27 March 2018 External T.I. 2017-0715561E5 - Withholding tax on royalties for streamed content

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: Does Canadian withholding tax apply on royalty payments by a Canadian company to a U.K. content provider for motion picture films and TV shows that are streamed to Canadian and foreign subscribers?

Position: Pursuant to subsection 212(5), Canadian withholding tax applies but only to the extent that the payment relates to the use or reproduction of the films or TV shows in Canada. The payment is not exempt under the Canada-U.K. Income Tax Convention but the rate of withholding tax can be reduced from 25% to 10%.

Reasons: Wording of subsection 212(5) and Article 12(3)(a) of the Canada-U.K. Income Tax Convention and ordinary meaning of the words “television” and “broadcasting”.

XXXXXXXXXX
									2017-071556
									Yves Grondin
March 27, 2018

Dear XXXXXXXXXX,

RE: Withholding Tax on Royalties for Streamed Content

We are writing in response to your correspondence of July 11, 2017 wherein you requested our views in respect of the application of Canadian withholding tax on royalty payments by a Canadian company to a U.K. content provider for motion picture films and TV shows that are streamed to Canadian and foreign subscribers by the Canadian company.

Unless otherwise stated, all statutory references in this letter are to the Income Tax Act (the “Act”) and all tax treaty references are to the Canada-U.K. Income Tax Convention (the “Canada-U.K. Tax Treaty” or the “Treaty”).

This technical interpretation provides general comments about the provisions of the Act and related legislations (where referenced) and the Canada-U.K. Tax Treaty. 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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Facts

• Canco is a company incorporated and resident of Canada which has an office and employees in Canada.
• Canco streams motion picture films and TV shows (the “digital content”) to its Canadian and foreign subscribers through a live TV video stream, a delayed TV stream and a digital content library.
• Subscribers pay Canco a monthly fee for the right to access the digital content.
• Canco has both Canadian and foreign subscribers.
• In order to obtain the rights to the films and TV shows that it streams, Canco pays a royalty to an arm’s length content provider that is a resident of the United Kingdom and that is also the beneficial owner of the payment (“U.K. Content Provider”).
• The amount of the royalty that is paid to the U.K. Content Provider is based on the amount of viewing of the digital content by Canco’s subscribers.
• Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.
• Canco does not change the content of the films and TV shows that it receives from the U.K. Content Provider.

Questions

1. Are the royalty payments by Canco to the U.K. Content Provider subject to Canadian withholding tax under subsection 212(5) of the Act?

2. If the royalties are subject to Canadian withholding tax under the Act, are they exempt from withholding tax under Article 12(3)(a) of the Canada-U.K. Tax Treaty?

Comments

1. Are the royalty payments by Canco to the U.K. Content Provider subject to Canadian withholding tax under subsection 212(5) of the Act?

Subsection 212(5) of the Act indicates that a Canadian withholding tax of 25% applies namely to a payment for a right in or to the use of a motion picture film, or a film, video tape or other means of reproduction for use in connection with television, provided that they are used or reproduced in Canada and only to the extent that this payment relates to that use or reproduction. For the purpose of this provision, it is our view that a motion picture film that is streamed remains a “motion picture film” and that a streamed TV show is a “means of reproduction” of the TV work.

Based on the facts stated above, we understand that a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content in Canada since Canco’s Canadian subscribers are viewing the streamed content in Canada. On the other hand, a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.

Under subsection 212(5) of the Act, Canadian withholding tax applies to the portion of the payments to the U.K. Content Provider which relates to the streaming of the digital content to Canco’s subscribers to the extent that the right in or to the use of the digital content is being used or reproduced in Canada.

Canadian withholding tax should not apply, under subsection 212(5) of the Act, to the portion of the payments to the U.K. Content Provider which relates to Canco’s foreign subscribers to the extent that the right in and to the use of the digital content is being used and reproduced outside of Canada. However, even if Canco’s subscribers are foreign, Canadian withholding tax can still apply, should the right in or to the use of the digital content be partly used or reproduced in Canada prior to being streamed to these foreign subscribers for viewing outside of Canada (but only to the extent of the payment that is related to the use or reproduction in Canada) or if it was being streamed in Canada.

2. If the royalties are subject to withholding tax under the Act, are they exempt from withholding tax under Article 12(3)(a) of the Canada-U.K. Tax Treaty?

Under Article 12 of the Canada-U.K. Tax Treaty, royalty payments arising in Canada and paid to a U.K. resident beneficial owner can either be exempt from Canadian withholding tax or can benefit from a reduced treaty rate of 10%.

Article 12(3)(a) of the Treaty provides that copyright royalties in respect of the production or reproduction of any literary, dramatic, musical or artistic work can be exempt from Canadian withholding tax. However, this exemption does not apply to payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. Instead of being exempt, these types of payments can be subject to a reduced withholding tax rate, under the Treaty, of 10%.

You have indicated to us that, based on the definitions of “broadcasting” and “radio or radiocommunication” under subsection 35(1) of the Interpretation Act, you do not consider streamed TV shows to be “in connection with television broadcasting” since they are not “propagated in space without artificial guide” and, as such, you believe that the royalty payments to the U.K. Content Provider in respect of the TV shows should be exempt from Canadian withholding tax under the Treaty. We do not agree with this view.

Definitions in the Interpretation Act do not apply automatically to every treaty or legislative enactment. Subsection 3(1) of the Interpretation Act indicates that a provision of the Interpretation Act may not apply if a contrary intention appears (either expressly in the text or as part of the context of the provision being applied). Furthermore, Article 3(2) of the Canada-U.K. Tax Treaty indicates that the meaning of a term under Canada’s domestic laws may not apply if the context requires otherwise. We are of the view that the text, context and purpose of Article 12(3)(a) of the Treaty indicate that an ordinary meaning was intended to be given to the words “television” and “broadcasting” and that their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content.

Based on the above, payments to the U.K. Content Provider in respect of motion pictures and television works that are streamed to Canadian subscribers would not be exempt from Canadian withholding tax under the Canada-U.K. Treaty, but could benefit from the reduced withholding tax rate under the Treaty of 10%. Furthermore, as discussed above, the reduced withholding tax rate of 10% could also apply for the payments related to Canco’s foreign subscribers if the right in or to the use of the digital content was partly used or reproduced in Canada prior to being streamed to these foreign subscribers for viewing outside of Canada or if it was being streamed in Canada.

We trust that our comments will be of assistance, and thank you for your enquiry.

Yours truly,

Nicolas Bilodeau
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch