10 January 1990 Ministerial Correspondence 58844 F - Computer Software

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.

January 10, 1990

Dear Sirs:

This is in reply to your letter of October 10, 1989 concerning the treatment of payments for the use of computer software made by a resident of Canada to a resident of the United States.

Paragraph 212(1)(d) of the Canadian Income Tax Act (the "Act") states that every non-resident person shall pay an income tax of 25 per cent on every amount that a resident in Canada pays or credits, to him as, on account or in lieu of payment of, or in satisfaction 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. In our view the Act provides Canada with the right to withhold tax payments made to non-residents for the use in Canada of computer software. Enclosed is a copy of Interpretation Bulletin IT-303 which you requested.

In our view the fee paid by a 24(1) 

Accordingly, it is our opinion that the transaction cannot be considered as an outright sale because of the various restrictions listed in the license agreement.

Paragraph 4 of Article XII of the Canada-U.S. Income Tax Convention (1980) (the "Convention") defines the term "royalties (for purposes of that article) to mean" ...Payments of any kind received as consideration for the use of, or the right to use, any copyright of literary ... work ... or for the use of, or the right to use, tangible personal property or for information concerning industrial, commercial or scientific experience...". Accordingly the definition of royalties in the Convention is broad enough to permit Canada to withhold its tax on payments made to a resident of the United States for the use of computer software. However, paragraph 2 of that article limits Canada right to withhold tax on royalty payments to 10 per cent of the gross amount of the royalties.

We are enclosing copies of Article XII of the Convention, the technical explanation with respect to that article and paragraph 212(1)(d) of the Act which imposes the tax on the computer software. We trust this satisfactory for your purposes.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch