T-3304-77
Farmparts Distributing Ltd. (Plaintiff)
v.
The Queen (Defendant)
and
T-3305-77
Farmparts Distributing Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Saskatoon, March 29;
Ottawa, May 10, 1979.
Income tax — Non-residents — Withholding tax —
Amount paid by Canadian distribution company to U.S. com
pany for exclusive right to buy machine for re-sale to sub-dis
tributors, their concept of merchandising, and trade name and
logos — Purchase price of any machine not included in
amounts paid — On re-sale to sub-distributors, only the
machine came from U.S. company — Whether or not pay
ments made to U.S. company subject to 15% tax pursuant to
s. 212(1)(d) — Income Tax Act, S.C. 1970-71-72, c. 63, s.
212(1)(d).
Plaintiff, by notices of assessment, was levied tax equivalent
to 15% of two amounts paid by it to Wonder International
Limited 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 plaintiff were for the exclusive right to
purchase exhaust pipe bending machines for re-sale to sub-dis
tributors, 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
re-sale to its sub-distributors, plaintiff 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 plaintiff
to the U.S. company pursuant to the contracts are subject to
15% tax imposed by paragraph 212(1)(d) in the 1976 taxation
year.
Held, the action is allowed. The words "rent, royalty or ...
[other] similar payment" used in paragraph 212(1)(d) require
a determination categorizing the payments made in every case
because the basic scheme and concept of the present Income
Tax Act is that all categories of specific factual situations are
provided for in its charging provisions. Therefore, in all of the
subparagraphs of paragraph 212(1)(d) (except 212(1)(d)(v)),
what is contemplated is payment on income account. Subpara-
graph 212(1)(d)(î) is the only applicable subparagraph. The
only thing that Farmparts obtained from the U.S. company for
these payments which fit within the concept of this subpara-
graph—payments on income account, and therefore within the
charging provision and subject to income tax—was the right to
use the name, logo and other things arising out of the U.S.
company's apparent failure to prohibit Farmparts from allow
ing its sub-distributors from using them. Plaintiff, in evidence,
has established that the assumptions for the assessments are not
correct in part and therefore is entitled to relief. Further, there
was an onus of allocation on the Minister to establish what part
of the payments were for "things" within the meaning of the
charging provisions of subparagraph 212(1)(d)(î) and so sub
ject to assessment for income tax which was not discharged.
The plaintiff, therefore, is entitled to succeed in full.
Harry Ferguson (Motors), Ltd. v. Commissioners of
Inland Revenue (1951) 33 T.C. 15, discussed.
ACTION.
COUNSEL:
D. H. Wright, Q.C. for plaintiff.
J. R. Power and R. G. Ventura for defendant.
SOLICITORS:
MacDermid & Company, Saskatoon, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GIBSON J.: Farmparts Distributing Ltd. of Sas-
katchewan, Canada by notices of assessment for
income tax dated November 26, 1976 and April
29, 1976 was levied tax equivalent to 15% of two
amounts paid by it to Wonder International Lim
ited of New Jersey, U.S.A., on the premise that
such should have been withheld and paid as
income tax.
This is a hearing on common evidence of the
appeals from both these assessments.
Farmparts entered into two agreements with
Wonder International dated respectively March 1,
1976 (Exhibit 1) and May 25, 1976 (Exhibit 2);
and Farmparts paid Wonder International $115,-
000 U.S. in respect of the agreement Exhibit 1
and $75,000 U.S. in respect of the agreement
Exhibit 2.
What Farmparts obtained from Wonder Inter
national pursuant 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, Northwest Territories, Yukon and
Alaska;
2. the concept or technique of merchandising
these replacement 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 1 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 International 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-dis
tributors 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 show
ing 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 advertising 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 installa
tion replacement muffler 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 without
objection by Wonder International. No effective
control of such use was required by Wonder Inter
national. But according to clause 17 in each of the
agreements, Exhibits 1 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 Farm-
parts 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 neces
sary 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 con
sent of Wonder International.)
The issue in each of the appeals is whether or
not the respective payments of $115,000 U.S. and
$75,000 U.S. made by Farmparts to Wonder
International are subject to the 15% tax imposed
by paragraph 212(1)(d) of the Income Tax Act in
the taxation year 1976.
Paragraph 212(1)(d) of the Income Tax Act
reads as follows:
212. (1) Every non-resident person shall pay an income tax
of 25% [15% for the purpose of these appeals] 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 a property that is railway rolling stock as defined in the
definition "rolling stock" in section 2 of the Railway Act
(A) if the payment is made for the use of that property
for a period or periods not expected to exceed in the
aggregate 90 days in any 12 month period, or
(B) in any other case, if the payment is made pursuant
to an agreement in writing entered into before Novem-
ber 19, 1974;
(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,
(ix) a rental payment for the use of or the right to use
outside Canada any corporeal property, or
(x) any payment made to a person with whom the payer is
dealing at arm's length, to the extent that the amount
thereof is deductible in computing the income of the payer
under Part I from a business carried on by him in a
country other than Canada;
The words "rent" or "royalty" are not defined
in paragraph 212(1)(d) of the Income Tax Act or
elsewhere in the Act.
Subsection 212(1) of the Act is a charging
provision. If these amounts are payments within
the meaning of paragraph 212(1)(d), these appeals
fail, and contrariwise.
Farmparts was incorporated under the laws of
the Province of Saskatchewan, Canada, on
December 9, 1974. Its business includes the sale
and distribution of farm machinery and farm and
automotive parts. In its distribution business it
made contract arrangements with thirty-one (31)
sub-distributors who bought its so-called "pack-
age" above referred to, and after that replacement
parts inventory.
