Pong Marketing and Promotions Inc. v. Ontario Media Development Corporation

[Indexed as: Pong Marketing and Promotions Inc. v. Ontario Media Development Corp.]

Ontario Reports

Ontario Superior Court of Justice,

Divisional Court,

Marrocco A.C.J.S.C., Sachs and Nordheimer JJ.

January 25, 2017

136 O.R. (3d) 434 | 2017 ONSC 434

Case Summary

Taxation — Interpretation — Applicant's motivation for developing interactive digital games irrelevant to eligibility for Ontario Digital Media Tax Credit — Respondent denying applicant's request for certificate of eligibility for tax credit on basis that games were developed for primary purpose of promoting sales of long-distance phone cards — Definition of interactive digital media product in regulation under Taxation Act, 2007 focusing on characteristics of game when user is playing it and not on moment when it was created or licensed — Respondent's decision unreasonable — Taxation Act, 2007, S.O. 2007, c. 11, Sch. A.

The applicant, which developed interactive digital games, applied for a certificate of eligibility for the Ontario Digital Media Tax Credit in respect of those games. Section 34 of O. Reg. 37/09 under the Taxation Act, 2007 defines "interactive digital media product" as "a combination of one or more application files and one or more data files, all in a digital format, that are integrated and that are intended to be operated together and that have the following characteristics when they are being operated: 1. Their primary purpose is to educate, inform or entertain the user . . .". The respondent found that the applicant's submitted products did not fall within that definition as they were developed for the primary purpose of promoting the sale of long-distance phone cards. The requested certificate of eligibility was denied. The applicant brought an application for judicial review of that decision.

Held, the application should be allowed.

Per Marrocco A.C.J.S.C. (Nordheimer J. concurring): The standard of review of the respondent's decision was reasonableness. The respondent's interpretation of s. 34 of O. Reg. 37/09 was unreasonable. The definition focuses on the time when the application files and data files are operated together by the user and provides that one of their characteristics at that moment is that their primary purpose is to educate, inform or entertain the user. The applicant's motivation for developing the games was an irrelevant consideration.

Per Sachs J. (dissenting): The respondent's decision was not unreasonable. The relevant words in the definition of "interactive digital media product" in s. 34 of O. Reg. 37/ 09, read in their entire context and in their grammatical and ordinary sense, do not prohibit a consideration of the purpose for which a product was developed. Further, it is not unreasonable when objectively assessing the primary purpose of a product while it is being operated to have regard to what the intended purpose of the product was when it was being developed.

Cases referred to

Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, 2002 SCC 42, 212 D.L.R. (4th) 1, 287 N.R. 248, [2002] 5 W.W.R. 1, J.E. 2002-775, 166 B.C.A.C. 1, 100 B.C.L.R. (3d) 1, 18 C.P.R. (4th) 289, 93 C.R.R. (2d) 189, REJB 2002-30904, 113 A.C.W.S. (3d) 52; [page435] Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, 329 N.B.R. (2d) 1, 64 C.C.E.L. (3d) 1, EYB 2008-130674, J.E. 2008-547, [2008] CLLC Â220-020, 170 L.A.C. (4th) 1, 372 N.R. 1, 69 Imm. L.R. (3d) 1, 291 D.L.R. (4th) 577, 69 Admin. L.R. (4th) 1, 95 L.C.R. 65, D.T.E. 2008T-223, 164 A.C.W.S. (3d) 727; Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 2003 SCC 20, 223 D.L.R. (4th) 577, 302 N.R. 1, J.E. 2003-713, 257 N.B.R. (2d) 207, 48 Admin. L.R. (3d) 33, 31 C.P.C. (5th) 1, 121 A.C.W.S. (3d) 172; McLean v. British Columbia (Securities Commission), [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67, 2013 SCC 67, 347 B.C.A.C. 1, 452 N.R. 340, 2013EXP-3911, J.E. 2013-2131, EYB 2013-230152, 366 D.L.R. (4th) 30, [2014] 2 W.W.R. 415, 53 B.C.L.R. (5th) 1, 64 Admin. L.R. (5th) 237, 235 A.C.W.S. (3d) 290; Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, [1994] S.C.J. No. 78, 171 N.R. 161, J.E. 94-1522, [1995] 1 C.T.C. 241, 95 D.T.C. 5017, 95 D.T.C. 5091, 3 G.T.C. 8071, 50 A.C.W.S. (3d) 541; Symes v. Canada, 1993 55 (SCC), [1993] 4 S.C.R. 695, [1993] S.C.J. No. 131, 110 D.L.R. (4th) 470, 161 N.R. 243, J.E. 94-55, 19 C.R.R. (2d) 1, [1994] 1 C.T.C. 40, 94 D.T.C. 6001, 44 A.C.W.S. (3d) 824; Venngo Inc. v. Ontario Media Development Corp., [2013] O.J. No. 961, 2013 ONSC 1036 (Div. Ct.)

