Heald, J:—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 interest, said assessment being dated April 29, 1976.
The sole issue in the appeal is whether payments totalling $115,000 (US) made by the respondent, a Canadian resident, to an American resident, Wonder International Ltd (hereafter Wonder), are subject to the 15% tax im- posed by paragraph 212(1)(d) of the Income Tax Act, RSC 1952, c 148, as amended by section 1 of SC 1970-71-72, c 63 and by Article XI of the Canada- US Tax Convention*.
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 identical. Likewise, at the hearing before us, the appeals were argued together.
At the trial, the parties’ pleadings were amended 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-US Tax Conventiont and section 6 of the Protocolt.
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, USA 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 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 (AB pp 19-21):
What Farmparts obtained from Wonder International 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, BC, 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 subdistributors paid $17,950. These sub-distributors obtained with their “package”:
1. one “Wonder Magic” 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 advertising agency of Farmparts);
3. an inventory of certain business forms;
4. “Wonder” decals of its logo;
5. a sign; and
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 personal 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, goodwill, trade marks, trade brands, franchises and other like property;
6. an opening inventory of exhaust pipes, shackles and other parts necessary to complete the installation 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 International but according to Clause 17 in each of the Agreements, Exhibits 1 and 2, which are entitled “Procedures Upon Termination” (of the Agreements), 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 subparagraph 212(1)(d)(i) supra stating as follows (AB p 27):
Accordingly in considering the facts disclosed in the evidence on these appeals and applying the meaning as indicated of this subsection 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 subsection, 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 International to prohibit Farmparts from telling its subdistributors 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 subsection. 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 MNR v Pillsbury Holdings Limited, [1965] 1 Ex CR 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)(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.
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 subparagraph 212(1)(d)(i) 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 submits that the intent of Parliament to widen the scope of paragraph 212(1)(d) is evidenced by the fact that paragraph 106(1)(d), the predecessor to paragraph 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” and the Robinson casef.
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 payments 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 lawt, that is, in this case, within the four corners of subparagraph 212(1)(d)(i).
The learned trial judge, based on his interpretation 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;
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, Saskatchewan 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 respondent 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 supported 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 subparagraph 212(1)(d)(i).
Dealing now with the second category, it is instructive to refer to the description of this concept, as found from the evidence, by the learned trial judge.
At pp 23 and 24 of Volume 1 of the Appeal Book, he described this concept or technique as follows:
Wonder International is a Delaware corporation of New Jersey, USA. It manufactured and sold the machine called “Wonder Matic” which was an exhaust pipe bending machine which enables 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 franchised dealers of the various automobile manufacturers. The replacement systems were installed by authorized dealers of these automobile manufacturers or by private repair shops or service stations which later 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 subparagraph 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 paragraph 212(1 )(d). I think also that the word “property” as used in subparagraph 212(1)(d)(i) and as defined by subsection 248(1) of the Income Tax Act* can be said to include such a merchandising 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 subparagraph 212(1 )(d)(i).
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 category does not come within subparagraph 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 subparagraph 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 MNR v Pillsbury Holdings Limited, [1965] 1 Ex CR 676; [1964] CTC 294; 64 DTC 5184 for this principle. He held further that there was an onus of allocation on the Minister to establish what portion of the payments were payments for “things” caught by the charging provisions of the section; that the Minister had not discharged that onus and accordingly, the respondent taxpayer was entitled to succeed in full.
The Minister, in assessing the respondent, made the following assumptions of fact (see AB p 8):
(a) that at all material times the plaintiff was a corporation incorporated pursuant to the laws of the Province of Saskatchewan and was a resident of Canada and Wonder was a corporation 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 (US) 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)(i) of the Income Tax Act’,
(d) that the amount of $115,000 (US) paid by the plaintiff to Wonder pursuant to the agreement of March 1, 1976, was a franchise fee for obtaining the Wonder Muffler franchise;
(e) that in carrying on the business granted under the March 1,1976 agreement the Plaintiff employed the style name of “Wonder Muffler (Western) a Division of Farm Parts Distributing 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 subparagraphs (b), (c) or (d) supra. Such being the case, it seems to me that the decisions in the Pillsbury (supra) and M J Conway Estate v MNR, [1966] Ex CR 64; [1965] CTC 283; 65 DTC 5169, 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 subparagraph (i) of paragraph (d) of subsection 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 subparagraph (d) of subsection 212(1). In view of the findings of the learned trial judge referred to supra, as to what the respondent received pursuant to the agreements, 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 payment 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 respondent as the result of any use*. The payments made herein seem to be quite unrelated to rentals, royalties 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.
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