Income Tax Technical News, No. 23, 18 June 2002

Notwithstanding its revised position on the terms of the Royalties Articles in most treaties, CCRA continues to be of the view that Part XIII tax applies to payments made by a user of computer software pursuant to a contract that requires that the source code or program be kept confidential, as the payments are for the use of a secret formula or process and, thus, represent a payment for the use of or right to use in Canada any property ... or other thing whatever - unless the payment is in respect of "shrinkwrap" software, or the exception in s. 212(1)(d)(vi) applies.

As Canada has removed its observation on Article 12 of the OECD Model Convention, CCRA generally will no longer view payments by a user of computer software pursuant to a contract that requires the source code or program to be kept confidential, as payments for the use of a secret formula and process and, thus, as constituting royalties. However, CCRA will view such payments as royalties within the definition of royalty if the particular Convention refers to "payments ... for the use of, or the right to use ... other intangible property."