A-530-79
The Queen (Appellant)
v.
Saint John Shipbuilding & Dry Dock Co. Ltd.
(Respondent)
Court of Appeal, Thurlow C.J., Ryan J. and Kerr
D.J.—Fredericton, June 2; Ottawa, July 8, 1980.
Income tax — Income calculation — Non-residents —
Payments made to foreign, non-resident corporation for right
to use computerized information in connection with its ship
building operation — Appeal from Trial Division decision that
those payments did not fall within the wording of s. 106 or 212
of the Income Tax Act nor within the meaning of "rentals and
royalties" as defined in the Protocol — Whether payments are
amounts in respect of which non-resident tax was payable —
Income Tax Act, R.S.C. 1952, c. 148, ss. 106, 109; S.C.
1970-71-72, c. 63, s. 212 — The Canada-United States of
America Tax Convention Act, 1943, S.C. 1943-44, c. 21,
Articles I and II and the Protocol, clause 6(a).
This is an appeal from a decision of the Trial Division which
held that three payments made to a foreign, non-resident
corporation for the right to use computerized information in
connection with respondent's shipbuilding operation, were
amounts which did not fall within the wording of section 106 of
the 1952 Income Tax Act as it applied to the 1971 taxation
year or as the renumbered section 212 of S.C. 1970-71-72, c. 63
for the 1972 and 1973 taxation years nor within the meaning of
the term "rentals and royalties" as defined in the Protocol to
the Canada-U.S. Tax Convention and were exempt under its
provisions. The question is whether those payments are
amounts in respect of which non-resident tax was payable for
the ; 1971, 1972 and 1973 taxation years.
Held, the appeal is dismissed. Firstly, it is not necessary to
reach a definite conclusion on the point of whether the wording
of subparagraph (1)(d)(i) of sections 106 and 212 of the
Income Tax Act is broad enough to include the payments in
question, since the Convention must prevail. Secondly, the
payments have none of the characteristics of rentals or royal
ties. There is no reason to think that the word "rental", when
used in reference to property rights of the kinds enumerated in
clause 6(a) of the Protocol, would connote characteristics dif
ferent from those it has in its more familiar use in relation to
tangible property. A rental can be paid in a lump sum, but the
word is inseparable from the connotation of a payment for a
term, whether fixed in time or determinable on the happening
of an event or in a manner provided for, after which the right of
the grantee to the property and to its use reverts to the grantor.
"Royalties", though a broad term, when used in the sense of a
payment for the use of property, connotes a payment calculated
by reference to the use or to the production or revenue or
profits from the use of the rights granted. Here, there was no
limit as to time with respect to use or the right to use. Nor were
the payments proportionate to or in any way related to use or
extent of use or to revenues or profits therefrom or to a period
of use. The right to use the information and to keep the
physical objects supplied by the foreign corporation, as well as
what was produced by using them in the computer, continued
in the respondent indefinitely.
Western Electric Co. Inc. v. Minister of National Revenue
[1969] 2 Ex.C.R. 175 (affirmed [1971] S.C.R. vi),
referred to. Minister of National Revenue v. Wain-Town
Gas and Oil Co. Ltd. [ 1952] 2 S.C.R. 377, referred to.
INCOME tax appeal.
COUNSEL:
L. P. Chambers, Q.C. and C. G. Pearson for
appellant.
E. Neil McKelvey, Q.C. for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
McKelvey, Macaulay, Machum & Fair-
weather, Saint John, for respondent.
The following are the reasons for judgment
rendered in English by
THURLOW C.J.: The issue in this appeal' is
whether lump sum payments of $25,375, $75,000
and $81,875 made by the respondent in 1971, 1972
and 1973 respectively to Com/Code Corporation,
a non-resident United States corporation, were
amounts in respect of which the respondent was
required by the applicable provisions of the Income
Tax Act 2 to deduct and remit to the Receiver
General of Canada non-resident income tax pay
able by Com/Code.
' Trial judgment [1979] 2 F.C. 743.
