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.
RE: Computer Software Payments
This memorandum relates to a referral to us by the Toronto District Office of a letter dated December 19, 1984 from XXX. As requested by you during our recent telephone conversation, our reply is being sent to you rather than to the Toronto District Office or the taxpayer.
XXX
The following are our comments on the contracts submitted by XXX, copies of which are attached for your files.
Maintenance Contract XXX
On the assumption that the monthly maintenance charges are reasonable in the circumstances; i.e. there is no "hidden charge" contained therein for the use of the licensed software, it is our view that they are not subject to Part XIII tax. Regulation 105 withholding will apply to the extent that a part (if any) of the monthly charges can be said to be in respect of services rendered in Canada.
There is no indication as to whether or not the contract is cancellable by XXX without losing its right to use the licensed software. It may be necessary to contact XXX to determine their rights in this regard. If it is not cancellable without losing the rights to use the licensed software, we are inclined to the view that the Department should initially take the hard line and say that the total monthly maintenance charge is simply an additional charge for the use of the licensed software. Our position is somewhat strengthened in this particular case by the fact that if the licensee chose to pay a monthly rent for the licensed software, the monthly rental charge would include the maintenance charge. This gross rental charge would presumably then be caught by subsection 212(1)(d)(i) of the Act (see the case of Granada Distributors Ltd. (83 DTC 511). If, however, the maintenance agreement is cancellable by XXX without losing its right to use the licensed software, the comments above re the XXX contract are applicable.
Computer Software License
Pursuant to a Revenue Canada, Taxation release dated January 26, 1983, payments made to a U.S. resident prior to July 1, 1983 for the use of computer software are exempt from Part XIII tax by virtue of the previous position of the Department taken with respect to Article XIII of the 1942 U.S. tax treaty. Thus, if the relevant license fee were paid prior to that date (which appears to be the case, as the contract is dated September 8, 1981), it is not subject to Part XIII tax. The following comments relate to such payments made after June 30, 1983.
Since the agreement is for a term of 25 years, the decision rendered in the Saint John Shipbuilding case (80 DTC 6275) is, in our view, not relevant. Hence, in any similar contract which calls for the license fee to be paid after June 30, 1983, the payment would be subject to a 15% Part XIII tax if made prior to October 1984, and a 10% Part XIII tax if made thereafter. These comments would apply to any payment made pursuant to paragraph 7(c) of the Agreement between XXX and XXX or pursuant to part C of the Addendum thereto.
Part E of the Addendum to the Agreement adds another twist to the issue of whether payments for the maintenance of a computer software program are subject to Part XIII tax. It is not clear what is meant by the word "current" contained therein, but if it means that XXX does not get free use of the latest version unless it continues to pay the maintenance fees for the remainder of the 25 year license term, it is our view that those subsequent maintenance payments are subject to Part XIII tax to the extent that they equal the amount that would otherwise have been payable for the updated version pursuant to paragraph 7(c) of the Agreement. If the word "current" simply means to the date that XXX obtains the use of the updated version, it is our view that the combined terms of 7(c) of the Agreement and part E of the Addendum do not, in an of themselves, justify a position that part of the maintenance payments represent use payments. We say this because those amounts were payable to XXX regardless of whether or not XXX obtained the use of an updated version of the licensed software.
With respect to the "maintenance of warranty" payments made to XXX by XXX, the comments expressed above with respect to the XXX maintenance contract are applicable.
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