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.
Dear Sirs:
This is in reply to your letters of November 21 and November 29, 1985.
You have asked for Revenue Canada's position regarding the requirement to withhold taxes on computer software "technical support payments" in the following hypothetical situations:
A. In conjunction with the acquisition of a license to use software, a Canadian resident pays a non-resident an additional sum for technical support. "Technical support services" consist of access to a toll-free support telephone hotline, access to an electronic mail hotline, a quarterly newsletter and periodic software updates.
B. A Canadian resident enters into a technical support agreement with a non-resident which is renewable each year at a fixed amount per annum. The "technical support" provided by the non-resident includes access to a toll-free support telephone hotline, access to an electronic mail hotline, and a quarterly newsletter.
C. As in B above except the "technical support" provided includes periodic software updates.
D. As in B above except the "technical support" provided includes the right to software updates if any happen to be issued during the contract period.
In our telephone discussion of March 17, 1986, you indicated to us that there is no difference between situations C and D above except that in situation D there is no guarantee that there will be any software updates, whereas in situation C it is certain that there will be software updates.
It is generally our position that the following two conditions must be met in order that any payment for "technical support services" not be considered part of the Computer software license fee subject to Part XIII tax:
- 1) The payment for these "technical support services" should be optional. That is, if the failure to enter into, the cancellation of, or the failure to renew an agreement to acquire the "technical support services" would cause the loss of the right to use the licensed software, we usually would consider the payment for such "technical support services" to be part of the software license fee subject to Part VIII tax.
- 2) The payment for "technical support services" should be reasonable in relation to the software license fee. Any unreasonable portion of the "technical support payments" would be viewed as a portion of the license fee subject to Part XIII tax.
We understand that computer software updates include modifications, improvements and additions to the software originally licensed. Therefore, strictly speaking, we consider payments for software updates to be the same in nature as the original software licence payments, that is, as falling within the meaning of "payments" in subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act") (and also as falling within the meaning of "royalties" in paragraph 4 of Article XII of the 1980 Canada-U.S. treaty if such treaty is applicable), rather than as being payments for services. However, it is possible that we could in some cases treat software update payments as part of the payments for services which are not subject to Part XIII tax if the software update payments represent a minor portion of the total "technical support payments".
With regard to the provision of services by way of a telephone or electronic mail hotline, we agree with your position that where the person providing information or advice on such hotlines is outside Canada, the services will not be considered to be rendered in Canada and thus the payments will not be subject to withholding tax under subsection 105(1) of the Income Tax Regulations.
We cannot comment on whether the payments for "technical support services" in the above hypothetical situations are exempt from withholding tax, as we would need to see the contract in each particular case. However, we can state that if a portion of a payment is clearly for services and not subject to withholding tax and another portion of the payment is clearly subject to withholding tax, and if such non-taxable and taxable portions are ascertainable by reference to the contract and/or a reasonable basis of allocation, it is our opinion that tax need only be withheld on the taxable portion.
We trust that the above will be of assistance to you in providing you with some general guidance on this matter.
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© Her Majesty the Queen in Right of Canada, 1986
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© Sa Majesté la Reine du Chef du Canada, 1986
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