2 For 1971 section 109 [R.S.C. 1952, c. 148], and for 1972
and 1973 renumbered section 215 [S.C. 1970-71-72, c. 63],
provided in part:
109. (1) When a person pays or credits or is deemed to
have paid or credited an amount on which an income tax is
payable under this Part, he shall, notwithstanding any agree
ment or any law to the contrary, deduct or withhold there
from the amount of the tax and forthwith remit that amount
to the Receiver General of Canada on behalf of the non-resi
dent person on account of the tax and shall submit therewith
a statement in prescribed form.
(Continued on next page)
The amounts in question were paid by the
respondent pursuant to a contract under which
Com/Code supplied to a Canadian computer ser
vice company for the respondent (it might alterna
tively have been for the respondent's own comput
er had it had one of the kind required) tapes
containing technical data or material referred to as
the Autokon-I System which, when combined with
input data on a specific ship's hull, produced tech
nical data for use in the construction of the hull.
The items supplied by Com/Code included, as
well, users manuals and programmers manuals.
The information so obtainable by the use of the
system was not secret. It was information that
could have been worked out by competent techni
cal personnel, as had formerly been necessary, by
more laborious efforts and with the expenditure of
much more time. Com/Code also made the system
available to other shipbuilders at a price. The
respondent was, however, bound by the contract to
keep the information obtained by use of the system
confidential and to use it only for the respondent's
purposes. Subject to that, there was no contractual
restriction on the respondent as to how many times
or over what period of time information might be
obtained or preserved or used and the amounts of
the payments were in no way related to the extent
of such use, or to revenues or profits attributable
thereto or to the period of such use. Under the
contract it was open to the respondent to continue
indefinitely obtaining information from the com
puter and to keep the information as long and to
use it as often as the respondent wished.
The contract does not purport to evidence a sale
of the tapes and manuals to the respondent.
(Continued from previous page)
(5) Where a person has failed to deduct or withhold any
amount as required by this section from an amount paid or
credited or deemed to have been paid or credited to a
non-resident person, that person is liable to pay as tax under
this Part on behalf of the non-resident person the whole of
the amount that should have been deducted or withheld, and
is entitled to deduct or withhold from any amount paid or
credited by him to the non-resident person or otherwise
recover from the non-resident person any amount paid by
him as tax under this Part on behalf thereof.
Instead, it purports to be a grant of a non-exclu
sive licence to use the system in connection with
the design and construction of the respondent's
ships, the forming of sections of ships and for other
industrial applications for which the system may
be suitable. There is in the contract no reference to
the ownership of the tapes or manuals so supplied
nor is there any provision which gives Com/Code
any right in any circumstances to require that they
be returned.
The statutory provision under which tax is
claimed on the amount paid in the year 1971 was
section 106 of the Income Tax Act, R.S.C. 1952,
c. 148, as amended by S.C. 1968-69, c. 44, s. 29(1)
and on the amounts paid in 1972 and 1973 was
section 212 of the Income Tax Act as amended by
S.C. 1970-71-72, c. 63. The relevant portions of
section 106 read as follows:
106. (I) Every non-resident person shall pay an income tax
of 15% 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,
(ii) for information concerning industrial, commercial or
scientific experience where the total amount payable as
consideration for such information is dependent in whole
or in part upon
(A) the use to be made thereof or the benefit to be
derived therefrom,
(B) production or sales of goods or services, or
(C) profits,
(iii) for services of an industrial, commercial or scientific
character performed by a non-resident person where the
total amount payable as consideration for such services is
dependent in whole or in part upon
(A) the use to be made thereof or the benefit to be
derived therefrom,
(B) production or sales of goods or services, or
(C) profits,
but not including a payment made for services performed
in connection with the sale of property or the negotiation
of a contract,
(iv) made pursuant to an agreement between a person
resident in Canada and a non-resident person under which
the non-resident person agrees not to use or not to permit
any other person to use any thing referred to in subpara-
graph (i) or any information referred to in subparagraph
(ii), or
(v) that was dependent upon the use of or production from
property in Canada whether or not it was an instalment on
the sale price of the property, but not including an instal
ment on the sale price of agricultural land,
but not including
(vi) a royalty or similar payment on or in respect of a
copyright,
(vii) a payment in respect of the use by a railway company
of railway rolling stock as defined in paragraph (25) of
section 2 of the Railway Act,
(viii) a payment made under a bona fide cost-sharing
arrangement under which the person making the payment
shares on a reasonable basis with one or more non-resident
persons research and development expenses in exchange
for an interest in any or all property or other things of
value that may result therefrom, or
(ix) a rental payment for the use of or the right to use
outside of Canada any corporeal property;
The only material difference in the relevant word
ing of section 212 is that under it the tax is fixed at
25%. However, under the Convention referred to
later in these reasons it is not to exceed 15% in
situations to which the Convention applies.
