29 August 1989 Ruling 58381 F - Payments to U.S. Resident with respect to Software Purchases by a Resident of Canada

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.

August 29, 1989

Dear Sirs:

This is in reply to your memorandum of July 12, 1989 wherein you requested information concerning the tax treatment of payments made to a U.S. resident with respect to software purchases by a resident of Canada.

It is our understanding that under a sale of computer software the purchaser does not acquire ownership of the computer software but merely acquires the right to use such software under a licence agreement.

The Income Tax Act (the "Act") requires a 25 per cent withholding tax on amounts paid by a Canadian resident to a non-resident of Canada in respect of rent, royalty or similar payment including any payment for the use of or the right to use in Canada any property, invention, trade name, patent, trade mark, design or model, plan, secret formula, process or other thing whatever.   The Act exempts royalty or similar payments from withholding tax where the payment is made in respect of a copyright in respect of the production or reproduction of the computer software.  Presumably, the payment received from the Canadian university was a payment for the use of the computer program and not for the right to produce or reproduce copies for sale.

Article XII of the Canada-U.S. Income Tax Convention reduces the withholding rate to 10 per cent where the use payments are made to a resident of the United States.

We are enclosing a copy of a Question and the Department's position concerning the treatment of computer software which provides additional information for your perusal.

We would suggest you contact the university which withheld 10 per cent from the software payments since they are responsible to provide copies 3 and 4 of the form NR4 to you not later than the last day of March following the calendar year of which the return is required.

We trust this information is adequate for your purposes.

Yours truly,

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