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 a payment for use of a patent is subject to withholding under Part XIII of the Income Tax Act?
Position: No.
Reasons: The payment is exempt from withholding pursuant to the Canada-U.S. Income Tax Convention (1980).
XXXXXXXXXX 2005-011256
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Licensee1")
This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer with respect to certain payments made to XXXXXXXXXX (the "Licensor"). In this letter, references to the "Act" mean references to the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act.
To the best of your knowledge and that of Licensee1, none of the issues involved in this ruling request:
i. is in an earlier return of Licensee1 or a related person;
ii. is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Licensee1 or a related person;
iii. is under objection by Licensee1 or a related person;
iv. is before the courts; or
v. is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and transactions and any references thereto are provided solely for the convenience of the reader. Our understanding of the facts, transactions and the purpose of the transactions is as follows:
Facts
1. Licensee1 is a corporation formed under the laws of the Province of XXXXXXXXXX. Licensee1's Business Number is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Service Office and the XXXXXXXXXX Tax Centre.
2. Liscensee1 is, and at all relevant times will be, a resident of Canada for purposes of the Act.
3. Licensor is a corporation formed under the laws of the State of XXXXXXXXXX, U.S.A. Licensor's principal place of business is XXXXXXXXXX.
4. Licensor is, and at all relevant times will be, a resident of the United States for purposes of the Canada-United States Income Tax Convention (1980) (the "Treaty") and a non-resident of Canada for purposes of the Act.
5. XXXXXXXXXX ("Licensee2") is a corporation formed under the laws of the State of XXXXXXXXXX, U.S.A.
6. Licensee2 is, and at all relevant times will be, a resident of the United States for purposes of the Treaty and a non-resident of Canada for purposes of the Act.
7. Both Licensee 1 and Licensee2 are wholly-owned by a group of XXXXXXXXXX individual shareholders.
8. No shareholder of Licensee1 has an ownership interest, either directly or indirectly, in Licensor.
9. Licensee1 is in the business of XXXXXXXXXX.
10. Licensee2 is in the business of XXXXXXXXXX. Its business is principally carried on in the United States.
11. Licensor is in the business of XXXXXXXXXX. All patents registered by Licensor are intended to be used solely in the manufacturing of products of Licensor in its business.
Transactions
12. Licensor, Licensee1 and Licensee2 entered into a contract on XXXXXXXXXX (the "Agreement"). The Agreement grants the Licensee1 and Licensee2 the non-exclusive right to use certain patents (the "Licensed Patents") held by Licensor in producing certain products (the "Licensed Products") for sale throughout XXXXXXXXXX.
13. The Licensed Patents and Licensed Products relate to XXXXXXXXXX and are outlined in Attachments 1 and 2 of the Agreement.
14. The Agreement is the only contract in force between Licensee1 and Licensor, or Licensee2 and Licensor.
15. Pursuant to XXXXXXXXXX of the Agreement, Licensee1 and Licensee2 will pay an amount equal to XXXXXXXXXX% of net revenue from the sale of Licensed Products for the period between XXXXXXXXXX, and an amount equal to XXXXXXXXXX% of net revenue from the sale of Licensed Products for the period from XXXXXXXXXX until the expiration of the Agreement.
16. The Agreement does not confer on Licensee1 or Licensee2 any information or rights with respect to the Licensor's business management, operations or marketing systems.
17. XXXXXXXXXX.
18. Negotiations with respect to the Agreement took place between staff of Licensor located at its principal place of business and staff of Licensee1. Outside legal counsel were also used to assist with the negotiations.
Purpose of the Transactions
19. The purpose of the transactions is to grant Licensee1 and Licensee2 an undisputed right to use the Licensed Patents in the Licensed Products XXXXXXXXXX.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, transactions, and purpose of the transactions, and provided that the transactions are completed in the manner described above, and subject to the comments set out below, our ruling is as follows:
Pursuant to Section 805 of the Regulations to the Act and
Article XII(3)(c) of the Treaty, Licensee1 is not required to withhold Part XIII tax from any payments made to Licensor pursuant to XXXXXXXXXX of the Agreement.
This ruling is governed by the general limitations and qualifications set out in Information Circular 70-6R5. It is binding on the Canada Revenue Agency (the "CRA") in respect of the Agreement. This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act that, if enacted, could affect the ruling.
Nothing in this letter should be construed as implying that the CRA has agreed to or ruled on:
a. whether Licensor is carrying on business in Canada for purposes of the Act; or
b. whether Licensor has a permanent establishment in Canada for purposes of any tax treaty (as defined in subsection 248(1)).
Additionally, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and transactions other than those specifically described herein.
Yours truly,
XXXXXXXXXX
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, 2005
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, 2005
Email this Content