2021 QCCA 393, 2021 QCCA 393

Agence du revenu du Québec c. Unidisc musique inc. 2021 QCCA 393 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-028299-196 (500-80-032118-151) DATE: March 10, 2021 CORAM: THE HONOURABLE FRANÇOIS DOYON, J.A. MARK SCHRAGER, J.A. CHRISTINE BAUDOUIN, J.A. AGENCE DU REVENU DU QUÉBEC APPELLANT – Defendant v. UNIDISC MUSIQUE INC.

RESPONDENT – Plaintiff JUDGMENT [ 1 ] On appeal from the judgment rendered on April 2, 2019, by the Court of Québec, District of Montreal (the Honourable Brigitte Gouin) , allowing Respondent’s appeal from certain tax assessments issued by Appellant, the Agence du Revenu du Québec. [ 2 ] For the reasons of Justice Schrager, J.A., with which Justices Doyon and Baudouin, JJ.A., concur, THE COURT : [ 3 ] ALLOWS the appeal; [ 4 ] SETS ASIDE the judgment of the Court of Québec; [ 5 ] REINSTATES the assessments issued by Appellant under number 1101 on December 5, 2014 and under numbers 1121, 1141 and 1161 on December 16, 2014, regarding taxation years 2010, 2011, 2012 and 2013; [ 6 ] THE WHOLE with costs in first instance and in appeal.

FRANÇOIS DOYON, J.A. MARK SCHRAGER, J.A. CHRISTINE BAUDOUIN, J.A. Mtre Normand Perreault LARIVIÈRE MEUNIER For Appellant Mtre Dominic Charles Belley Mtre Jonathan Lafrance NORTON ROSE FULBRIGHT CANADA For Respondent Date of hearing: February 2, 2021 REASONS OF SCHRAGER, J.A.

[ 7 ] This is an appeal from the judgment rendered on April 2, 2019, by the Court of Québec, District of Montreal (the Honourable Brigitte Gouin), [1] allowing Respondent’s appeal from certain tax assessments issued by Appellant, the Agence du Revenu du Québec. [ 8 ] The ultimate question at issue before this Court pertains to the tax treatment of master tape recordings acquired by Respondent and, particularly, whether the trial judge erred in concluding that the master tapes acquired by Respondent are tangible property and can therefore be treated as depreciable property at an annual capital cost allowance rate of 20% under class 8(

j) of

Schedule B of the Regulation respecting the Taxation Act . [2] [ 9 ] For the reasons stated below, I would allow the appeal and reinstate the initial assessments as issued by Appellant. I. FACTS [ 10 ] The facts are not contested, but the effect to be given to the tax treatment of those facts is in issue. [ 11 ] Respondent is a company operating in the music industry and, specifically in this instance, selling recordings.

In the normal course of its business, it purchased a large number of master tapes of recordings of music described by it as the first recording of a song or musical composition, being the best quality of recording and thus enabling the fabrication of copies of good quality for resale as CDs or online music.

The master recordings are magnetic tapes on which each instrument and voice are physically recorded on separate tracks. [ 12 ] As mentioned above, for taxation purposes, in its returns for the years 2010 to 2013 inclusively, Respondent treated the master recordings as tangible depreciable property under class 8(

j) of

Schedule B of the Regulation respecting the Taxation Act , which, for the years in question provided an annual depreciation rate of 20%. Respondent’s position is that the depreciation rate cannot exceed 7% since the property is intangible, as provided by

section 130 (

b) of the Taxation Act applicable at the time: [3] 130. A taxpayer may however deduct: 130. Un contribuable peut toutefois déduire les montants suivants : (…) […] (

b) the amount that the taxpayer claims in respect of a business, not exceeding 7% of the eligible incorporeal capital amount in respect of the business at the end of the year except that, where the year is less than 12 months, the amount allowed as a deduction under this paragraph shall not exceed that proportion of the maximum amount otherwise allowable that the number of days in the taxation year is of 365.

b) le montant qu’il demande à l’égard d’une entreprise, n’excédant pas 7 % de la

partie admise des immobilisations incorporelles relatives à l’entreprise à la fin de l’année ; toutefois, lorsque l’année comprend moins de douze mois, le montant déductible en vertu du présent paragraphe ne peut excéder la proportion du montant maximal qui serait déductible par ailleurs que représente le rapport entre le nombre de jours de l’année d’imposition et 365. II.

