2009 Ruling 2008-0284551R3 - Royalty Paid to Non-Resident

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 royalty paid by a Canadian corporation to a U.S. corporation is exempt from Part XIII tax as a result of Article XII of the Canada-U.S. Tax Convention?

Position: Yes, if the U.S. corporation is the beneficial owner of the royalty, and the payment is not part of an avoidance transaction.

Reasons: The U.S. corporation is entitled to benefits of the Convention under Article XXIX-A(3).

XXXXXXXXXX 								2008-028455

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling - Royalty Payments for Patents & Technology

This letter is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of XXXXXXXXXX We also acknowledge your letters to us dated XXXXXXXXXX , as well as numerous communications by email and telephone. Although the proposed transactions took place on XXXXXXXXXX , the taxpayers would still like rulings on the completed transactions.

Definitions

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof.

(b) "Canco" means XXXXXXXXXX ., a corporation resident in Canada for purposes of the Act and the Treaty.

(c) "Former Agreements" mean the agreements described in 5 below.

(d) "LLC" means XXXXXXXXXX , a limited liability company organized and existing under the laws of XXXXXXXXXX .

(e) "LLC/Opco Agreement" means the XXXXXXXXXX , described further in 7 below.

(f) "Opco" means XXXXXXXXXX ., a corporation resident in the U.S. for purposes of the Act and the Treaty.

(g) "Opco1" means XXXXXXXXXX ., a corporation incorporated under the laws of the U.S.

(h) "Opco2" means XXXXXXXXXX , a limited liability company organized and existing under the laws of XXXXXXXXXX .

(i) "Opco3" means XXXXXXXXXX , a limited liability company organized and existing under the laws of XXXXXXXXXX .

(j) "Opco4" means XXXXXXXXXX ., a corporation incorporated under the laws of XXXXXXXXXX .

(k) "Opco/Canco Agreement" means the XXXXXXXXXX , described further in 7 below.

(l) "New Agreements" mean the agreements described in 7 below.

(m) "Parentco" means XXXXXXXXXX ., a corporation resident in XXXXXXXXXX for purposes of the Act and the Canada-XXXXXXXXXX Income Tax Convention.

(n) "Parentco/LLC Agreement" means the XXXXXXXXXX , described further in 7 below.

(o) "Treaty" means the Canada-United States Tax Convention (1980), as amended by the Fifth Protocol signed on September 21, 2007.

(p) "U.S." means the United States of America.

Facts

1. Parentco is engaged in, XXXXXXXXXX

2. Opco is engaged in the XXXXXXXXXX

3. Canco is engaged in XXXXXXXXXX

4. Opco1, Opco2, Opco3 and Opco4 are subsidiaries of Opco (i.e. Opco owns XXXXXXXXXX % of each of Opco2 and Opco 3, XXXXXXXXXX % of Opco1 and XXXXXXXXXX % of Opco4). Opco1, Opco2 and Opco3 are engaged in XXXXXXXXXX

5. Prior to XXXXXXXXXX , (a) each of the XXXXXXXXXX entities (i.e. Canco, Opco1, Opco2, Opco4 and the XXXXXXXXXX subsidiaries) had one or more separate Former Agreements with Parentco, and (b) Opco had a XXXXXXXXXX Agreement with Parentco. (Opco3 commenced XXXXXXXXXX in XXXXXXXXXX , and did not have Former Agreements with Parentco.) The Former Agreements comprised the following:

XXXXXXXXXX

6. Royalties paid to Parentco by Canco under the applicable Former Agreements between Parentco and Canco were subject to a 25% withholding tax under paragraph 212(1)(d) of the Act, reduced to XXXXXXXXXX % under Article XXXXXXXXXX of the Canada-XXXXXXXXXX Income Tax Convention.

Completed Transactions

7. On XXXXXXXXXX , the Former Agreements were cancelled and the New Agreements were entered into (except for certain XXXXXXXXXX Agreements pending execution). The New Agreements comprise the following:

XXXXXXXXXX

8. Each party to the New Agreements enforces its rights and discharges its obligations under the respective New Agreements as principal in its own right, and does not act as an agent, nominee, trustee or fiduciary of or in any other representative capacity for any other person.

9. Opco's activities are substantial in relation to the activities carried on by Canco giving rise to the royalties paid under the Opco/Canco Agreement. For example, for XXXXXXXXXX , Canco had revenue of approximately Cdn$XXXXXXXXXX , whereas Opco had revenue of approximately US$XXXXXXXXXX . Canco had assets (excluding XXXXXXXXXX ) of approximately Cdn$XXXXXXXXXX , whereas Opco had assets (excluding XXXXXXXXXX ) of approximately US$XXXXXXXXXX . Canco had approximately XXXXXXXXXX employees (excluding XXXXXXXXXX employees), whereas Opco had approximately XXXXXXXXXX employees (excluding XXXXXXXXXX employees).

10. Opco is required to include royalties received under the Opco/Canco Agreement in its income for U.S. tax purposes.

11. Opco does not carry on business through a permanent establishment in Canada in respect of which the XXXXXXXXXX property under the Opco/Canco Agreement is connected for purposes of the Treaty.

12. LLC is engaged in managing, developing, enhancing, procuring, enforcing and licensing the XXXXXXXXXX property under the New Agreements in XXXXXXXXXX . It employs XXXXXXXXXX employees and realized a pre-tax profit after expenses of approximately US$XXXXXXXXXX for XXXXXXXXXX . LLC is wholly-owned by Opco, and is fiscally transparent for U.S. tax purposes.

13. Royalties paid by Canco to Opco under the Opco/Canco Agreement in respect of XXXXXXXXXX , and related withholding tax under paragraph 212(1)(d) of the Act were (all amounts in Canadian dollars):

Royalties 	Royalties Paid Amount  Withholding Tax     Paid By
in Respect 					Paid to Receiver
of

   	 			         General 

XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX

14. Royalties payable by Opco to LLC under the LLC/Opco Agreement were US $XXXXXXXXXX for XXXXXXXXXX .

15. Royalties payable by LLC to Parentco under the Parentco/LLC Agreement were US $XXXXXXXXXX , in respect of XXXXXXXXXX . Amounts payable by LLC to Parentco under the XXXXXXXXXX were US $XXXXXXXXXX in respect of XXXXXXXXXX .

Purpose of the Completed Transactions

XXXXXXXXXX wished to consolidate all of its XXXXXXXXXX property licenses into one point of entry into XXXXXXXXXX (i.e. through LLC) in order to facilitate managing, protecting, enhancing and enforcing the XXXXXXXXXX property.

Other Information

To the best of your knowledge and that of Canco and Opco, none of the issues involved in this advance income tax ruling is:

• in an earlier return of Canco or Opco, or a related person;
• being considered or under assessment by a tax services office or taxation centre in connection with a previously filed tax return of Canco or Opco or a related person;
• under objection by Canco or Opco or a related person;
• before the courts, and no judgement has been issued which may be under appeal; or
• the subject of a ruling previously issued by the Directorate.

Rulings Given

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant Definitions, Facts, Completed Transactions, Purpose of the Completed Transactions and Other Information, we rule as follows:

A. Opco is entitled to the benefits of the Treaty by virtue of paragraph 3 of Article XXIX-A of the Treaty in respect of royalties paid on or after XXXXXXXXXX by Canco to Opco under the Opco/Canco Agreement described in 7 above.

B. Provided, as addressed by you, that Opco is the beneficial owner of the royalties paid by Canco to Opco for the use of or the right to use XXXXXXXXXX property under the Opco/Canco Agreement described in 7 above, such royalties that otherwise are subject to tax under paragraph 212(1)(d) of the Act, are exempt from such tax by virtue of subparagraph 3(c) of Article XII of the Treaty.

C. Provided, as addressed by you, that the Completed Transactions do not constitute an avoidance transaction within the meaning of that term set out in subsection 245(3) of the Act, neither subsection 245(2) of the Act, nor paragraph 7 of Article XXIX-A of the Treaty will apply to redetermine the tax consequences confirmed in the rulings given in A. and B. above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA with respect to royalties paid by Canco to Opco as described in Ruling B. above. The above rulings are based on the Act in its present form and do not take into account any proposed amendments which, if enacted, could have an effect on the rulings given.

Caveats

This letter is based solely on the Facts and Completed Transactions described above. The documentation submitted with your request does not form part of the Facts and Completed Transactions and any references thereto are provided solely for the convenience of the reader.

Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to

(a) any tax consequences relating to the Facts and Completed Transactions described herein other than those specifically described in the rulings given above; or

(b) whether the provisions of subsection 247(2) of the Act would apply to adjust the quantum or nature of the amount paid by Canco to Opco under the Opco/Canco Agreement described in 7 above.

The CRA has asked the tax authorities in both XXXXXXXXXX and the U.S. to notify the CRA of any facts that would indicate that Opco has not acquired the right to license the XXXXXXXXXX property under the Opco/Canco Agreement described in 7 above and receive royalties described in Ruling B above as principal. Should such facts emerge, the rulings given herein will not be binding on the CRA.

Yours truly,

XXXXXXXXXX
For Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 XXXXXXXXXX