26 January 1990 Ministerial Correspondence 58964 F - Withholding Tax Requirements

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 26, 1990

Dear Sirs:

This is in reply to your letter of October 23, 1989 wherein you requested our opinion concerning withholding tax requirements in the following hypothetical situation:

(1)     The distributor is a taxable Canadian corporation.

(2)     The distributor enters into a distribution agreement ("the Agreement") with a non-resident manufacturer of computer software.

(3)     The Agreement allows the distributor to import and distribute software products from the non-resident manufacturer.

(4)     The non-resident manufacturer is not resident in Canada, and is not considered to be carrying on business in Canada, pursuant to the provisions of the Act.

(5)     Under the terms of the Agreement, the distributor's relationship with the manufacturer is that of an independent contractor.  The distributor's appointment only grants the distributor a right to distribute the manufacturer's products to authorized dealers, and does not in any way transfer any right, title or interest in any of the manufacturer's products to the distributor.

(6)     The distributor has no tight to duplicate, cope, or change the software in any manner.  The distributor is generally precluded form opening, or otherwise altering the packaging of the software without the manufacturer's express written permission.

Pursuant to subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act") the terms "rent, royalty or similar payment" used in paragraph 212(1)(d) includes any payment of for the use of or right to use any property in Canada.  Paragraph 9 of Interpretation Bulletin IT-303 confirms our position of this point.

It is our view that when the U.S. manufacturer licences the computer software he retains ownership of the program and all that he gives up is the right to use that property.  In our view that Canadian distributor cannot acquire a greater title than that given up by the manufacturer.  Accordingly, since the manufacturer only grants the right to use the property, any payment made to the non-resident manufacturer by either the distributor or the dealer would be subject to Part XIII tax.

Where the distributor acts as agent for the non-resident manufacturer when he distributes computer software to the dealer in Canada paragraph 7(c) of Information Circular 77-16R3 indicate that the agent who receive Part XIII amounts on behalf of an non-resident is responsible for withholding Part XIII tax to the extent that the tax was not previously withheld.  Accordingly, it is our view that the distributor is responsible for ensuring that Part XIII tax is withheld on all payments made by him or through him as agent to the U.S. manufacturer of the computer software in the situation set out above.

We trust this is adequate for your purposes.

Yours truly,

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