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 payments to non-residents are subject to a 25% withholding tax under subsection 212(5). Whether the treaty provides any relief for royalties under the Canada-US Tax Convention and the Canada-France Tax Convention
Position: Yes.
Reasons: Under subsection 212(5) withholding tax applies to payments to a non-resident for a "right in or to the use of" a) a motion picture film or b) a film, video tape or other means of reproduction for use in connection with television, that has been or is to be used or reproduced in Canada. Both the Canada-US and Canada-France Treaty may provide relief, as royalties may be reduced to a tax rate of 10% under certain circumstances.
XXXXXXXXXX
J. Nichols
2011-039276
April 19, 2011
Dear XXXXXXXXXX :
RE: Motion picture films - subsection 212(5) of the Income Tax Act
We are writing in reply to your letter dated January 13, 2011 requesting our view whether subsection 212(5) of the Income Tax Act (the "Act") would apply to certain payments for rights to motion picture films made to non-residents and whether relief is available under the Royalties articles of the Canada-US Tax Convention (the "US Convention") and the Canada-France Tax Convention (the "France Convention"), based on the following facts.
1. Canco, a Canadian resident company, has entered into a contract under which it will pay a fee to a US distribution company that is a resident of the USA, for the purposes of the US Convention, for a right in or the use of certain motion pictures.
2. Canco has entered into a second contract under which it will pay a fee to a French distribution company that is a resident of France for purposes of the France Convention, for a right in or the use of certain motion pictures.
3. It is your understanding that neither film distribution company is deemed to be carrying on business in Canada, nor do they have a permanent establishment ("PE") in Canada for the purposes of the respective Conventions.
4. The motion pictures are used in Canada, through the processes of reproducing them in a digitized format by Canco and encrypting them in Canada in accordance with the terms of the arrangement with the distribution companies.
5. Canco then develops special software in order to allow the motion pictures to be viewed by XXXXXXXXXX .
6. XXXXXXXXXX pay Canco a fee for each time a motion picture is viewed XXXXXXXXXX .
7. The fees paid by Canco to the distribution companies are based on the number of times the relevant motion pictures are viewed.
Our comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed, and are the subject matter of an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. We are, however, prepared to provide the following general comments.
The fees Canco paid to the non-residents are subject to subsection 212(5) of the Act, which states:
212(5) Motion picture films - Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of
(a) a motion picture film, or
(b) a film, video tape or other means of reproduction for use in connection
with television (other than solely in connection with and as part of a
news program produced in Canada),
that has been or is to be used or reproduced in Canada.
Subsection 212(5) would apply, as Canco does pay for a right to use a motion picture film and since Canco uses this right to reproduce the motion pictures in a digitized format and encrypts them in Canada. The payments made by Canco to the distribution companies meet the definition of "royalties", described in Article 12 of the respective tax Conventions and are subject to a reduction of the withholding tax rate from 25% to 10%, provided the distribution companies are the beneficial owners of those payments. The fees to the French distribution company may however, be exempt from Canadian withholding tax if the types of motion pictures involved meet the criteria in the France Convention under paragraph 4(a) of Article 12 provided that the French distribution company is subject to tax in France in respect of the payment received from Canco.
We trust our comments will be of assistance.
Yours truly,
Olli Laurikainen
Manager
International Section II
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs 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, 2011
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, 2011
Email this Content