CRA indicates that fees to a non-resident for ongoing software upgrades do not qualify as copyright royalties

In accordance with the Syspro decision (in which a tax court judge found that copyright entails distribution rights), CRA indicated that fees paid to a non-resident for the exclusive rights to distribute and sublicense software in Canada are exempt from Part XIII tax, pursuant to s. 212(1)(d)(vi).  However, CRA also suggested that fees for ongoing upgrades and support are service fees, and would not fall within s. 212(1)(d)(vi).

Given that software upgrades are themselves software, and therefore accorded copyright protection, it is not clear that ongoing upgrade fees should be excluded from s. 212(1)(d)(vi).  CRA's position appears to be based on the notion that fees for "upgrades and support" are predominantly for support services.  However, sophisticated "support" tickets are often bug reports and feature requests, which would themselves culminate in new, copyrighted software patches.

Scott Armstrong.  Summary of 23 August 2012 T.I. 2011-0427181E5 under s. 212(1)(d)(vi).