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: 1. Is the payment that Corporation C receives as it relates to the purchase or rental of Digital Content exempt from Canadian withholding tax?
2. Are the monthly fees paid by the Customers to Corporation C for the performance of services exempt from withholding tax?
Position: 1. Yes
2. Yes
Reasons: 1. The payments Corporation C receives for the purchase or rental of Digital Content by the Home User or Customer are exempt from Canadian withholding taxes since the Canada-U.S. Treaty exempts royalty payments in respect of works for private home use.
2. The monthly fees paid by the Customers to Corporation C for the performance of services are exempt from withholding taxes by virtue of paragraph 212(4)(a) and paragraph 1 of Article VII of the Canada-U.S. Treaty.
XXXXXXXXXX
2011-041689
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above-referenced entity.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling letter:
(i) is in an earlier return;
(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a ruling previously issued by the Directorate.
The rulings given herein are based solely on the facts, proposed transactions and the purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling letter is based and any reference to these documents is provided solely for the convenience of the reader.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions are as follows:
Definitions
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this advance income tax ruling;
XXXXXXXXXX
"Content Owners" means XXXXXXXXXX who own rights to Digital Content that Home Users want to view;
"Corporation" has the meaning assigned by subsection 248(1) of the Act;
"Corporation A" means XXXXXXXXXX
"Corporation B" means XXXXXXXXXX
"Corporation C" means XXXXXXXXXX
"Customer A" means XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
"Country 1" means the United States of America;
"CRA" means the Canada Revenue Agency;
"CyberABC" means Corporation C's business unit that XXXXXXXXXX Digital Content;
"Digital Content" means movies, television shows, music videos, documentaries, and other audio-visual content;
"Customers" means Corporation C's business customers who offer the purchase or rental of Digital Content to Home Users through a CyberABC enabled Online Store. "Customers" refer to Customer A and Customer B;
"Home Users" means individuals who purchase or rent the right to view Digital Content through an online store for strictly limited non-commercial personal use;
"Customer B" means XXXXXXXXXX ;
XXXXXXXXXX
"Treaty" means the Convention between Canada and the United States of America with respect to taxes on Income and on Capital, September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and
September 21, 2007.
Facts
1. Corporation A is a public company listed and resident in Country 1. XXXXXXXXXX . The products and services which Corporation A provides XXXXXXXXXX enable Corporation A's business customers to deliver Digital Content to their Home Users which is stored or distributed in electronic format rather than physical media.
2. Corporation A is considered a "qualifying person" pursuant to paragraph 2(c) of Article XXIX-A of the Treaty.
3. Corporation B is resident in Country 1 and is wholly-owned by Corporation A. Corporation B is a "qualifying person" pursuant to paragraph 2(d) of Article XXIX-A of the Treaty.
4. Corporation C is a Limited Liability Company, created under the laws of and carrying on business in Country 1. Corporation C is treated under taxation law of Country 1 as fiscally transparent. Corporation C is wholly-owned by Corporation B. XXXXXXXXXX . One of Corporation C's businesses is CyberABC, which enables its business customers (i.e. Customers) to set up online stores ("Online Stores") to sell or rent Digital Content to Home Users. XXXXXXXXXX .
5. In the Corporation C/CyberABC business model, there are generally four participants:
a) Content Owners
b) Customers
c) CyberABC
d) Home Users
6. Corporation C has content license agreements with many Content Owners under which Corporation C has been granted limited rights to distribute Digital Content to Home Users through the CyberABC delivery platform. Each content license agreement is signed in Country 1. The limited grant of rights is commercialized through the set-up and operation of the Customers' Online Stores. XXXXXXXXXX . The scope of Corporation C's content license agreements with Content Owners only allows for distribution of the Digital Content for home use and prohibits Corporation C from distributing Digital Content for business use, broadcast, or public display. XXXXXXXXXX .
7. The Customers and Corporation C are not related. The Customers are Canadian residents.
8. Corporation C enters into agreements with Customers which enable the implementation of a white-label CyberABC Online Store branded as the Customer's Online Store. The CyberABC's infrastructure platform used for the Customer's Online Store aggregates Digital Content from Content Owners, displays the available Digital Content choices to Home Users and allows the Home Users to download or stream the Digital Content after using a credit card for payment XXXXXXXXXX .
9. XXXXXXXXXX
10. XXXXXXXXXX
Proposed Transactions
Contract 1 - Corporation C as Merchant of Record
11. Corporation C, through its CyberABC platform, will create and operate Customer A's Online Store as well as provide XXXXXXXXXX and other services. Corporation C will act as the merchant of record for sales or rentals through Customer A's Online Store and will be responsible for billing and collecting payments from the Home User. Corporation C is the beneficial owner of the payment received from the Home User. XXXXXXXXXX . Customer A will pay Corporation C a separate fee for the managed services provided by Corporation C, as described in paragraph 12 below.