Statutes referred to

Taxation Act, 2007, S.O. 2007, c. 11, Sch. A [as am.], s. 93(8), (14) [as am.]

Rules and regulations referred to

General, O. Reg. 37/09, s. 34 [as am.], (1) [as am.], (3) [as am.], (3)6

Ontario Media Development Corporation, O. Reg. 672/00 [as am.], ss. 1, 4

APPLICATION for judicial review of a decision refusing an application for a certificate of eligibility for tax credit.

Scott Hutchison and Kenneth Grad, for applicant.

Lise Favreau and Jeffrey Claydon, for respondent.

[1] MARROCCO A.C.J.S.C. (NORDHEIMER J. concurring): — The applicant is a digital studio that creates interactive digital games.

[2] The respondent is an agency of the Ontario Ministry of Tourism, Culture and Sport. In part, it administers tax credit programs that promote investment in Ontario's media industry. The tax credit with which we are concerned (the Ontario Interactive Digital Media Tax Credit) is jointly administered by the respondent and the Canada Revenue Agency. A corporation that wishes to receive the tax credit must apply to the respondent for a certificate of eligibility in respect of a product that it has developed. If the respondent issues a certificate, the corporation then submits it to the Canada Revenue Agency, which issues a refund in appropriate cases.

[3] On April 16, 2014, the applicant applied to the respondent for a certificate of eligibility in respect of 15 "Sweepstakes" games that the applicant had developed between February 2011 [page436] and March 2013. The applicant had developed more than 30 interactive digital games in the five years prior to its application.

[4] The applicant was seeking a tax credit worth approximately $2 million. The claimed amount represented the work of over 60 Pong game developers, testers, mathematicians and designers.

[5] After an initial review of the applicant's materials, the respondent advised in writing on July 29, 2015 that it appeared that the Sweepstakes games did not qualify for the tax credit because the games were developed for the primary purpose of promoting the sale of long-distance phone cards and other related products and services. The applicant responded by submitting additional documentation, including a document entitled "Business Model Clarification". However, the respondent did not change its view.

[6] In the respondent's view, products that are primarily promotional are not eligible because an eligible product's primary purpose must be to educate, inform or entertain the user.

[7] The respondent issued a formal letter of ineligibility on December 11, 2015. After receipt of this letter, the applicant commenced this application for judicial review seeking, in part, to quash the respondent's decision.

The Ontario Interactive Digital Media Tax Credit

[8] The Ontario Interactive Digital Media Tax Credit ("DMTC") is a refundable tax credit, introduced in Ontario in 1998 and available to qualifying corporations for qualifying expenditures related to the creation, marketing and distribution of eligible interactive digital media products. The amount of the tax credit is based on a percentage of development labour expenditures and certain marketing and distribution costs incurred by a corporation that has developed an interactive digital media product for sale or license. The DMTC is not a grant. Qualifying corporations receive a payment in the amount of the tax credit after they have developed the interactive digital media product.

[9] Eligible interactive digital media products are defined in s. 34(1) of O. Reg. 37/09, made under the Taxation Act, 2007, S.O. 2007, c. 11, Sch. A.

[10] Statements made in the legislature when this tax credit was introduced in 1998 focused on the tax credit as a means to create jobs in Ontario. These statements indicated that the digital media, sound recording, and computer animation and special effects tax credits were intended to support "high-technology, knowledge-based industries". [page437]

[11] When the DTMC provisions were amended two years later, the Finance Minister stated that the DMTC was also meant to support the arts and cultural communities.

[12] Comments made during the debates when the tax credit was expanded in 2006, 2008 and 2009 describe the industry targeted by the tax credit in various ways, including as the "digital media" industry, the "entertainment and creative cluster" and the "digital media and entertainment sector".

The Nature of the Games with which We are Concerned

[13] One way in which the applicant generates revenue is by licensing the submitted games as part of a delivery system to third parties.

[14] At one point, the applicant provided information to clarify its request for a tax credit. The respondent included this clarification in its application record at tab 9. This clarification explained the nature of the games with which we are concerned. I include a summary of that clarification in the next few paragraphs.

[15] Sweepstakes is the name for a library of games licensed by the applicant to retailers, café owners, bars and restaurants.

[16] The original Sweepstakes games are "casino-style" games that work as follows: a finite set of sweepstakes prizes is generated by the applicant's math department and sorted into files. These files are saved, stored on the server computer at each location belonging to a licensee and sequentially delivered to the player upon the commitment of "sweepstakes points". A player receives sweepstakes points each time he or she purchases a telephone card. A player can also receive points by requesting entry into a game without making a purchase. While the outcome of the game is predetermined, the number of points affects a participant's chance of winning a prize.

[17] The applicant introduced games of skill into the Sweepstakes library during its fiscal year ending March 31, 2013. The skill gaming platform drastically changed the mathematical models. The skill games require the player to play a casino-style, slot-based game to see the "potential prize"; that is the prize for which he or she is playing in the skill game. The value of the actual prize awarded to a participant depends upon the participant's success at performing a skill-based task involving hand-eye coordination, timing and psychomotor learning. This skill game consists of a horizontal bar with an arrow indicator that moves from side to side. The participant must, within 25 seconds, stop the arrow indicator precisely on the centre line of the horizontal bar. If a participant achieves this result, he or she is awarded 110 per cent of the potential prize. If a participant stops [page438] the arrow just off the centre line, he or she receives 100 per cent of the potential prize. A participant's haphazard application of skill during the skill-based task results in a smaller percentage of the potential prize.

[18] While the applicant completed the products with which we are concerned by March 31, 2013, customization and content development carries on indefinitely.

The Typical Commercial Arrangement

[19] The respondent included a draft three-year licensing agreement in its application record. This draft sets out the business relationship between the applicant as licensor and a licensee and was submitted to the respondent as part of the applicant's application for the DMTC.

[20] The draft agreement provides in part that

the licensor (the applicant) is in the business of providing a "delivery system" that includes platform software, wholesale telephone communication delivery services, Internet time, a database, operational hardware and operational software;

the licensor's operational hardware includes the computer terminals on which the game is played;

the licensee is in the business of selling long-distance calling cards, office services and related retail products, and desires to use the applicant's delivery system in all its business locations;

gross profit, on which licensing fees are based, is the money received from the purchase of long-distance phone time less the amount paid out in prizes; and

the licensee is required to pay to the licensor 15 per cent of the gross profit from each of the licensee's business locations.

The Respondent Denies the Request for a Tax Credit

[21] The applicant was first advised that the respondent would not issue a certificate of eligibility for its submitted games on July 29, 2015, approximately 15 months after it filed its application. The applicant was permitted to file further documentation; however, the respondent's decision never changed.

[22] The applicant received formal notification that a certificate of eligibility had been denied on December 11, 2015. Notification came in the form of a letter from the director of tax credits [page439] and financing programs. The letter was brief and conclusory in content. The operative portion of the letter is as follows:

Based on our review of the documentation and copies of the Products submitted, we find the primary purpose of the Products is to promote the sale of phonecards [sic] and other related products and services.

[23] The reasons for the refusal are set out in a "response to request for information" dated December 11, 2015 authored by Michael Olivier. Mr. Olivier, apart from describing the Sweepstakes products, specifically commented on the following statements taken from the applicant's website and draft licensing agreement:

"Pong Marketing is a Telecommunication Company in the business of delivering a promotional sweepstakes system to enhance the sale of its pre-paid long distance phone time."

"In order to compete against the industries [sic] top competitors in the phone card market . . . Pong Marketing has introduced a promotional program that includes Sweepstakes games."

"The idea of sweepstakes is to create consumer involvement with a brand or product and thus encourage consumption of the product."

"The adoption of interactive video game promotions continues at an extraordinary rate, with more marketers embracing this delivery system for sweepstakes giveaways."

"Sweepstakes Points are awarded free each time a customer purchases long distance phone time, or by completing a (aeNo Purchase Necessary') form available at the retailer's location."

"The Sweepstakes Points have no monetary value, and can only be used to reveal (aevalidate') the Sweepstakes games on a validation terminal."

"The participants' win [sic] are determined by the server by sequentially selecting the next ticket (not random) from the predetermined pool of tickets. The terminal only displays the predetermined outcome in an entertaining way."

"When the customer has used all the free entry points, any wins may be redeemed by the customer either for cash [sic]."

-- ". . . as a competitive weapon by providing an extra incentive for the target audience to purchase or support one brand over another. In the game promotion program (ie sweepstakes), [page440] Pong Marketing promotes its telephone cars [sic] (the Tel-Connect calling card) by allowing stores to integrate the sales of its cards with their promotion. This form of marketing acts as an incentive so that the purchase of its cards will be favored over those of its competitors."

(Emphasis in correspondence)

Mr. Olivier indicated that, furthermore, the submitted licence agreements confirm the promotional nature of the submitted Sweepstakes games.

The Standard of Review

[24] The applicable standard of review for the respondent's interpretation of the regulations with which we are concerned is reasonableness. See Venngo Inc. v. Ontario Media Development Corp., [2013] O.J. No. 961, 2013 ONSC 1036 (Div. Ct.), at para. 1, where this court stated:

The standard of review applicable to the question of whether this falls within the regulation is that of reasonableness. This is a question that concerns OMDC's interpretation of its home legislation and is exactly the type of issue that falls within OMDC's specialized expertise. The question of whether the primary purpose of a website is to "educate, inform or entertain" lies at the core of the OMDC's function.

The Respondent's Decision is Unreasonable

[25] In my view, the OMDC's interpretation of s. 34 of O. Reg. 37/09 is unreasonable. I do not believe its decision bears a "somewhat probing examination". See Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 2003 SCC 20, at para. 25.

[26] An interactive digital media product is defined in s. 34 of O. Reg. 37/09 as follows:

34(1) . . . a combination of one or more application files and one or more data files, all in a digital format, that are integrated and are intended to be operated together and that have the following characteristics when they are being operated:

1. . . . their primary purpose is to educate, inform or entertain the user.

2. They achieve their primary purpose by presenting information in at least two of the following forms:

i. text,

ii. sound,

iii. images. [page441]

3. They are intended to be used by individuals.

4. By interacting with them, the user can choose what information is to be presented and the form and sequence in which it is to be presented.

[27] It is helpful to observe at this point that the "their" highlighted in item 1 of the definition in the previous paragraph refers to the application files and the data files. It does not refer to the developer and cannot be reasonably interpreted as referring to the developer.

[28] The respondent found that the applicant's submitted products did not fall within this definition as they are "primarily promotional" and thus their primary purpose is not to inform, educate or entertain.

[29] Characteristics 2, 3 and 4 do not play a part in the decision under review so I will not address these characteristics further.

[30] The excerpts referred to by Mr. Olivier in his July 29, 2015 response set out the respondent's conclusion that the applicant developed the Sweepstakes products to

-- "enhance the sale of its prepaid long-distance phone time";

help licensees or retailers compete against the top competitors in the phone card market; and

"create consumer involvement with a brand or product to encourage consumption of the product."

[31] The reasons reveal that the respondent considered that the applicant's motive for creating the Sweepstakes products supported the conclusion that the Sweepstakes games were ineligible interactive digital media products. In addition, Mr. Olivier states, at p. 12 of the respondent's record, that the respondent "looks at why and how a product was developed as a key factor in determining the products primary purpose".

[32] In my view, and contrary to the respondent's position, the applicant's motivation for developing the product is an irrelevant consideration. This conclusion flows directly from the definition of an interactive digital media product eligible for a certificate of eligibility and resulting tax credit.

[33] The definition focuses on the time when the application files and data files are operated together by the user and provides that one of their characteristics at that moment is that their primary purpose is to educate, inform or entertain the user. The only time the user operates those files is when he or she is playing a Sweepstakes game. The primary purpose of the applicant when creating or licensing the product is a different inquiry. [page442]

[34] Marketing phone time is a matter of fundamental importance to the licensee and to the licensor (the applicant). Specifically, the licensing arrangement provides that the applicant receives 15 per cent of gross profit, which is defined as the money received from the purchase of long-distance phone time less the amount paid out in prizes.

[35] A developer intending to license games will primarily want the games to promote the product of the licensee otherwise the licensee will not want the games. The respondent's reliance on this motivation or statements of it to conclude that the developer's product is primarily promotional and therefore not eligible for the tax credit means that the developer's fundamental purpose weighs negatively against eligibility for the tax credit, even though the legislature intended to use the tax credit to assist high-technology, knowledge-based industries.

[36] This is an unreasonable way of looking at things because it undermines legislative intent: see Symes v. Canada, 1993 55 (SCC), [1993] 4 S.C.R. 695, [1993] S.C.J. No. 131, 110 D.L.R. (4th) 470, at p. 746 S.C.R. The dissent in the Symes decision did not disagree with this proposition but rather disagreed with the majority's interpretation of the purpose of the legislation under consideration: see at p. 815 S.C.R.

[37] The regulation avoids this problem because the definition of an interactive digital media product focuses on the characteristics of the game when the user is playing it, not the moment when it is created or licensed. The definition requires the respondent to look at the primary purpose of the game from the perspective of the player. That is consistent with the definition, which keys on the purpose of the game, not on the purpose of the developer.

[38] For the same reason, statements on the applicant's website are also unhelpful when determining whether it is a characteristic of the game (when it is played) that its primary purpose is the entertainment of the user.

[39] If the respondent thinks that the regulation, properly interpreted, is not achieving the intended objective or is overly generous, then it is open to the government to amend the regulation.

[40] The respondent submitted that the Ontario Media Development Corporation has a cultural aspect to it -- a submission with which I agree. I recognize that the digital media tax credit is available to not-for-profit arts and cultural enterprises. I also recognize that those corporations do not have a profit motive. I do not believe this makes any difference to the proper interpretation of the regulation. The tax credit was introduced to benefit [page443] or assist the development of the interactive digital media industry. At the same time, tax credits were introduced to benefit sound recording, computer animation and special effects companies and thereby create jobs in Ontario. The inclusion of not-for-profit arts and cultural enterprises was not accompanied by a corresponding restriction on the availability of this credit to for-profit corporations.