TRIAL JUDGMENT [ 13 ] The judge agreed that the master recordings were tangible depreciable property under class 8( j ). [4] Accordingly, the judge referred the assessments back to Appellant to be treated as such in virtue of the applicable rate of depreciation. [ 14 ] The judge first highlighted that full effect should be given to the purchase agreements in order to properly qualify the tapes [5] and stressed that the common intention of the parties should therefore be sought. [6] [ 15 ] The judge then concluded that Appellant wrongly assumed that the purchase agreements contained rights associated with music. [7] She found that the terms of the contracts and Mr.

Cucuzzella’s testimony were clear as to the limitation of Respondent’s rights, since it must pay royalties to artists and publishers in order to sell copies of any of the musical work recorded on the master tapes acquired. [8] [ 16 ] She continued by stating that tax laws must be interpreted in a coherent manner with other legislation such as the Copyright Act [9] and concluded that Respondent had acquired rights referred to in

section 18 of the Copyright Act , as those rights were inextricably linked to the master recordings. [10] However, she stated that Appellant mistakenly concluded that Respondent had acquired other rights. [11] [ 17 ] That conclusion - that Respondent did not acquire all rights pertaining to the music - led her to conclude that the quality of the sound was the sole criterion on which Respondent relied in purchasing the tapes. [12] She therefore concluded that the tapes had an intrinsic value [13] and decided that the master recordings were tangible property falling under class 8(

j) of

Schedule B of the Regulation respecting the Taxation Act and were thus subject to an annual capital cost allowance of 20%. [14] [ 18 ] As for the allocation of the purchase price, the judge noted that in light of the evidence, the entire purchase price should be allocated to the physical support since Respondent acquired the master tapes because of the sound quality. [15]

III. DISCUSSION [ 19 ] Appellant presents three questions to the Court: (

i) Did the trial judge err in law in the application of the rules of evidence? (ii) Did the trial judge err in law in the application of the clear act rule (“théorie de l’acte clair”)? (iii) Did the trial judge err in law in allocating the purchase price? * * * [ 20 ] Respondent treated the tapes as intangible property on its financial statements, such that Appellant argues that the judge’s failure to treat this as an admission is an error in law.

This allegation of Appellant was admitted; the financial statements themselves were not adduced in evidence in first instance. [ 21 ] The treatment of the tapes for financial statement purposes as intangible property is in the nature of a qualification of the asset and, as such, is a legal conclusion or opinion rather than an acknowledgment of a fact – i.e. an admission. [16] As such, I disagree that the judge erred in this regard.

Just as Appellant, the judge was not bound by the financial statements in determining the tax treatment of the master tapes absent a statutory provision to the contrary. [17] That Respondent may have considered the assets as intangible, even if not an admission, is also not binding on the judge in the exercise of the qualification for tax purposes of the purchased tapes. * * * [ 22 ] However, I do agree with Appellant that the judge erred by analyzing the common intention of Respondent and the vendors of the master tapes. The contracts were entered into by Respondent with arms’ length parties.

All the contracts, whose terms are identical, are clear as to what was purchased, such that no analysis of what the parties intended to sell or purchase is required nor was any revision of the contracts requested. [18] The principal of Respondent (Mr. Cucuzzella) did not contradict the terms of the agreements when he testified that the purchase price was a function of the sound quality of the master tapes. It is that quality which enabled Respondent to fabricate and sell good quality copies of the music.

The right to do this was an integral and essential element of what the Respondent purchased. [ 23 ] Appellant is correct that Respondent purchased more than the mere physical tapes. The bundle of rights purchased is not subject to controversy as the rights are clearly and specifically enumerated in one of the contracts of sale produced in evidence: 1. Scope of Purchase and Sale/Assets (

a) Seller hereby sells, assigns, transfers and conveys to Purchaser, in perpetuity for the universe (“Territory”), without restriction of any kind, subject, however, to the territorial restrictions set forth in the Artist Contracts delivered by the Seller (as hereinafter defined), all of its right, title and interest of any nature whatsoever , including, but not limited to, the intellectual property rights, neighboring rights and all copyrights , for the full term of copyright and any extensions and renewals thereof, in and to all the master recordings embodying the performances of various artists which are set forth in

Schedule “A” attached hereto and made part hereof (“Masters”).

The Masters shall include (as the same are in Seller’s possession) any and all edits, mixes, remixes and versions thereof as well as any all unreleased version thereof owned or controlled by Seller, and including the performances embodied therein together with any and all original packaging art (as well as such elements or reproductions of the packaging art as are in Seller’s possession) and liner copy (as are in Seller’s possession) and all contracts with third parties respecting the Masters (as are in Seller’s possession) and all parts derivatives of the Masters (as are in Seller’s possession) and all rights and interests attendant to the Masters, including, but not limited to, the following : (

i) The exclusive right to manufacture, advertise, sell, license, distribute or otherwise use or exploit , in any and all fields of use, in any configurations and/or by any technological or electronic forms, manners, techniques or methods of recording, duplication, transmission or distribution, now or hereafter known, the Masters and all Records and other derivatives thereof, under any name or trademark, and to authorize others to do so, or at its discretion, to refrain therefrom; (ii) The exclusive right to mix, re-mix, edit, couple or recouple any of the Masters, but subject to the terms of the Artist Contracts (as hereinafter defined); (iii) The exclusive right to use and publish the names, biographical material and photographs of featured artists (“Artist(s)”) whose performances are embodied in, (but subject to the terms of) the Artist Contracts delivered by the Seller; and of any other parties who rendered services of any nature in connection with, the Masters for advertising and trade purposes in connection with the manufacture, distribution, promotion, sale and other exploitation of the Masters and any derivatives thereof; (iv) The right to, and allow others to, publicly perform, broadcast, communicate and transmit the Masters in and by all technological or electronic forms , media, techniques or methods now or hereafter known, or otherwise, including, but not limited to, the right to analogically and digitally transmit, distribute and perform the Master by radio broadcast, television, the world-wide Internet, satellite, cable, wire and wireless systems; (

v) The exclusive right to use or adapt the artwork furnished by Seller or to develop and create new artwork for the packaging, advertising, sale and exploitation of Records hereunder; (vi) The exclusive right to use or license any of the Masters or the performances embodied therein for any purpose and reproduce by any method now or hereafter known, including, but not limited to, any use in connection with the synchronization of such performances in any and all audiovisual media now or hereafter known and any soundtrack albums derived there forms;

(vii) (

A) All rights whatsoever of Seller in and to the various agreements with each Artist, producer or other third parties who rendered services or thereunder (“Artist Contract(s)”) delivered by the Seller as set forth in

Schedule “B” attached hereto and made part hereof; (

B) The unrecouped balances of the various artists, producers and other third parties as more fully described in

Schedule “C” attached hereto and made part hereof; (viii) All rights whatsoever of Seller in and to the mechanical licenses, provided same are assignable to Purchaser, and any other licenses relating to the Masters which licenses and any rights thereunder are assigned to Purchaser hereby; (ix) All causes of action for the prior use or infringement of any of the Masters; (

x) All rights to receive, directly or indirectly, royalties, bonuses, advances, guarantees, or any other revenues derived from any source throughout the Territory from the sale, use or other exploitation of the Masters or any portion thereof, or from agreements relating to the Masters or to portion thereof; (xi) All books and records of account in any way associated or connected with the Masters and any Artist, producer or other third- party agreements in respect of all of the foregoing; and any and all other documents, records and materials necessary and appropriate to effectuate the intent of this Agreement and to use and exploit the Masters, (as the same are in Seller’s possession); (

b) As used herein, “Assets” shall mean individually and collectively all of the foregoing set forth in subparagraph 1(

a) above; (…) 7. Seller’s Representations, Warranties and Covenants. (…) (

b) Each Master as listed in

Schedule “A” consists of performances by the respective recording artists. (…) 11.

Definitions. (a) “Masters”, “master recording” - Any recording of sound, whether or not coupled with a visual image, by any method and on any substance or material or in any form, whether now or hereafter known, intended primarily for reproduction in the form of Records, or otherwise. (…) (Emphasis added) [ 24 ] In

summary, Respondent purchased the tapes together with the right to make and sell copies thereof, subject to the right of the composers and publishers of the music and songs recorded on such tapes – i.e. the payment to them of the applicable royalties for each copy sold. The contract is clear in this regard as is the testimony of the president of Respondent.

The reasons to purchase a master recording are what is recorded on the physical tape (the song or music) and by whom (the artist) as well as, in particular, the quality of the copies that can be manufactured from it, which quality enhances the value of such copies and the price they fetch in the marketplace. [ 25 ] Unless the parties’ contract contains an ambiguity, a Court should not do otherwise than give effect to the clear words of the document. [19] [ 26 ] Both the text of the contracts and Mr. Cucuzzella’s testimony are to the effect that Respondent acquired rights from the agreements.