12. Corporation C will provide managed services necessary to operate Customer's A Online Store in exchange for a fee. These services are all performed in Country 1. The managed services may include:
a. Responsibility for Operations - Corporation C will be responsible for all aspects of the operation of the Online Store, including without limitation: XXXXXXXXXX ;
b. Responsibility for Infrastructure - Corporation C will be responsible for XXXXXXXXXX for the Online Store;
c. Content Costs and Other Payments - Corporation C will be responsible for obtaining the content licensing agreements which entitles the Online Store to distribute Digital Content to the Home User;
d. Rights and Authorizations - Corporation C will be responsible for procuring all necessary rights, clearances, consents, licenses, permissions and authorizations to offer and operate the Online Store;
e. Tracking Purchases - Corporation C will identify and track sales of all Digital Content through the Online Store. XXXXXXXXXX ;
f. Program Management - Corporation C will assign one or more program managers to Customer A. XXXXXXXXXX ;
g. Marketing - Corporation C will provide marketing support. XXXXXXXXXX .
13. The servers on which Customer A's Online Store is hosted are owned by a wholly-owned subsidiary of Corporation A resident in Country 1. The servers are located in Country 1.
14. The Home User must accept and enter into the Customer A's terms of service in order to obtain the Digital Content. The terms of service include:
a. A non-exclusive, non-transferable, limited rights and license for Home User to access and use Customer A's Online Store to view and privately display Digital Content;
b. The license is granted to a person and is for the limited purpose of personal use and not for any commercial purpose;
c. No business entity is licensed to use Customer A's Online Store;
d. Home Users may not sublicense, alter, adapt, transmit, publicly perform or display, distribute, customize, modify, add to, delete from, create derivative works based upon any portion of the content, link or forward any web address of Customer A's Online Store, copy, counterfeit or paste the content to any other website or web page. Home Users may not publicly display any portion of Customer A's Online Store or films or other audiovisual or digital works available on Customer A's Online Store.
Contract 2 - Customer B as Merchant of Record
15. Corporation C, through its CyberABC platform, will operate Customer B's Online Store only as a technology and service provider. Customer B will act as a merchant of record in the transaction to sell or rent Digital Content to the Home User.
16. Corporation C provides agreed-upon services to create and operate Customer B's Online Store, in conjunction with Customer B, as well as provide technology and other services. As Customer B will act as merchant of record, it will be responsible for billing and collecting payment from the Home User. XXXXXXXXXX . Corporation C is the beneficial owner of the payment received from Customer B. XXXXXXXXXX . Customer B will pay a separate fee to Corporation C for their services, as described in paragraph 17 below.
17. The services provided by Corporation C to Customer B are all carried out in Country 1. The services include:
a. Responsibility for Infrastructure - Corporation C will be responsible for the design and architecture of the CyberABC back-end technology;
b. Content Costs and Other Payments - Corporation C will be responsible for obtaining the content licensing agreements which entitle the Online Store to distribute Digital Content to the Home User;
c. Rights and Authorizations - Corporation C will be responsible for procuring all necessary rights, clearances, consents, licenses, permissions and authorizations to offer and operate the Online Store; and
d. Other Services - Corporation C may provide other services as agreed, XXXXXXXXXX .
18. Customer B, among other things, controls the relationship with the Home User, XXXXXXXXXX , enters into the retail transaction with the Home User and may provide services to the Home User.
19. The Home User must accept and enter into Customer B's terms of service in order to obtain the Digital Content. The terms of service include:
(a) A non-exclusive, non-transferable, limited rights and license for Home User to access and use Customer B's Online Store to view and privately display Digital Content;
(b) The license is granted to a person and is for the limited purpose of personal use and not for any commercial purpose;
(c) No business entity is licensed to use Customer B's Online Store; and
(d) Home Users may not sublicense, alter, adapt, transmit, publicly perform or display, distribute, customize, modify, add to, delete from, create derivative works based upon any portion of the content, link or forward any web address of Customer B's Online Store, copy, counterfeit or paste the content to any other website or web page. Home Users may not publicly display any portion of Customer B's Online Store or films or other audiovisual or digital works available on Customer B's Online Store.
Purpose of the Proposed Transactions
20. The purpose of the transactions is to fulfill commercial contracts.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. A payment to Corporation C by a Canadian Home User for a purchase made on Customer A's Online Store is exempt from tax under Part XIII of the Act by virtue of paragraph 6 of Article IV and subparagraph 3(a) of Article XII of the Treaty.
B. The monthly fee paid by Customer A to Corporation C for the performance of services, as described in paragraph 12 above, to the extent it could otherwise be considered a management or administration fee or charge, will not be taxable under paragraph 212(1)(a) of the Act by virtue of paragraph 212(4)(a) of the Act, as long as such amounts are reasonable in the circumstances.
C. The payment to Corporation C by Customer B for transaction fees, as described in paragraph 16 above, is exempt from tax under Part XIII of the Act by virtue of paragraph 6 of Article IV and subparagraph 3(a) of Article XII of the Treaty.
D. The monthly fee paid by Customer B to Corporation C for the performance of services, as described in paragraph 17 above, to the extent it could otherwise be considered a management or administration fee or charge, will not be taxable under paragraph 212(1)(a) of the Act by virtue of paragraph 212(4)(a) of the Act, as long as such amounts are reasonable in the circumstances.
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency ("CRA") provided the proposed transactions are carried out before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
The above noted rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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