[41] The applicant submitted that the delay in determining eligibility for the tax credit is "anathema to the very purpose of the Digital Media Tax Credit". While this may be true, it is not a matter that affects whether the applicant's products satisfy the regulatory definition of an interactive digital media product.

[42] The applicant also objected to the sufficiency of the reasons provided by the respondent. I reject this argument. The respondent's decision is clear. It denied a certificate of eligibility because the applicant's intention in creating the product was primarily promotional. The respondent explained why it came to that conclusion. While I have concluded that its decision is unreasonable, the reasons explain the respondent's decision with sufficient precision that this court can review it.

[43] The applicant submitted that when interpreting taxation laws, where there is more than one interpretation available, the decision maker is required to adopt the interpretation most favourable to the taxpayer (see Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, [1994] S.C.J. No. 78, 171 N.R. 161, at pp. 14-16 S.C.R.). While I agree with this submission, it may be a little more broadly put than the actual comment of Justice Gonthier, at p. 20 S.C.R.: "Only a reasonable doubt, not resolved by the ordinary rules of interpretation, will be settled by recourse to the residual presumption in favour of the taxpayer." I do not find it necessary to resort to this principle to resolve this application because I do not think the respondent's interpretation is a reasonable one. If I am wrong and the respondent's interpretation is also reasonable, then the application of this principle requires the respondent to apply the reasonable interpretation of the regulation which is more favourable to the taxpayer.

[44] In conclusion, the respondent's decision is unreasonable. It is inconsistent with the plain meaning of the wording of the regulation.

[45] My colleague in her dissent notes that some of the material filed with the respondent indicated that the applicant was at some point using the Sweepstakes games to promote its own phone cards and that if this were the case the games could [page444] not qualify for a tax credit. This conclusion formed no part of the respondent's reasons for refusing a certificate of eligibility. Thus, I must conclude that the respondent decided that this reason for refusing a certificate of eligibility was not available to it in this matter.

[46] This application is allowed.

[47] This court cannot require the respondent to conclude that the primary purpose of the applicant's product, when the definition is properly applied, is to entertain the user. The court is neither able to come to such a conclusion nor would it be appropriate for the court to impose such a conclusion on the respondent. Accordingly, this matter is remitted back to the respondent for reconsideration having regard to these reasons.

[48] The parties agreed on costs in the amount of $10,000, inclusive of disbursements and applicable taxes. This is a reasonable figure for costs. Accordingly, the respondent will pay the applicant's costs in the amount of $10,000, inclusive of disbursements and applicable taxes.

SACHS J. (dissenting): --

Overview

[49] I have had the benefit of reading the reasons of Marrocco A.C.J.S.C. and agree with him that the applicable standard of review is reasonableness; that any delay in determining the applicant's eligibility for the tax credit at issue (the "DMTC") does not affect whether the applicant's products are eligible for the DMTC; that there is no merit to the applicant's argument based on sufficiency of reasons; and that this is not a case where there is a need to resort to the residual presumption in favour of the taxpayer.

[50] The central question on this application is whether the decision of the respondent (the "OMDC") that the primary purpose of the applicant's sweepstakes game products is to promote the sale of phone cards is a reasonable one. The majority concludes that it is not because in coming to that decision the respondent took into consideration the purpose for which the products were developed.

[51] I disagree that the respondent's consideration of the purpose for which the products were developed rendered its decision an unreasonable one. Thus, I would dismiss the application. [page445]

The Role of Deference

[52] The Supreme Court in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190, [2008] S.C.J. No. 9, 2008 SCC 9, at paras. 47-49 (in part quoting from other authorities), explained that reasonableness is a deferential standard that is "rooted in part in a respect for governmental decisions to create administrative bodies with delegated powers". This deferential standard requires "respectful attention to the reasons offered or which could be offered in support of a decision" and "recognizes the reality that, in many instances, those working day to day in the implementation of frequently complex administrative schemes have or will develop a considerable degree of expertise or field sensitivity to the imperatives and nuances of the legislative regime":

In short, deference requires respect for the legislative choices to leave some matters in the hands of administrative decision makers, for the processes and determinations that draw on particular expertise and experiences, and for the different roles of the courts and administrative bodies within the Canadian constitutional system.

[53] More recently, in McLean v. British Columbia (Securities Commission), [2013] 3 S.C.R. 895, [2013] S.C.J. No. 67, 2013 SCC 67, at para. 33, the court restated:

[A]s this Court has repeatedly indicated since Dunsmuir, . . . the resolution of unclear language in an administrative decision maker's home statute is usually best left to the decision maker. That is so because the choice between multiple reasonable interpretations will often involve policy considerations that we presume the legislature desired the administrative decision maker -- not the courts -- to make. Indeed, the exercise of that interpretative discretion is part of an administrative decision maker's "expertise".