Respondent acquired both tangible property (the tapes) and intangible property (the music and songs recorded on the tapes together with the rights associated with those sound recordings – i.e. to make and sell copies). [ 27 ] The trial judge seems to have concluded that since Respondent had not acquired all rights arising from or recognized under the Copyright Act (which remain with the authors (composers) and publishers), it did not acquire any rights, or at least those it did acquire were so inextricably connected to the master recordings, they constituted tangible property. [20] [ 28 ] The agreements and Mr.

Cucuzzella’s testimony are to the effect that Respondent did not acquire all copyright on the musical work. The agreements provide that royalties must be paid to the composer and publisher when reproducing and selling the musical work. [21] However, that does not mean that Respondent did not acquire any rights by virtue of the agreements. The terms of the contractual document and Mr. Cucuzella’s testimony are clear on that matter. [ 29 ] Moreover, the judge’s reasoning points to such conclusion.

The trial judge concluded [22] that Respondent had indeed purchased rights – and more specifically – rights arising from

section 18 of the Copyright Act , which reads in part as follows: Copyright in sound recordings Droit d’auteur sur l’enregistrement sonore 18

(1) Subject to subsection (2), the maker of a sound recording has a copyright in the sound recording, consisting of the sole right to do the following in relation to the sound recording or any substantial part thereof: 18

(1) Sous réserve du paragraphe (2), le producteur d’un enregistrement sonore a un droit d’auteur qui comporte le droit exclusif, à l’égard de la totalité ou de toute

partie importante de l’enregistrement sonore :

(

a) to publish it for the first time,

a) de le publier pour la première fois; (

b) to reproduce it in any material form , and

b) de le reproduire sur un support matériel quelconque ; (

c) to rent it out,

c) de le louer. and to authorize any such acts. Il a aussi le droit d’autoriser ces actes. Copyright in sound recordings Droit d’auteur sur l’enregistrement sonore

(1.1) Subject to subsections (2.1) and (2.2), a sound recording maker’s copyright in the sound recording also includes the sole right to do the following acts in relation to the sound recording or any substantial part of it and to authorize any of those acts:

(1.1) Sous réserve des paragraphes (2.1) et (2.2), le droit d’auteur du producteur d’un enregistrement sonore comporte également le droit exclusif, à l’égard de la totalité ou de toute

partie importante de celui-ci : (

a) to make it available to the public by telecommunication in a way that allows a member of the public to have access to it from a place and at a time individually chosen by that member of the public and to communicate it to the public by telecommunication in that way; and

a) de le mettre à la disposition du public et de le lui communiquer, par télécommunication, de manière que chacun puisse y avoir accès de l’endroit et au moment qu’il choisit individuellement; (

b) if it is in the form of a tangible object, to sell or otherwise transfer ownership of the tangible object , as long as that ownership has never previously been transferred in or outside Canada with the authorization of the owner of the copyright in the sound recording.

b) lorsque l’enregistrement sonore est sous forme d’un objet tangible, d’effectuer le transfert de propriété , notamment par vente, de l’objet, dans la mesure où la propriété de celui- ci n’a jamais été transférée au Canada ou à l’étranger avec l’autorisation du titulaire du droit d’auteur sur l’enregistrement sonore. Le producteur a aussi le droit d’autoriser ces actes. (…) […] (Emphasis added) Paragraph (

b) clearly differentiates the “tangible object” (i.e. the tape) from the sound recording confirming that Respondent purchased (mainly) intangible property. The fact that the rights acquired were not rights to music per se but rights to the sound recording bears no relevance. Rights, whether they are rights in music or rights to sound recordings of music, constitute intangible property. [23] [ 30 ] The judge reasoned that since the copyright in the music was not purchased, then the property purchased was simply the tapes – i.e. tangible property (see paras. 51, 52, 53 and 54 of the judgment).

The judge insisted that Respondent did not purchase all the rights (i.e. the copyright) associated with the music. She concluded that in selling the tapes, the vendors could only assign the rights described in section 18(1) of the Copyright Act , which is what they did in fact do. They did not sell the copyright arising from the composition or publication as it did not belong to them.

