22 October 1990 Internal T.I. 59469 F - Royalty Payments for Use of Computer Software under Canada-U.S. Income Tax Convention

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.

October 22, 1990

Dear Sirs:

This is in reply to your letter of January 17, 1990 and further to our reply letter of January 10, 1990 concerning the amendments to paragraph 38 of Information Circulars 77-16R2 and 77-16R3 in respect of royalty payments for the use of computer software under perpetual or unlimited term licensing agreements. We apologize for the delay in our reply.

You have questioned whether payments made by residents of Canada to U.S. residents for the use of computer software under perpetual or unlimited term licensing agreements are subject to the comments set out in the last sentence of paragraph 38 of Information Circular 77-16R3 since October 1, 1984.

The answer to your question is yes except that paragraph 5 of Article XXX of the Canada-U.S. Income Tax Convention (1980) (the "Convention") permits an extension of the October 1, 1984 date up to the end of the first taxation year of the recipient beginning after 1985.

As an example of this extension, a U.S. recipient had a taxation year from December 1 to November 30 and received royalty payments from Canada which were subject to withholding taxes at the rate of 10% pursuant to Article XII of the Convention. On the assumption that the rate of tax on such royalties under the 1942 Convention was nil, the exemption provided under the 1942 Convention would have been extended from October 1, 1984 to November 30, 1986.

With respect to any possible confusion caused by the revisions to paragraph 38 of Information Circular 17-16R2 and 77-16R3, we regret that we can only reiterate the following comments made in our letter of January 10, 1990:

(i)     The addition of the last sentence in paragraph 38 of Information Circular 77-16R2 only applies to the 1942 Canada-U.S. Income Tax Convention.

(ii)     The last sentence in paragraph 38 of information Circular 77-16R3 was added as a result of the expanded definition of "royalties" in Article XII of the 1980 Canada-U.S. Income Tax Convention.

We trust these comments will be of assistance to you.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch