Vauban Productions v. The Queen, 75 DTC 5371, [1975] CTC 511 (FCTD), aff'd 79 DTC 5186, [1979] CTC 262 (FCA)

Under a lease, the lessor retains residuary rights to the leased property. It was found that under the circumstances of the case, where there had not been an absolute transfer of distributorship rights to films from the taxpayer to the C.B.C., the taxpayer was to be regarded as leasing film rights.

The taxpayer transferred to the CBC certain film rights. Since the taxpayer did not transfer all its rights respecting the films to the CBC, the transaction was characterized as a leasing of films rather than an outright sale of rights. [C.R.: 20(1)(a) - Depreciable Property]

It was determined that there was a typographical error in the English version of the Canada-France Income Tax Convention (1951) in light of the French version.

Addy, J. indicated that he was "conscious" of the principle that "a liberal interpretation should be given to a tax convention".

Addy, J. stated (respecting Article 13 of the 1951 Canada-France Tax Convention): "The term 'royalties' normally refers to a share in the profits or a share or percentage of a profit based on user or on the number of units, copies or articles sold, rented or used."

The non-resident taxpayer, a film distributor, which had acquired from another film distributor the distributorship rights for certain films, agreed in consideration for a lump-sum payment to supply copies of those films to the CBC and to grant it for the same period of time the exclusive right to show them on its French-language television network. Such a contract was a lease of a motion picture film rather than an outright sale for purposes of a withholding tax exemption appearing in the former Canada-France treaty because the rights acquired by CBC were not as extensive as those acquired by the taxpayer: CBC acquired only the right to show the films on its own network and not to assign or lease them; and the taxpayer had the right to a return of the films at the end of the term. The application of s. 106(2) of the pre-1972 Act was conceded.

Addy J. stated (at p. 5371):

"The term 'royalties' normally refers to a share in the profits or a share or percentage of a profit based on user or on the number of units, copies or articles sold rented or used. When referring to a right, the amount of the royalty is related in some way to the degree of use of that right."