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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether payments to non-residents for "programming languages" are subject to the same rules as payments for computer software.
Position TAKEN:
Programming languages are merely a type of computer software program. Therefore payments made in respect thereof should be subject to the same rules as payments for other software programs.
Reasons FOR POSITION TAKEN:
It is our understanding that programming languages are basically a software programs composed of a group of commands that enable the user to more effectively communicate with a computer in order to create another software program. In basic terms, it translates machine language into a simpler language composed a set of commands. Such commands may then be put together to write an applications program which will permit the user to perform an application by simply providing input and running the program.
Programming languages may be acquired in a manner similar to shrink-wrap software from a retail store.
942189
XXXXXXXXXX O. Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX
January 17, 1995
Dear Sirs:
Re: Part XIII Tax - Payments for Computer Software
This in reply to your facsimiles of August 25, September 19 and November 2, 1994 wherein you requested clarification of the Department's position in regard to the above subject matter.
In addition, you specifically inquired about the taxation under Part XIII of the Act of payments made for "programming languages". It is our understanding that a computer programming language is merely a form of computer software program. Therefore the positions set out below apply equally to payments made in respect of computer programming languages.
Where payments are made by a Canadian resident to a non-resident and such payments are in respect of the use of, or the right to use, software it is Revenue Canada's view that the payments represent compensation for the right to use a secret formula or process and are considered to be royalties for the purpose of most, if not all, of Canada's income tax treaties. As a result, these payments are subject to tax under subparagraph 212(1)(d)(i) of the Act. The rate of tax that subsection 212(1) of the Act imposes on a royalty payment to a non-resident is 25%.
This rate may be reduced by an income tax treaty and is generally 10% under most income tax treaties Canada has with industrialized nations.
Payments for the Right to use Shrink-wrap and Custom Computer Software
As a result of a recent study, Revenue Canada will now treat a transaction whereby a non-resident sells a Canadian resident "shrink-wrap computer software" as a sale of tangible goods, and therefore, Part XIII tax will not be applicable to the proceeds received by a non-resident in respect of such transaction. However, Revenue Canada continues to view a payment to a non-resident for the use of, or the right to use, "custom computer software" for a specified or indefinite period of time as being subject to Part XIII tax under subparagraph 212(1)(d)(i) of the Act.
The term "shrink-wrap computer software" is generally used to describe software that is pre-packaged and commercially available through mail order or at a retail store. Generally, such software is packaged along with a copy of the other related information, including the general licensing agreement, under a plastic shrink-wrapped cover. The general license agreement does not contain the name of the particular end-user of the software or the amount of the license fee. Moreover, the end-user of the software is not normally required to acknowledge in any manner that he has read or agreed to the terms of the software license.
The term "custom computer software" on the other hand, generally describes computer software the use of which is subject to a specific computer software license agreement. As a condition to the end-user acquiring the right to use the computer software, the end-user is required to enter into a computer software license agreement with respect to the use of the software. Such agreement will usually set out the amount of and the description of, the fees to be paid under the particular computer software license and the agreement will usually be signed by both parties to acknowledge acceptance of its terms. While custom computer software includes computer software that has been designed for a particular end-user's needs, the Department views all software as being custom computer software where an end-user acquires the right to use any computer software program under a specific license agreement. It does not matter that copies of the particular software program may also be available to the end-user and other end-users, as shrink-wrap computer software.
Where Part XIII tax was withheld and the non-resident taxpayer was not liable to pay any Part XIII tax, or the amount withheld was in excess of the amount the non-resident taxpayer was otherwise liable to pay, a refund request can be made pursuant to subsection 227(6) of the Act. Such a request must be made in writing within two years from the end of the calendar year in which the amount was paid. For example, for amounts remitted in 1994, only those requests received before 1997 will be considered for refund.
The Department of Finance announced as part of the 1993 budget that it is committed to exempting from Part XIII tax, all arm's length payments made for the use of software, and that such exemptions would be provided on a bilateral basis and included in Canada's income tax treaties as they are (re)negotiated. To date, only the Protocols to the respective income tax treaties between Canada and the Netherlands, and Canada and the U.S. contain such exemptions, and only the Netherlands Protocol is in force at this time.
The above material was the subject matter of a paper given by Michael Hiltz of the Rulings Directorate at the 1994 Canadian Tax Foundation Annual Conference.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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