The taxpayer had previously paid royalties under a licence agreement with an affiliated Netherlands corporation ("VIBV"). When VIBV became a resident of the Netherlands Antilles, VIBV assigned the licence agreement (but not the patents or trade-marks) to its newly-incorporated Netherlands-resident subsidiary ("VHBV"). Under the assignment agreement, VHBV was required to pay to VIBV 90% of the royalty fees earned by it. The taxpayer withheld Part XIII tax at the Treaty-reduced rate of 10% on the royalty fees paid to VHBV on the basis that VHBV was the "beneficial owner" of the royalties under Article 12 of the Canada-Netherlands Convention. The Minister assessed the taxpayer on the basis that VIBV was the beneficial owner, so that Part XIII tax had been required to be withheld by the taxpayer at the non-Treaty reduced rate of 25% (Canada having no tax treaty with the Netherlands Antilles).
In allowing the taxpayer's appeal, Rossiter ACJ. found that VHBV was the beneficial owner of the royalties. Despite a contractual obligation for VHBV to transfer 90% of the royalties to VIBV, the flow was not automatic in practice. Moreover, VHBV had been established to manage licensing royalty stream, and had independent discretion as to how its 10% share of revenue should be spent. The royalty fees were also co-mingled with other accounts before going to VIBV, and the amounts received and paid by VHBV were different, so that it was not clear that the amounts paid to VHBV were the same funds as those paid to VIBV. VHBV also assumed risk in respect of the royalties because the incoming and outgoing amounts were denominated in different currencies.