Indeed, the right to make copies and sell such copies of the music is subject to respect of the composer’s and publisher’s copyrights – i.e. the payment of royalties. [24] The judge’s conclusion that all that was purchased was a physical tape is erroneous. [ 31 ] The error arises from ignoring the rest of the description of what was sold found in the contractual document and equating, in law, the copyright (protected under sections 3 , 13 and 15 of the Copyright Act ) with all the intangible rights. There are intangible rights sui generis and as described in

section 18 of the Copyright Act , which were purchased in association with the physical tapes. It is not credible that an experienced business person would pay in excess of one million dollars for tapes without the right to make and sell copies (albeit subject to the composer’s and the publisher’s copyrights).

The value is found in what is recorded on the plastic or cellulose and what Respondent can do with it – i.e. make and sell good quality copies, albeit subject to respect of the composers and publishers copyrights by the payment of royalties. [ 32 ] Although what Respondent acquired includes a tangible element (i.e. the physical tapes), in view of the above, the judge erred in characterizing all the purchased property as tangible. [25] [ 33 ] Respondent points to the testimony of Appellant’s tax auditor who, Respondent argues, thought, erroneously, that Respondent had purchased the copyright in the music and songs recorded on the master tapes.

Since this was not true, Respondent maintains that the judge was correct to quash the assessments. In my view, such argument is of no assistance to Respondent. The auditor is not bound to be an expert in copyright law. She was certainly clear in her testimony that Respondent purchased rights. Her inability to correctly qualify those rights according to the applicable

section of the Copyright Act is irrelevant. Respondent’s in-house lawyer is clear in her memo that Respondent purchased rights and she specifically refers to s. 18 of the Copyright Act . Irrespective of the applicable

section of the Copyright Act , it is clear that Appellant was assessing the purchase of rights. Any obligation of Appellant to state an assessing position refers, at most, to the relevant tax provisions. Moreover, even an erroneous reference to the tax legislation would not necessarily invalidate an assessment. [26] In any event, Respondent does not argue that Appellant’s assessing position in terms of the provisions of the Taxation Act and the Regulation respecting the Taxation Act was not clear. * * *

[ 34 ] Though there is some value in the physical tapes aside from the bundle of intangible rights, Appellant took the position that this was “pratiquement nul” as its counsel stated in the internal assessing memo. Respondent took an all or nothing position, leading no evidence as to a possible division or allocation of the value between the tangible and intangible property.

Although the physical master tapes would have some value apart from the associated bundle of rights, perhaps even considerable worth, there is no evidence upon which to base an allocation between the tangible and intangible aspects of the purchased assets. [ 35 ] Assessments are presumed to be valid, such that the taxpayer has the burden to demonstrate that the assessment is incorrect. [27] This burden must be met by precise and probable proof. [28] Respondent presented no proof whatsoever.

As such, and given the judge’s error in setting aside the assessments, the allocation of all the value of the tapes to intangible property should stand. * * * [ 36 ] For all the foregoing reasons, I would allow the appeal and reinstate the initial assessments, bearing numbers 1101, 1121, 1141 and 1161. MARK SCHRAGER, J.A. [1] Unidisc musique inc. v. Agence du revenu du Québec , 2019 QCCQ 1818 [ Judgment under appeal ] . [2] Regulation respecting the Taxation Act , CQLR c. I-3, r. 1 . 130. A taxpayer may however deduct: 130. Un contribuable peut toutefois déduire les montants suivants : (…) […] (

b) the lesser of i. the portion of the amount (that is not otherwise deductible in computing the income of the taxpayer) that is an expense incurred in the year for the incorporation of a corporation, and ii. the amount by which $3,000 exceeds the aggregate of all amounts each of which is an amount deducted by another taxpayer in respect of the incorporation of the corporation.

b) le moins élevé des montants suivants: i. la

partie du montant qui n’est pas déductible par ailleurs dans le calcul du revenu du contribuable et qui est une dépense engagée dans l’année pour la constitution en société d’une société; ii. l’excédent de 3 000 $ sur l’ensemble des montants dont chacun est un montant déduit par un autre contribuable relativement à la constitution en société de la société. [9] Copyright Act, RSC 1985 , c. C-42 . [16] See Jean-Claude Roger and Sophie Lavallée, La Preuve civile , 4 th ed., Cowansville, Éditions Yvon Blais, 2008, para. 847. Poliquin v. Poulin de Courval , 2017 QCCS 232 , para. 9-14 ; Gurman v.

Costom , AZ-50187541 , p. 6 (S.C.) . [19] Uniprix inc. v. Gestion Gosselin et Bérubé inc. , 2017 SCC 43 , [2017] 2 S.R.C. 59 , paras. 34-37 .