Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether Part XIII Tax is payable on fees paid to a non-resident vendor for the use of on-line trading program.
Position: A payment to a non-resident vendor for right to use digital property does not generally constitute a royalty payment described in subparagraph 212(1)(d)(i) of Part XIII of the Act.
Reasons: The CRA views that a payment to access digital property (subject to certain exceptional cases) generally gives rise to business proceeds.
XXXXXXXXXX
2011-042278
August 2, 2012
Dear XXXXXXXXXX,
This is in response to your interpretation request regarding the tax treatment of a licence fee paid by a Canadian resident to use a non-resident vendor’s digital property that enables access to an on-line marketplace trading platform (the “Licence Fee”). You describe a situation where, similar to eBay, a non-resident vendor operates an on-line marketplace that facilitates the purchase and sale of goods via its cloud software that is accessible with an internet browser. You further indicated that for each such sale the vendor will charge a blended fee to its Canadian customers composed of a trade commission and the Licence Fee. Your concern is that the Licence Fee may be subject to Part XIII tax under paragraph 212(1)(d) of the Income Tax Act (the “Act”). However, you believe that the payment should not be subject to Part XIII tax since it could be considered either a payment for a service or a payment in respect of a modern version of shrinkwrap computer software.
Our Comments
The Commentary to Article XII of the Organisation for Economic Co-operation and Development Model Tax Convention (the “OECD Convention”) provides that generally, the use of computer software for operation by an end user is not characterized as a royalty for treaty purposes. Further, as indicated in the Canada Revenue Agency’s (the “CRA’s”) Income Tax Technical News No. 25, in general, most cases that involve payments for the use of computer software are likely to be viewed as business profits for treaty purposes.
Unless the provisions of bilateral tax agreements between Canada and the non-resident vendor’s country of residence includes an intellectual property clause specifically providing that payments for digital property are considered taxable as a royalty, based on the limited information you have provided it is the CRA’s position that the Licence Fee would generally be viewed as a payment that gives rise to business proceeds from the provision of digital services supplied by the non-resident vendor.
We trust these comments will be of assistance to you.
Yours truly,
Lita Krantz CA,
Assistant Director,
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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