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 muffler systems for American
automobiles were supplied by the various fran
chised dealers of the various automobile manufac
turers. The replacement systems were installed by
authorized dealers of these automobile manufac
turers 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 replace
ment muffler systems was different from either of
the two concepts of merchandising referred to
above.
Wonder International manufactured this
machine which enabled an operator to bend uni
versal 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 sys
tems 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.
During all material times, no exhaust pipe bend
ing machine was manufactured in Canada. Conse
quently, this Wonder International machine came
into Canada duty free. That, however, is not the
situation today. According to the evidence there
are at least two manufacturers of exhaust pipe
bending machines in Canada, and so the advan
tage (whatever it may have been, or thought to
have been) of buying this Wonder International
machine no longer exists.
Pursuant to Exhibits 1 and 2 and not in issue in
these appeals, Farmparts also had to pay Wonder
International pursuant to clause 8 in each of the
agreements a royalty (within the meaning of "roy-
alty" in paragraph 212(1)(d) of the Income Tax
Act) in "the sum of Five (5%) Percent of ... (its)
gross receipts". Farmparts paid Wonder Interna
tional royalty payments under these provisions and
deducted and paid the requisite income tax for a
year or two but has ceased now, according to the
evidence, because Wonder International apparent
ly is no longer in business.
The pleadings, especially the assumptions in the
defence on which issue was joined, require special
ly a determination of whether or not each of the
payments made by Farmparts to Wonder Interna
tional in respect of the agreements, Exhibits 1 and
2, was or was not "rent, royalty or a similar
payment" within the meaning of paragraph
212(1)(d) of the Income Tax Act.
That paragraph also employs the following
words in an attempt to better categorize such
payments, namely: "including, but not so as to
restrict the generality of the foregoing, any pay
ment (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".
Counsel for the defendant submits that each of
these payments by Farmparts to Wonder Interna
tional a non-resident person was within the mean
ing of one or more of the following things in that
subparagraph, namely: "for the use of or for the
right to use in Canada ... property ... trade name
... or other thing whatever".
Counsel for the plaintiff, among other things,
submits that the ejusdem generis rule should be
employed in considering all the words used in this
paragraph of the Act to assist in determining
whether each of these payments should be con
sidered as a payment falling within the meaning of
"rent, royalty or ... [other] similar payment"; and
that in so employing this rule one should find that
they are outside such meaning because that para
graph refers to and charges only payments made
on income account not on capital account. (Cf.
Murray (Inspector of Taxes) v. Imperial Chemical
Industries, Ltd.')
The words "rent, royalty or ... [other] similar
payment" used in paragraph 212(1)(d) of the
Income Tax Act require a determination catego
rizing the payments made in every case. This is so
because the basic scheme and concept of the
present Income Tax Act is that all categories of
specific factual situations are provided for in its
1 [1967] 2 All E.R. 980 at 981.
charging provisions. In other words, everything is
considered to be covered.
This is a fundamental change from the basic
scheme and concept of the previous Act which
employed general language in its charging provi
sions. It dealt with principles and standards. It left
for judicial decision whether a particular factual
situation fell within or without such general lan
guage in the charging provisions.
Therefore, in considering the categorization of
the payments made in this case, it appears that in
all of the subparagraphs of section 212(1)(d) of
the Income Tax Act (except subparagraph
212(1)(d)(v)) what is contemplated is payments
on income account. It appears also that subpara-
graph 212(1)(d)(i) only may be applicable in these
appeals. It appears also that the subject payments
were lump sum payments, made once and for all,
but that feature in the subject cases is not of
material assistance in determining the categoriza
tion of such payments.
As is commented upon in such texts as White-
man and Wheatcroft on Income Tax, 2nd ed., and
as was said in Harry Ferguson (Motors), Ltd. v.
Commissioners of Inland Revenue 2 by Lord Mac-
Dermott C.J., at page 42, the problem of deciding
what features or characteristics distinguish "an
income receipt from a capital receipt" is a difficult
question of fact:
During the debate many cases were cited in which a decision
was reached as to whether particular payments were capital or
income .... There is so far as we are aware no single infallible
test for settling the vexed question where a receipt is of an
income or a capital nature. Each case must depend upon its
particular facts and what may have weight in one set of
circumstances may have little weight in another. Thus the use
of the words "income" and "capital" is not necessarily conclu
sive; what is paid out of pr fits may not always be income; and
what - is paid as consideration for a capital asset may on
occasion be received as income. One has to look to all the
relevant circumstances and reach a conclusion according to
their general tenor and combined effect.
But this does not hold true of payments, although
the problem of deciding whether a payment is on
income account or on capital account is also a
question of fact. In the case of payments the
difficulty experienced in the case of receipts of "no
2 (1951) 33 T.C. 15.
single infallible test" to determine whether a
receipt is capital or income frequently does not
exist where often with respect to payments there
are tests available in the context of particular facts
and statutory provisions so that a payment may be
more easily designated as either of an income or
capital nature.
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 Farm-
parts obtained from Wonder International for
these payments which fit within the concept of this
subparagraph, namely, payments on income
account (and therefore within the charging provi
sions 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 International to pro
hibit 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
provisions of this paragraph. Again, what part
should be so allocated is impossible to determine.
In the result, the plaintiff in evidence has estab
lished that the assumptions for the assessments are
not correct in part. The plaintiff is therefore en
titled to relief. (See M.N.R. v. Pillsbury Holdings
Limited 3 .) 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 subpara-
graph 212(1) (d) (i) 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.
3 [1965] 1 Ex.C.R. 676.
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.