20 May 1982 Income Tax Severed Letter 5-1787E

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.

This is in reply to your Round-Trip Memorandum dated March 30, 1982 concerning enquiries directed to your District Office by the above companies. The following are the positions which we suggest you incorporate in your replies.

XXX

The situation, as we understand it involves Company A, a U.S. resident, and Company B and Company C, two Canadian resident companies related to each other for income tax purposes. Company A has title to 2" master tapes of commercially produced movies. Company B is a manufacturer that reproduces those motion pictures from 2" tape to 1/2" video cassettes. Company C distributes prerecorded 1/2" video cassettes to retailers across Canada.

Pursuant to written agreements, company a manufactures 1/2" video cassettes (i.e. reproduces motion pictures as described above) in Canada for Company A for a fee. Title to the cassettes rests with Company A. Upon manufacture, the cassettes are delivered directly from the warehouse of Company B to that of Company C who is invoiced for them at fair market value by Company A.

You question whether non-resident withholding tax is exigible on the payments made by Company C to Company A.

In our view, the transactions described above involve, among other things, an outright sale of a 1/2" pre-recorded video cassettes to a person resident in Canada (Company C) by a person resident in the United States (Company A) whose business operations include the sale of such property and who, it is assumed, does not have a permanent establishment in Canada. Accordingly, the above payments by Company C to Company A, which otherwise would, in the case, of a non-treaty country, be subject to withholding tax pursuant to subsection 212(5) of the Income Tax Act, are exempted from tax by Article I of the Canada-United States Tax Convention because they are payments on account of industrial and commercial profits of a U.S. resident.

XXX

XXX such a payment would represent a royalty or similar payment on or in respect of a copy right and would be exempt from non-resident withholding tax by virtue of subparagraph 212(1)(d)(vi) of the Income Tax Act as well as by Article XIII C of the Canada-United States Tax Convention, assuming with regard to the latter that all the provisions of that Article are otherwise met.

To the extent that any portion of the aforementioned payments is in respect of the right to use the trade marks or trade names set forth in Exhibit A to the license agreement (see 15(b) thereof; Exhibit "A" was not attached to the copy of the agreement submitted to us), it would be subject to withholding tax pursuant to subparagraph 212(1)(d)(i) of the Act.

XXX In any event, the individual Canadian licensees are, pursuant to subsection 215(1) of the Act, responsible for the deduction of any withholding tax applicable.