forth supra and
as found by the learned Trial Judge can be said to
be payments "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".
So far as the first category is concerned, I have
no difficulty in concluding that this category
represents a use of a trade name and is thus clearly
caught by the charging provisions of section
212(1)(d)(i).
Dealing now with the second category, it is
instructive to refer to the description of this con
cept, as found from the evidence, by the learned
Trial Judge.
At pages 23 and 24 of Volume 1 of the Appeal
Book, [pages 511-512 of the published judgment]
he described this concept or technique as follows:
Wonder International is a Delaware corporation of New
Jersey, U.S.A. It manufactured and sold the machine called
"Wonder Matic" which was an exhaust pipe bending machine
which enabled an operator of it to make universal exhaust pipes
fit the exhaust systems of any American automobile.
This concept of merchandising replacement muffler systems
for automobiles is relatively new.
Before that and for many years parts for replacement muf
fler systems for American automobiles were supplied by the
various franchised dealers of the various automobile manufac
turers. The replacement systems were installed by authorized
dealers of these automobile manufacturers or by private repair
shops or service stations which latter would obtain the muffler
parts for replacement from such authorized automobile dealers.
In recent years however, at least two companies and now
more, established and operate in many cities and towns a
specialized muffler replacement business. Two of the prominent
ones are Midas Muffler and Speedy Muffler. They obtain their
inventory from certain plants in Canada. Midas and Speedy at
each of their locations stock a considerable inventory of muffler
pipes, mufflers, shackles, etc.
The subject merchandising concept for replacement muffler
systems was different from either of the two concepts of
merchandising referred to above.
Wonder International manufactured this machine which
enables an operator to bend universal exhaust pipes to the
required angle so that they fitted the exhaust systems of any
American automobile thereby eliminating the necessity of a
vendor and installer of replacement muffler systems carrying
and having a large inventory of muffler exhaust pipe. Small
service stations, small garages and any other establishments by
buying and using this machine could establish and operate an
"added on" division of their businesses without the necessity of
being required to have and using large amounts of working
capital for inventories of exhaust pipes and other necessary
parts to carry on such a business. That was the big feature of
this machine and the merchandising concept.
Based on this description, it seems to me that,
likewise, this category clearly comes within the
charging provisions of section 212(1)(d)(i). In my
view, this concept or technique can be said to be a
"plan" or perhaps a "process" as those words are
used in section 212(1)(d)(i). I think also that the
word "property" as used in section 212(1)(d)(i)
and as defined by section 248 (1) of the Income
Tax Act 7 can be said to include such a merchan
dising concept. I therefore conclude that in this
category, the respondent receives the use of or the
right to use a plan or a process or property as those
terms are used in section 212(1)(d)(i).
The relevant portion of section 248(1) reads as follows:
"property" means property of any kind whatever whether
real or personal or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in
action,
(b) unless a contrary intention is evident, money, and
(c) a timber resource property.
I come now to the third category. In order to
answer this question, it is necessary to look at the
nature of the "right" here under consideration. It
seems clear to me that what the respondent
receives, in this category, is the exclusive right to
buy and to resell the Wonder pipe bending
machine within the territories set out in Exhibits 1
and 2 referred to supra. In my view, this "right"
can, under no circumstances, be said to constitute
the use or the right to use the machine. If such be
the case, then it follows, in my view, that the
"right" conferred on the respondent by this cate
gory does not come within section 212(1)(d)(i).
In summary, I have the view that the first and
second categories set forth supra are caught by the
charging provisions of section 212(1)(d)(i) but
that the third category is outside those charging
provisions.
The learned Trial Judge concluded, by applying
different criteria, that only the first category
referred to supra was caught by the charging
provisions of the section. It was his view that the
determining factor was whether the "things"
received by the respondent could be said to be on
income account or capital account. With this view
I respectfully disagree for the reasons cited earlier
herein. Having thus concluded that the respondent
taxpayer had established that the Minister's
assumptions for the assessments were partially
incorrect, the learned Trial Judge then held that
the respondent taxpayer was entitled to relief and
relied on the case of M.N.R. v. Pillsbury Holdings
Limited 8 for this principle. He held further that
there was an onus of allocation on the Minister to
establish what portion of the payments were pay
ments for "things" caught by the charging provi
sions of the section; that the Minister had not
discharged that onus and accordingly, the respond
ent taxpayer was entitled to succeed in full.