(Emphasis in original)

[54] Thus, an appropriately deferential approach to the review of the respondent's decision should take into account that the eligibility criteria for the DMTC have been entrusted by the legislature to the respondent. It is the respondent, not the courts, that has been given the task of employing the modern approach to statutory interpretation to determine the meaning of the criteria and to apply that meaning to the facts before it. It is only if the respondent's conclusion is beyond the range of acceptable and defensible outcomes, given the facts and the law, that this court should interfere.

[55] Put another way, where the standard of review is reasonableness, the reviewing court should not substitute its view of the interpretation and application of the statute for the tribunal's reasonably held view. In [page446] Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, [2003] S.C.J. No. 17, 2003 SCC 20, at para. 55, the Supreme Court explained reasonableness as follows:

A decision will be unreasonable only if there is no line of analysis within the given reasons that could reasonably lead the tribunal from the evidence before it to the conclusion at which it arrived. If any of the reasons that are sufficient to support the conclusion are tenable in the sense that they can stand up to a somewhat probing examination, then the decision will not be unreasonable and a reviewing court must not interfere. This means that a decision may satisfy the reasonableness standard if it is supported by a tenable explanation even if this explanation is not one that the reviewing court finds compelling.

(Citations omitted)

[56] In this case, it is my view that there is a reasonable line of analysis within the respondent's reasons that could lead it from the law and the evidence before it to the conclusion at which it arrived.

The Applicant's Application and the OMDC's Decision

[57] On April 16, 2014, the applicant applied to the OMDC for the tax credit in relation to 15 games that were completed in its fiscal year ending March 31, 2013. The applicant requested a tax refund in the amount of nearly $2 million for expenses incurred for the development of these games.

[58] The OMDC describes these games as "sweepstake games" and "games of chance, similar to video slot machines. Like coins placed into a slot machine, the user can play the games in exchange for a certain number of aepoints'. Players can earn points by purchasing additional phone card time. A pre-determined number of prizes are available to be won by users."

[59] In its application to the OMDC, the applicant stated the following:

Gaming Platforms

PMP has developed outstanding multimedia gaming platforms as off the shelf products for our sweepstakes clients. The Sweepstakes program is an existing platform with products and features being added as PMP recognizes, and reacts to new opportunities in the market place[.]

Sweepstakes

Sweepstakes is a library of games that PMP has developed and licensed to Retailers, Café Owners, and Owners of Bars and Restaurants[.]

[60] Applications for the DMTC are processed in the order in which they are received. The OMDC did not begin reviewing the applicant's application until July 6, 2015. [page447]

[61] After an initial review of the applicant's materials, the OMDC advised the applicant that it appeared that the sweepstakes games did not qualify for the tax credit, because their purpose is primarily promotional. In particular, the OMDC expressed the view that the sweepstakes games were developed for the primary purpose of promoting the sale of long-distance phone cards. This concern was expressed through correspondence on July 29, 2015.

[62] The OMDC then provided examples from the applicant's application materials that indicated that the sweepstakes games had a primarily promotional purpose. In particular, it referred to the manner in which the sweepstakes games and the system through which they are delivered are described in the template licensing agreement filed as part of the application:

1.0 Definitions

Delivery System: loyalty platform software . . . supplied in any way by the Licensor . . . to the Licensee for the use in the sale and promotion of the products or the loyalty program.

Sweepstakes Games: A means of promotion to aid in the sale of long distance calling cards and other related products and services.

Sweepstakes Prizes: Any prizes awarded to participants from the Delivery System.

[63] The OMDC also referenced material from the applicant's website that described the sweepstakes games and the applicant's business model in the following terms:

"Welcome!

Pong Marketing is a Telecommunication Company in the business of delivering a promotional sweepstakes system to enhance the sale of its pre-paid long distance phone time.

In order to compete against the industries top competitors [sic] in the phone card market (ie AT&T, Verizon) Pong Marketing has introduced a promotional program that includes sweepstakes games."

"Ideal Solutions

The idea of sweepstakes is to create consumer involvement with a brand or product and thus encourage consumption of the product.

The adoption of interactive video game promotions continues at an extraordinary rate, with more marketers embracing this delivery system for sweepstakes giveaways."

"Advantages 02

Game Promotional Program

as a competitive weapon by providing an extra incentive for the target audience to purchase or support one brand over another. In the game promotion program [page448] (ie sweepstakes), Pong Marketing promotes its telephone cars [sic] (the Tel-Connect calling card) by allowing stores to integrate the sales of its cards with their promotion. This form of marketing acts as an incentive so that the purchase of its card will be favored over those of its competitors[.]"

