27 September 1989 Income Tax Severed Letter 58355 F - Withholding Tax on Computer Software Payments

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.

September 27, 1989

Dear Sirs:

Re:  Withholding Tax on Computer Software Payments

This is in reply to your letter of July 10, 1989.  You have requested clarification of the Department's basis for the position it took in its response to question no. 41 at the 1988 Revenue Canada Round Table. Specifically, in your view when a license agreement gives a Canadian end-user of computer software the right to make copies for internal use, the payment under the license agreement, made to a resident of the United States, should qualify for an exemption from Canadian withholding tax under subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act") and paragraph 3 of Article XII of the Canada-U.S. Income Tax Convention (1980) (the "Treaty").

In our view, any computer software payment that can reasonably be considered to be on or in respect of a copyright in respect of the production or reproduction of the software does qualify for an exemption from Canadian withholding tax under subparagraph 212(1)(d)(vi) of the Act and under Article XII of the Treaty.  However, it is our view that in all cases involving an end-user, a software license payment would be entirely in satisfaction of benefits derived by that end-user from his use of the software.  Accordingly, the payment would not qualify for exemption from Canadian withholding tax under subparagraph 212(1)(d)(vi) of the Act or Article XII of the Treaty. 

If you feel that you are aware of a situation where this is not the case, the Department is prepared to review your representation along with a copy of the licensing agreement in question.

We trust this is the information you require.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch