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 non-resident corporation would be subject to tax in Canada on a bundled “licence fee” payment it receives from a corporation resident in Canada. The “licence fee” can be considered to have the following components:
1. A payment for the right to sublicense the right to download and use the custom computer software by end-users in Canada.
2. A payment for the exclusive right to market and distribute custom computer software in Canada.
3. A payment for ongoing software upgrades and support of the custom computer software through the non-resident corporation's website and telephone lines.
Position: General comments provided
XXXXXXXXXX
2011-042718
M. Gauthier
Attention: XXXXXXXXXX (613) 948-1143
August 23, 2012
Dear XXXXXXXXXX,
Re: Application of Part I and Part XIII tax in Canada to a computer software licensing fee
We are writing in reply to your letter dated November 7, 2011 in which you asked whether a non-resident corporation would be subject to tax in Canada on a bundled “licence fee” payment it receives from a corporation resident in Canada. You indicated that the bundled “licence fee” comprises a payment for the right to sublicense software, a payment for the exclusive right to market and distribute the software in Canada, and a payment for ongoing software upgrades and support of the software through the non-resident corporation’s website and telephone lines.
You also requested whether the comments found under the heading “Related Services” in technical interpretation 9430560 (E) continue to represent our position.
Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended.
Our comments
The fact scenario presented in your letter appears to relate to completed or proposed transactions. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, “Advanced Income Tax Rulings”, dated May 17, 2002. Where the particular transactions are complete, the inquiry is typically addressed by a tax services office by way of an audit review. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
Paragraph 212(1)(d) generally provides for an income tax of 25% on all amounts paid or credited to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or a similar payment. The types of payments subject to tax under paragraph 212(1)(d) include, but are not limited to, those described in subparagraphs 212(1)(d)(i) to (v) but do not include those described in subparagraphs 212(1)(d)(vi) to (xi). Specifically, subparagraph 212(1)(d)(vi) excludes royalties or similar payments on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work.
It is our understanding that the right to produce and reproduce computer software would be copyright protected as a literary work under the Copyright Act and it is generally understood to include allowing an end-user to download the software onto their computer. In such a case, a payment for the right to sublicense the right to download and use the custom computer software by an end-user in Canada would appear to satisfy the requirements for the exemption from Part XIII tax pursuant to subparagraph 212(1)(d)(vi).
The right to distribute custom computer software would not be protected by copyright within Canadian copyright law in its own right. However, it is our understanding that the right to distribute may be implicated or inherent in the copyright of the computer software itself, depending on the facts of the particular situation. For example, where a Canadian company is given the right to make copies and the right to install the computer software on the computers of the end-users, these actions might implicate the right to distribute such copies to the customer or else the Canadian company may be charged with copyright infringement.
Furthermore, in (TCC) Syspro Software Ltd. v The Queen (2003 TCC 498), Justice Garon stated, at paragraph 23:
“The words “a copyright in respect of the production or reproduction of any . . . work” must therefore be given a broad meaning and would, in my view, encompass any other right connected with the right to produce or reproduce the work, including the right to distribute the work.”
Therefore, a payment for the right to distribute the custom computer software in Canada could be considered in respect of a copyright in respect of the production or reproduction of a literary work and be exempt from Part XIII tax pursuant to subparagraph 212(1)(d)(vi).
Where the payment is for ongoing software upgrades and support of the software through the non-resident corporation’s website and telephone lines, the comments found under the heading “Related Services” in technical interpretation 9430560 (E) continue to represent our position. We would also like to confirm with you that for non-resident withholdings to apply, section 105 of the Income Tax Regulations does require the services to be rendered in Canada.
We hope this information is of assistance to you.
Yours truly,
Guy Goulet CPA, CA, M.Fisc.
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
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