The Minister, in assessing the respondent, made
the following assumptions of fact (see A.B. p. 8):
8 [1965] 1 Ex.C.R. 676.
(a) that at all material times the Plaintiff was a corporation
incorporated pursuant to the laws of the Province of Saskatche-
wan and was a resident of Canada and Wonder was a corpora
tion incorporated pursuant to the laws of the state of Delaware,
of the United States of America, and was a non-resident of
Canada;
(b) that pursuant to the agreement of March 1st, 1976,
Wonder granted to the Plaintiff the use of or the right to use in
Manitoba, Saskatchewan and Alberta, Wonder's systems,
methods, machinery, products and trade name and to conduct a
business under the trade name "Wonder Muffler" and/or other
trade name, mark, style, logo, and label that Wonder shall
make available to the Plaintiff;
(c) that the payment of $115,000.00 (U.S.) by the Plaintiff to
Wonder was a payment for the use of or for the right to use in
Canada Wonder's property, invention, trade name, patent,
trade mark, design or model, plan, process or other thing
whatever, within the meaning of subparagraph 212(1)(d)(î) of
the Income Tax Act;
(d) that the amount of $115,000.00 (U.S.) paid by the Plaintiff
to Wonder pursuant to the agreement of March 1st, 1976, was
a franchise fee for obtaining the Wonder Muffler franchise;
(e) that in carrying on the business granted under the March
1st, 1976 agreement the Plaintiff employed the style name of
"Wonder Muffler (Western) a Division of Farm Parts Dis
tributing Ltd.".
Based on the findings of fact of the learned Trial
Judge, supra, the Minister has not succeeded in
establishing the assumptions set out in paragraphs
(b),(c) or (d) supra. Such being the case, it seems
to me that the decisions in the Pillsbury (supra)
and Conway 9 cases apply and that the assessment
must therefore fall.
The appellant submitted in the alternative that
if the payments made by the respondent to
Wonder were not caught by the language of sub-
paragraph (i) of paragraph (d) of section 212(1),
then, in any event, these payments were, in reality,
payments for "rent, royalties or similar payments"
as described in the general section of paragraph
(d) of section 212(1). In view of the findings of the
learned Trial Judge referred to supra, as to what
the respondent received pursuant to the agree
ments, it seems quite clear that these payments
could not in any way be considered to be rentals,
or royalties, or payments which are similar to rents
or royalties. The payment made by the respondent
was a lump sum payment, a "one-time" payment
for the duration of the agreement (25 years),
renewable for a further 15 years by the respondent
without payment of any additional fee; the pay
9 Conway v. M.N.R. [ 1966] Ex.C.R. 64 at 69.
ment was to be made irrespective of the extent of
use by the respondent under the agreements and
was unrelated to the profits made by the respond
ent as the result of any use 10 . The payments made
herein seem to be quite unrelated to rentals, royal
ties or similar payments. I accordingly reject the
appellant's alternative argument.
In view of the conclusions I have reached supra,
it becomes unnecessary to consider the appellant's
submission that the monies paid by the respondent
were monies paid for obtaining the use or the right
to use in Canada the Wonder Muffler franchise".
For the foregoing reasons, I would dismiss the
appeal with costs.
* * *
RYAN J.: I concur.
* * *
KERR D.J.: I concur.
' 0 See: United Geophysical Co. of Canada v. M.N.R. 61
DTC 1099 at 1104-1105.
See also: Vauban Productions v. The Queen 75 DTC 5371 at
5372.
See also: Murray v. Imperial Chemical Industries, Ltd.
[1967] 2 All E.R. 980 at 983.
See also: The Queen v. Saint John Shipbuilding & Dry Dock
Co. Ltd. 79 DTC 5297 at 5300-5303.
" The issue as to the applicability of Articles I and II of The
Canada-United States of America Tax Convention and section
6 of the Protocol and thus the franchise question, need only be
considered if it is concluded that subject payments are caught
by the charging provisions of section 212(1).
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.