22 December 1989 Internal T.I. 58817 F - Canada-U.S. Income Tax Convention on Non-resident Withholding Tax on Computer Programs

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.

December 22, 1989

Dear Sirs:

Re:  24(1)

This is in reply to your letter of September 25, 1989 24(1)

The Canadian Income Tax Act (the "Act") requires withholding of 25 per cent tax on every amount that a resident of Canada pays or credits to a non-resident on account or in lieu of payment of, or in satisfaction of rent, royalty or similar payment, including payments of any kind for the use of or the right to use computer software in Canada.  An exemption from the rule is provided in the Act and in paragraph 3 of Article XII of the Canada-U.S. Income Tax Convention (1980) (the Convention) where the payment is a payment on or in respect of a copyright in respect of the production or reproduction of any literary work.  Computer programs are literary works by definition under the Canadian Copyright Act.

In your situation, it would appear, based on the limited information provided,  24(1)

Article XII of the Convention provides that payments of any kind for the use of computer software arising in Canada and paid to a resident of the United States, who is the beneficial owner of such royalties, that the rate shall not exceed 10 per cent of the gross amount of the royalties.  Accordingly, Canada is required by virtue of the Convention to reduce the rate of withholding tax in respect of the computer software to 10 per cent.

Paragraph 2 of Article XXI of the Convention provides that income derived by a scientific, literary, educational or charitable organization shall be exempt from tax in Canada if it is resident in the United States but only to the extent that such income is exempt from tax in United States.  However, paragraph 3 of that Article states that the above rule will not apply with respect to the income of such an organization from carrying on a trade or business.

24(1)

We are enclosing a copy of Articles XII and XXI of the Convention together with the appropriate technical explanations for your perusal and trust this explanation of Canadian law adequately explains our position.

Yours truly,

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