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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether royalty payment based on the number of copies of software distributed or the income earned therefrom is a "royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work" within the meaning of subparagraph 212(1)(d)(vi) of the Act and is therefore exempt from Part XIII withholding tax otherwise payable under paragraph 212(1)(d) of the Income Tax Act.
Position: Yes, depending on facts of each case.
Reasons: Wording of subparagraph 212(1)(d)(vi);
facts on hand.
XXXXXXXXXX 2002-014754
Suzanie Chua
October 30, 2002
Dear XXXXXXXXXX:
Re: Copyright Royalties - Subparagraph 212(1)(d)(vi)
This is in reply to your letter regarding copyright payments in respect of a computer software program.
The hypothetical facts you outlined are as follows:
1. Canco is a corporation resident in Canada and is controlled by a non-resident corporation, Forco.
2. Forco owns the copyright to a computer software program (the "Software").
3. Forco has provided Canco with a master copy of the Software under an agreement whereby Canco is granted the right to reproduce the Software in Canada and distribute the copies to its Canadian customers.
4. Forco receives from Canco royalties based on either the number of copies of the Software distributed by Canco or on the amount of license fees earned by Canco.
You question whether the royalty payments received by Forco are exempt from withholding tax under subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act").
The copyright that is the subject matter of subparagraph 212(1)(d)(vi) refers to the "production or reproduction of ...work". Subsection 3(1) of the Copyright Act defines "copyright" in relation to a work. Subparagraph 212(1)(d)(vi) is not intended to apply to all of the rights enumerated in the Copyright Act. Rather, this provision of the Act refers to works that are "literary, dramatic, musical or artistic" and only to the "production or reproduction" of such works. There is no specific reference in the Copyright Act to the right to distribute the copyright work per se. However, royalty payments for the right to make copies of the copyright work and to distribute those copies are considered by the CCRA to be royalties in respect of a copyright in respect of the production or reproduction of the work that are exempt from Part XIII tax under subparagraph 212(1)(d)(vi). It does not matter whether the royalty is calculated based on the number of copies made, the number of copies sold or the amount of the license fees earned. Based on the limited information you provided in your hypothetical facts, we concur with your view that subparagraph 212(1)(d)(vi) would likely apply to the license royalties paid by Canco. With regard to the documents referred to in your letter, Document 9410795 no longer reflects our position. In our view, Document 9127045 does reflect our current position as the views expressed therein are not inconsistent with the views expressed here.
Generally in an arm's length arrangement, a licensor would be expected to agree not to reproduce or distribute or permit any other person to reproduce or distribute copies of the software in a particular geographical area specifically assigned to the licensee. In such cases, a portion of the payments derived by the licensor under the agreement would be considered in respect of such undertaking and would fall under subparagraph 212(1)(d)(iv); consequently, it would not be exempt by virtue of subparagraph 212(1)(d)(vi). Accordingly, while it was not stated in the facts of your hypothetical scenario, the non-arm's length agreement between Forco and Canco could result in the operation of subsection 247(2) of the Act if there is an exclusive right to copy and distribute that is explicitly or implicitly granted to Canco, i.e., whether subsection 247(2) can be applied to allocate a portion of the total royalty to subparagraph 212(1)(d)(iv), depends on the facts of each case. Such portion of the total royalty would not be exempt from withholding under subparagraph 212(1)(d)(vi).
We trust these comments are of assistance.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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