(Emphasis in the OMDC correspondence)

[64] The OMDC offered the applicant the opportunity to file additional "original development documentation" that might address its concern that the purpose of the sweepstakes games is primarily promotional. In doing so, the OMDC explained that in assessing a product's primary purpose, it considers "why and how a product was developed as a key factor in determining the product's primary purpose, what audience or target market it was developed for and who was the product marketed to, by reviewing all of the product's development and marketing documentation".

[65] The OMDC also offered the applicant the opportunity to withdraw the application, with the right to resubmit it if the eligibility criteria were to change in the future.

[66] The applicant chose to submit further material, which the OMDC reviewed.

[67] The additional material submitted by the applicant included game videos from each of the 15 sweepstakes games, pictures from Internet cafés where the games were being played, marketing and game revenue material, a YouTube demonstration video and screen shots from a "Pong Studios" website.

[68] The OMDC then provided the applicant with an explanation as to why the submitted material did not address its concerns. This explanation included the following:

(a) There are consistent references to buying time on phone cards in the submitted games. The OMDC provided specific examples from each video of pop-up bubbles that included these references.

(b) The OMDC noted that some of the pictures from the Internet cafés where the games were being played contained long-distance phone card signs.

(c) The OMDC noted that the YouTube video contained an animated character that thanks the viewer for purchasing a phone card.

[69] The applicant disagreed with the OMDC's concerns regarding the primary purpose of the sweepstakes games and requested an appeal. The OMDC advised that there was no appeal process. On November 3, 2015, the OMDC received a letter from counsel for the applicant requesting that it either [page449] reconsider its decision or issue a letter of ineligibility so that proceedings could be commenced.

[70] The OMDC reviewed the application again. At the conclusion of the review, the OMDC sent the applicant a letter dated November 30, 2015 that set out the procedural history of the application, summarized the governing criteria and provided specific examples from the applicant's application to support the OMDC's unchanged view that the purpose of the sweepstakes games is primarily promotional.

[71] On December 11, 2015, the OMDC issued a letter stating that the applicant's submitted products do not satisfy the eligibility requirements because their primary purpose is not to "educate, inform or entertain the user". Rather, it is "to promote the sale of phonecards [sic] and other related products and services".

The Legislative Context

[72] Subsection 93(8) of the Taxation Act, 2007, S.O. 2007, c. 11, Sch. A delegates the responsibility for determining whether a corporation is eligible for the DMTC to the OMDC. Therefore, a full appreciation of the legislative context requires a consideration of the legislation that governs that agency.

[73] Under O. Reg. 672/00, the OMDC is a Crown agency. Its objects are set out at s. 4 of the Regulation:

4. The objects of the Corporation are to stimulate employment and investment in Ontario,

(a) by contributing to the continued expansion of a business environment in Ontario that is advantageous to the growth of the cultural media industry and to the growth of new employment, investment and production opportunities in Ontario;

(b) by facilitating and supporting innovation, invention and excellence in Ontario's cultural media industry by stimulating creative production, format innovation and new models of collaboration among sectors of the cultural media industry;

(c) by fostering and facilitating co-operation among entities within the cultural media industry and between the public and private sectors to stimulate synergies in product development and the creation of products with original Canadian content;

(d) by assisting in the promotion and marketing of Ontario's cultural media industry as a world-class leader;

(e) by administering provincial tax credit programs and such other programs and initiatives as may be required by legislation or a Minister of the Government of Ontario; and

(f) by acting as a catalyst for information, research and technological development in the cultural media industry provincially, nationally and internationally. [page450]

[74] Section 1 of the Regulation defines the "cultural media industry" as follows:

"cultural media industry" means an industry the main businesses of which are,

(a) the development, publication, distribution, marketing or sale of books or magazines in print or machine readable form,

(b) the development, production, distribution, marketing, sale or exhibition of audio-visual products with substantive cultural content, including film and television productions, sound recording products, and interactive digital media products, or

(c) the creation and development for commercial purposes of new or hybrid cultural media works or products which contain cultural content[.]

(Emphasis added)

[75] The DMTC is only available for a product that the OMDC certifies to be an "eligible product". Under s. 93(14) of the Taxation Act, 2007, an "eligible product" is defined as follows:

93(14) In this section"eligible product" means, in respect of a qualifying corporation, a product,

(a) that satisfies the prescribed conditions or that is a specified product, and

(b) for which public financial support would not be contrary to public policy in the opinion of the Ontario Media Development Corporation or, if another person is designated for the purposes of subsection (8), in the opinion of that person[.]

[76] As already noted in the majority's reasons, under s. 34(3) of O. Reg. 37/09, passed pursuant to the Taxation Act, 2007, one of the conditions for a product to be an eligible product is that it be an interactive digital media product, which in turn, under s. 34(1), requires that the when the product is being operated its "primary purpose is to educate, inform or entertain the user".

