CRA finds that royalties paid by a Canadian company for TV video streams could be bifurcated for Part XIII purposes based on Canadian and non-resident viewership
Canco streams movies and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a TV video stream and a digital content library. Canco pays a royalty to an arm’s length U.K. content provider (“U.K. Content Provider”) that is based on the amount of viewing of the digital content by Canco’s subscribers. Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.
CRA found that s. 212(5) was still applicable in this streaming context, stating that “a motion picture film that is streamed remains a ‘motion picture film’ and a streamed TV show is a “means of reproduction” of the TV work." It also found that the royalty payments could be bifurcated between a (Part XIII) taxable and non-taxable component, stating that “a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.”
Art. 12 of the Canada-U.K Treaty exempted copyright royalties, but there was an exclusion from this exemption for payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. CRA rejected an argument that the definition of “broadcasting” in the Interpretation Act had the effect of making this exclusion inapplicable to TV shows. Instead “an ordinary meaning was intended to be given to the words ‘television’ and ‘broadcasting’ and … their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content” – so that the applicable Treaty rate was 10%, not zero.