It will be observed that the net cast by subpara-
graph 106(1)(d)(i) is very broad. It includes not
only "rent, royalty or a similar payment" but "any
payment" for "the use of or for the right to use in
Canada" any "property" (a word which is defined
in the broadest of terms in paragraph 139(1)(ag)
(now a part of subsection 248(1)) or any of the
items enumerated in the wording that follows it, or
"other thing whatever". This very broad wording
came into effect in 1968. Prior to that the wording
had been much narrower. Western Electric Co.
Inc. v. M.N.R. 3 was decided on it.
3 [1969] 2 Ex.C.R. 175; affirmed [1971] S.C.R. vi.
With respect to payments to residents of the
United States, however, the provisions of the
Income Tax Act are, and have been since 1944,
subject to the provisions of the Canada-U.S.
Reciprocal Tax Convention and Protocol thereto
signed in March 1942. 4
Articles I and II of the Convention provide:
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 Conven
tion 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 contract
ing States.
Paragraph 6(a) of the Protocol, as renumbered
in 1956, defines "rentals and royalties" as follows:
6. (a) The term "rentals and royalties" referred to in Article
11 of this Convention shall include rentals or royalties arising
from leasing real or immovable, or personal or movable prop
erty 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, franchises and other like property:
Both the Tax Review Board and the Trial Divi
sion of this Court held that the amounts here in
question did not fall within the wording of section
106 or 212 of the Income Tax Act. The Trial
Division also held that the amounts did not fall
within the meaning of "rentals and royalties" as
° See The Canada-United States of America Tax Conven
tion Act, 1943, S.C. 1943-44, c. 21.
defined in the Protocol to the Convention and were
exempt under its provisions.
Assuming that the wording of subparagraph
(1)(d)(i) of sections 106 and 212 is to have its full
scope and is not to be restricted because of the
presence of the subparagraphs which follow it, I
am not satisfied that the provision is not broad
enough to include the payments in question. It is
not easy for a payment of the kind described to
escape the definition of "any payment ... for the
use of or for the right to use in Canada any
property ... or other thing whatever." But I do not
think it is necessary to reach a definite conclusion
on the point since the Convention must prevail
and, if because of its provisions, Com/Code was
not liable for Canadian income tax in respect of
the amounts, that is the end of the matter.
As the amounts in question were plainly indus
trial and commercial profits of Com/Code they
were exempted under the broad language of
Article I of the Convention and could only be
made subject to the Canadian non-resident tax if
they fell within the exception from industrial and
commercial profits provided in Article II with
respect to "income in the form of rentals and
royalties". Moreover, the amounts could only be
"income in the form of rentals and royalties" if
they fell within the definition of "rentals and
royalties" in the Protocol.
That definition appears to be intended to expand
the scope of what would be covered by the ordi
nary meaning of rentals and royalties but it seems
to me that the expansion is not in the meaning of
the words but is by reference to the sorts of things
in respect of which the rentals and royalties are
paid. The expression is to include "rentals or royal
ties" from leasing both real or immovable and
personal or movable property (all apparently of a
corporeal nature) and is to include as well "rentals
or royalties" for the use of or for the privilege of
using a list of items of incorporeal property.
Nowhere, however, is there any wording which
could have the effect of expanding the definition
by including payments that do not have the char
acteristics ordinarily associated with rentals or
royalties. It was submitted for the appellant that
the use of the words "or for the privilege of using"
expanded the meaning but I do not think that is so.
The wording is apt with respect to rentals 5 while
the wording "for the use of' is apt with respect to
royalties. There is therefore no justification for
interpreting the definition so as to distort the
ordinary meaning of either word.
In my opinion what Com/Code gave and the
respondent received under the contract cannot be
regarded as the use of or the privilege of using
"patents, copyrights, secret processes and for
mulae, good will, trade marks, trade brands [or]
franchises" within the meaning of the definition
but it seems to me to be conceivable that it might
fall within the meaning of "other like property".'
However, assuming that it does, I do not think that
the payments made by the respondent can be
regarded as "rentals or royalties" for its use or for
the privilege of using it.
The payments have none of the characteristics
of rentals or royalties. The word "rental" is not a
familiar one to use in connection with property
rights of the kinds enumerated but I see no reason
to think that when used in reference thereto it
would connote characteristics different from those
it has in its more familiar use in relation to
tangible property. A rental can, of course, be paid
in a lump sum but in my opinion the word is
inseparable from the connotation of a payment for
a term, whether fixed in time or determinable on
the happening of an event or in a manner provided
for, after which the right of the grantee to the
property and to its use reverts to the grantor.
"Royalties", though a broad term, when used in
the sense of a payment for the use of property.
connotes a payment calculated by reference to the
use or to the production or revenue or profits from
5 Vide Stroud's Judicial Dictionary, Fourth Edition, p. 2328:
Rent.
... It has been said that the primary meaning of "rent" is the
sum certain, in gross, which a tenant pays his landlord for the
right of occupying the demised premises (see C. Litt. 96 a, 141
b. 142 a; Jacob; Elph.; Woodfall).
6 Compare Western Electric Co. Inc. v. M.N.R. (supra).
the use of the rights granted. In Jowitt's Diction
ary of English Law the term is defined thus:
Royalty, a payment reserved by the grantor of a patent, lease
of a mine or similar right, and payable proportionately to the
use made of the right by the grantee. It is usually a payment of
money, but may be a payment in kind, that is, of part of the
produce of the exercise of the right. See RENT.
Royalty also sometimes means a payment which is made to
an author or composer by an assignee or licensee in respect of
each copy of his work which is sold, or to an inventor in respect
of each article sold under the patent.?
Neither "rentals" nor "royalties", in the ordinary
connotation, in my opinion, includes a lump sum
payment for the use of or for the privilege of using
property indefinitely.
It seems to me as well that the repetition of the
expression "rentals or royalties" in the definition,
which, with deference, appears to me to have an
unusual grammatical construction, indicates that
the authors had in mind that what was being dealt
with was the taxation of income, as opposed to
capital, and that the expression "rentals or royal
ties" is used, rather than "any payment", in order
to ensure that no payment that would not have the
characteristics of "rentals or royalties" would be
included.
Here there was no limit as to time with respect
to use or the right to use. Nor were the payments
proportionate to or in any way related to use or
extent of use or to revenues or profits therefrom or
to a period of use. The right to use the information
and to keep the physical objects supplied by Com/
Code, as well as what was produced by using them
in the computer, continued in the respondent
indefinitely. It follows, in my view, that the pay
ments were not rentals or royalties within the
meaning of the Convention and Protocol and that
Com/Code was not liable to non-resident tax in
respect of them.
See also M.N.R. v. Wain-Town Gas and Oil Co. Ltd.
[1952] 2 S.C.R. 377, per Kerwin J. (as he then was) at p. 382.
The appeal therefore fails and it should be
dismissed with costs.
* * *
RYAN J.: I agree.
* * *
KERR D.J.: I agree.
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.