[77] What this legislative review makes clear is that the decision as to whether a product is eligible for the DMTC has been delegated to an agency with a clear mandate to foster the development and enhancement of the cultural media industry in Ontario. This reinforces the majority's observation that the purpose of the tax credit is not just to create jobs; it is to create jobs in particular sectors.

The Reasonableness of the OMDC's Decision

[78] There is an aspect of this application that I wish to comment on at this point. It is not the focus of the OMDC's decision and, thus, it is not addressed in the reasons of the majority. [page451] In its factum, the applicant states that after designing a game, it licenses that game to third parties, including telecommunications companies. These games are then used to promote these other companies' products.

[79] This position appears to be at odds with the material that was before the OMDC. In that material, the applicant describes itself as a telecommunications company and the licensees as retailers. For example, in the website excerpt quoted earlier in these reasons the applicant is described as a telecommunications company that uses the sweepstakes games to promote the sale of its own phone cards. In the licensing agreement filed as part of the record before the OMDC, the licensees are described as retailers, bar owners, etc., while the applicant, as the licensor, is described as providing telecommunication services and a promotional system for its services. It may be that the applicant's business model has now changed, but again that point is unclear from the record.

[80] I raise this issue as pursuant s. 34(3)6 of O. Reg. 37/ 09, a product that is used primarily to promote the products or services of the corporation seeking the tax credit is not eligible for the tax credit. Thus, if the applicant is using the games at issue primarily to promote the sale of its own phone cards, the games do not qualify for the tax credit.

[81] Again, I note that this was not the rationale used by the OMDC for denying the applicant's application for the tax credit. The application was denied on the basis of s. 34(1) of the Regulation, namely, that the submitted products do not have as their primary purpose educating, informing or entertaining the user when they are being operated.

[82] It is quite clear that in making its decision as to the primary purpose of the applicant's products when they are being operated, the OMDC had regard to the purpose for which the products were developed.

[83] In assessing the reasonableness of the OMDC's decision, it is helpful to begin with a statement of the principle that applies to any statutory interpretation exercise. It is set out in a number of decisions of the Supreme Court of Canada including Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, 2002 SCC 42, where Iacobucci J. said, at para. 26:

In Elmer Driedger's definitive formulation, found at p. 87 of his Construction of Statutes (2nd ed. 1983):

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [page452]

[84] I do not agree that the words of the legislation at issue read in their entire context and in their grammatical and ordinary sense prohibit a consideration of the purpose for which a product was developed. The legislation contains no language precluding such a consideration. Further, it is not unreasonable when objectively assessing the primary purpose of a product while it is being operated to have regard to what the intended purpose of the product was when it was being developed. After all, it is the product's primary purpose that governs the analysis and it is reasonable to assume that a successfully developed product, when it is being operated, will fulfill the primary purpose for which it was developed.

[85] This does not mean that the user may not also be entertained while he or she is operating the applicant's products. The wording of the legislation specifically contemplates that an eligible product may have more than one purpose while it is being operated by the user. The OMDC's task was to determine the primary purpose of the product. In this case, the OMDC decided, after reviewing (among other things) game videos of the products in question, that while the products are being operated their primary purpose is to encourage the user to buy phone cards, not to entertain. The OMDC's finding in this regard is entitled to deference.

[86] I agree that one of the purposes of the DMTC is to encourage the development of profit-making interactive digital media companies. I do not agree that the OMDC's decision in this case defeats this purpose. Rather, it reasonably reflects a choice by the legislature not to make the credit available for products whose primary purpose while they are being operated is not to educate, inform or entertain.

[87] The applicant submits that if it could be argued that there were two possible reasonable interpretations of the legislation governing the DMTC, the rules governing the interpretation of tax statutes required that its preferred interpretation govern. In other words, even if the OMDC's decision was a reasonable one, it must be set aside because in coming to its decision the OMDC did not apply a presumption in favour of the taxpayer and accept the reasonable interpretation of the relevant legislative provisions put forward by the applicant.

[88] Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, [1994] S.C.J. No. 78, 171 N.R. 161 and the cases that have followed it have made it clear that the presumption at issue now has a very limited role to play in the interpretation of tax legislation. It is a residual presumption that should only be resorted to if it is not possible to resolve the [page453] meaning of the legislation by applying Driedger's modern approach to statutory interpretation. In this case, the OMDC was able to resolve the meaning of the legislation in question without resort to the residual presumption. A reasonableness review requires that the OMDC's decision in this regard be respected unless it falls outside the range of possible and acceptable outcomes.

Conclusion

[89] For these reasons, I would dismiss the applicant's application and order the applicant to pay the respondent its costs fixed in the amount of $10,000.

Application allowed.

End of Document