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 franchise relicensing fee payment is considered a "rent, royalty or similar payment" for the purposes of paragraph 212(1)(d)?
Position: Yes.
Reasons: Any payment of the nature of a rent or royalty or similar payment is subject to 212(1)(d).
XXXXXXXXXX 2013-051292
March 27th, 2014
Dear XXXXXXXXXX:
Re: Withholding tax on relicensing fee
This is in response to your correspondence dated November 18, 2013, wherein you asked for our interpretation as to whether a non-resident corporation ("Nrco") shall pay Part XIII tax on an amount that a person resident in Canada ("Canco") pays to it as a franchise relicensing fee. More specifically, you asked us to confirm that such a franchise relicensing fee payment would not be considered a "rent, royalty or similar payment" for the purposes of paragraph 212(1)(d) of the Income Tax Act ("Act").
In your letter, you indicated that you were of the opinion that such fee paid at the time of the application for a renewal of a franchise used in Canada can be viewed as an initial fee or an application fee. Accordingly, you submitted that, as indicated by Justice O'Connor in Zainul and Shazma Holdings Ltd. et al v. The Queen - 2004 TCC 527, such a payment would not be a "rent, royalty or similar payment" for the purposes of 212(1)(d) of the Act.
Our comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
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).
The terms "rent" and "royalty" are not defined in the Act. In general, a rent or royalty represents a payment made to the owner of property for the right to use such property for a given period of time.
In the situation described in your letter, a review of all the relevant facts and documentation would be necessary to reach a definitive conclusion on whether the franchise relicensing fee paid by Canco would be considered to be a "rent, royalty or similar payment" for the purposes of paragraph 212(1)(d) of the Act. However, based on the limited facts provided, it is our view that it would be reasonable to consider that the relicensing fee is paid to Nrco for the right to use a franchise in Canada for a given period of time and consequently would be a "rent, royalty or similar payment" for the purpose of paragraph 212(1)(d) of the Act. Consequently, Nrco would be subject to Part XIII tax on the amount paid by Canco to it for the renewal of a franchise used in Canada under paragraph 212(1)(d) of the Act.
We trust our comments will be of assistance.
Yours truly,
Guy Goulet, CPA, CA, M. Fisc.
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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