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: Where a non-resident payee holds the copyright to custom computer software, are payments made by Canco to the non-resident for the right to distribute that software exempt from Part XIII withholding tax?
Position: Yes, in the circumstances.
Reasons: Payment for distribution rights in this case are considered copyright royalties as the right to distribute is viewed as a component of the right to reproduce the software or is ancillary to such a right.
XXXXXXXXXX
2012-046280
XXXXXXXXXX, 2014
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX) and your subsequent submissions of XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier tax return of the taxpayer or a related person;
(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
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 proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.
Definitions
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
The following terms and taxpayers referred to throughout this document will have the following meaning:
"Agreement" means the legal Reseller Agreement negotiated between Forco and Canco detailing the rights and conditions under which Canco agrees to sublicense the Custom Software to sub-licensees within Canada, as described in paragraphs 9 to 13;
"Canco" means the proposed new corporation described in paragraph 7;
"CRA" means the Canada Revenue Agency;
"Custom Software" means XXXXXXXXXX;
"Forco" means XXXXXXXXXX;
"License Fee" means the one-time fee to be paid by Canco to Forco under the Agreement in consideration for each sublicense that will be granted by Canco. This fee will be equal to a percentage of the actual fee that will be invoiced by Canco to the sub-licensee for the Custom Software;
"Treaty" means XXXXXXXXXX; and
XXXXXXXXXX.
Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:
FACTS
1. Forco is a resident of XXXXXXXXXX; its head office is located at XXXXXXXXXX. Pursuant to XXXXXXXXXX, Forco is considered a "tax exempt organization" in XXXXXXXXXX for income tax purposes.
2. Forco's objective, XXXXXXXXXX.
3. Forco is a "qualifying person" as that term is defined in XXXXXXXXXX of the Treaty.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
6. Forco currently conducts its activities in Canada through XXXXXXXXXX branch operations: XXXXXXXXXX. These Canadian branch operations are outside the scope of this request and for greater certainty, the activities of these branch operations do not form part of the proposed transactions described in paragraphs 7 to 13 below.
PROPOSED TRANSACTIONS
7. Forco will create a new corporation to ensure all Canadian activities related to its Custom Software are maintained in Canada. Forco will incorporate Canco without share capital under Part 2 of the Canada Not-for-profit Corporations Act and its head office will be located in the province of XXXXXXXXXX.
8. The sole member of Canco will be Forco.
9. Canco will enter into the Agreement with Forco to sell the Custom Software in Canada.
10. Pursuant to the Agreement, Forco will grant a non-transferable, non-exclusive license to Canco to market and sublicense Forco's Custom Software and associated documentation, as updated from time to time, to Canco's sub-licensees which will include XXXXXXXXXX or other organizations that agree to certain terms and conditions.
11. Under the Agreement, Canco will be authorized to:
a. Use the Custom Software and associated documentation to provide technical maintenance and support to the sub-licensees;
b. Use the Custom Software and associated documentation for demonstration purposes; and
c. Reproduce the Custom Software to the extent necessary for safekeeping and archival purposes and reproduce the associated documentation which includes reproduction of promotional material to further its marketing efforts (subject to copyright restrictions).
12. Custom Software orders will be placed by Canco to Forco for each sublicense granted in Canada. Upon receipt of the order, Forco will send authorized copies of the Custom Software and associated documentation to Canco for delivery to the sub-licensee.
13. Pursuant to the Agreement, Canco will pay Forco a License Fee.
PURPOSE OF THE PROPOSED TRANSACTIONS
14. The proposed reorganization to create Canco will ensure the Canadian activities of Forco, as they relate to its Custom Software and associated documentation, will be localized in Canada with Canco being subject to Canadian privacy law requirements.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in the manner described above, and there are no other transactions that may be relevant to the rulings given, we rule that:
A. The License Fee paid by Canco to Forco will be exempt from Part XIII withholding tax pursuant to subparagraph 212(1)(d)(vi).
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. As previously stated, the documentation submitted with this request, specifically the Agreement, does not form part of the facts and proposed transactions except as expressly referred to herein with respect to the License Fee.
For greater certainty, the CRA has not considered, confirmed or made any determination in respect of:
(a) any additional fees that may be contemplated under the Agreement;
(b) any income tax considerations associated with Forco's branch operations in Canada; and
(c) whether or not subsection 247(2) of the Act applies to any transactions between Forco and Canco as described in the facts or proposed transactions of this letter.
The above advance income tax rulings, which are based on the Act and Income Tax Regulations to the Act in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.
Yours truly,
XXXXXXXXXX
Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and 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, 2014
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, 2014
Email this Content