25 June 1986 Income Tax Severed Letter 5-1696

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Dear Madam

This is in reply to your letter of June 4 concerning withholding requirements on payments made to U.S. residents with respect to maintenance agreements under computer software licenses.

Normally, it requires a review of the particular contract to determine the extent to which a payment for the maintenance or updating of computer software is subject to Part XIII tax. Our general views in this regard are as follows:

A. Maintenance

• Provided the amount of the payment is reasonable in the circumstances, a payment for maintenance of computer software will be exempt from Part XIII tax if the maintenance is optional. That is, if the failure to enter into, the cancellation of, or the failure to renew an agreement to acquire the maintenance services would cause the loss of the right to use the licensed software, we normally consider the payment for such services to be part of the software license fee and, thus, subject to Part XIII tax pursuant to subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act").
• If the maintenance is optional but the amount of the charge therefor is unreasonable in relation to the software license fee, the unreasonable portion will be considered part of the licence fee and, thus, subject to Part XIII tax.

B. Updated

• 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 license payment; that is, as falling within the provisions of subparagraph 212(1)(d)(i) of the Act and the meaning of "royalties" in paragraph 4 of Article XII of the Canada-U.S. Income Tax Convention (1980), rather than as being payments for services. However, it is possible that in some cases software update payments could be treated 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 maintenance payments.

If the payment is considered to be a payment for services and thus not subject to Part XIII tax, it will also not be subject to the withholding requirements set out in subsection 105(1) of the Income Tax Regulations unless the services are rendered in Canada. With regard to the provisions of services by way of a telephone or electronic mail hotline, it is our view that where the person providing information or advice on such hotlines it outside Canada, the services will not be considered to be rendered in Canada.

We trust the above comments will be of assistance.