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.
Principal Issues: Whether sale of shrink-wrap software by controlled foreign affiliate ("CFA") constitutes "investment business" as defined in subsection 95(1)?
Position: No
Reasons: Case-by-case determination but on the hypothetical facts, CFA would be treated as engaged in sale of tangible goods.
2003-001679
XXXXXXXXXX Suzanie Chua
613 957-2115
March 2, 2004
Dear XXXXXXXXXX:
Re: Shrink-wrap software and "investment business" definition in subsection 95(1)
We refer to your letter regarding the above matter and write in response to your query raised. The hypothetical situation you have described is as follows:
1. Canco is a taxable Canadian corporation that manufactures shrink-wrap software in Canada.
2. CFA is a controlled foreign affiliate of Canco.
3. CFA purchases copies of the shrink-wrap software from Canco for resale to unrelated persons outside Canada.
4. CFA does not have exclusive distribution rights, licence or any other right connected to the shrink-wrap software except the right to resell the copies in exactly the same form as they were purchased in from Canco. CFA does not conduct any other business.
5. The general licensing agreement contained in the pre-packaged shrink-wrap software from Canco is a licence granted by Canco directly to the end-user and does not contain the name of the end-user of the software or the amount of the licence fee; CFA is not a party to the general licensing agreement.
The question you raised is whether the income earned by CFA on the sale of shrink-wrap software as described is a "royalty" or "similar return or substitute therefore" in the context of the "investment business" definition in subsection 95(1) of the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.
Canada Revenue Agency ("CRA") has stated the term "shrink-wrap computer software" is generally used to describe software that is pre-packaged and commercially available through mail order or at a retail store and generally, such software is packaged under a plastic shrink-wrap cover and includes a general licensing agreement. The general licensing agreement is a licence granted by the manufacturer to the end-user and does not contain the name of the end-user of the software or the amount of the licence fee.
Based on our understanding of the software industry practice as described, the CRA's position remains that the licence of shrink-wrap software by a company to an end-user as described above, constitutes a sale of tangible goods.
As you are aware, the CRA reviews each situation on a case-by-case basis. However, based on the hypothetical facts described above, it is our view that CFA would be considered to derive its income from sale of tangible goods. Accordingly, it would not be viewed as engaged in a business the principal purpose of which is to derive income from property for purposes of the "investment business" definition in subsection 95(1) of the Act.
Please note, however, that it would generally be expected that Canco would sell the copies to CFA for the same price as it would charge an arm's length distributor, otherwise, section 247 of the Act could apply to the transactions described in your letter.
We trust that the foregoing will be of assistance to you.
Yours truly
Olli Laurikainen
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content