8 May 1995 External T.I. 9500705 - 7661-1 PART XIII SOFTWARE ROYALTIES

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.

		950070
XXXXXXXXXX		Olli Laurikainen
		957-2116
Attention: XXXXXXXXXX

May 8, 1995

Dear Sirs:

Re: Part XIII Tax - Shrink-wrap Computer Software

This is in response to your letter dated January 5, 1995. You request confirmation that payments made by a Canadian resident to a non-resident for "shrink-wrap computer software" are not subject to Part XIII withholding tax and ask for guidelines for the identification of such software.

Revenue Canada now treats a transaction whereby a non-resident receives payment from a Canadian resident for "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, subject to the application of any income tax treaty exemption, 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 to be 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. Normally, such software is packaged along with related information and a general licensing agreement, under a plastic shrink-wrapped cover (thus the name "shrink-wrap computer software"). However, the manner in which computer software is packaged and the location where it may be purchased are not vital to its classification as either "shrink-wrap computer software" or "custom computer software". The key consideration is the manner in which the software is licensed. Shrink-wrap computer software can be identified by a general license agreement that normally 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 shrink-wrap computer software is not required at the time of purchase 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, 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 custom computer software, the end-user is required to enter into a computer software license agreement with respect to the use of the software and the agreement will usually be signed by both parties to acknowledge acceptance of its terms. Such agreement often sets out the amount of and the description of, the fees to be paid under the particular computer license. 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.

We hope the above information is of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch