17 July 1990 Internal T.I. 59549 F - Motion Picture Film Royalties

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.

Attention: Guy Mayson

July 17, 1990

Dear Sirs:

Re: Motion Picture Film Royalties

This is in response to your memorandum of January 20, 1990 wherein you requested clarification of the taxation of motion picture film royalties paid to non-residents.

As discussed during our telephone conversations, 24(1) is our understanding that the Canadian taxes would normally be creditable against taxes payable by such producers to the government of their country of residence.  As a result the aggregate tax burden borne by a producer in both countries should generally be equal to what it would have been had Canada not imposed such a withholding tax.  This result would only fail to materialize if a producer is in a loss position and is therefore not subject to tax in the other country or where the foreign tax on his net income from Canadian sources is less than the amount of tax Canada is permitted to withhold from his gross receipts under the relevant income tax convention.

Payments in respect of motion picture film rights made to non-resident distributors who do not carry on business in Canada through a permanent establishment (i.e. a branch office) would also be subject to Canadian withholding tax.  Subsection 212(5) of the Income Tax Act (the "Act") does not distinguish between payments that are made to non-resident producers nor do the income tax conventions.  Accordingly, we feel that Canadian withholding taxes would generally not put such a non-resident distributor at a competitive advantage in relation to Canadian distributors.

Non-resident distributors who earn motion picture film royalties in Canada through a permanent establishment here would not be subject to withholding tax under subsection 212(5) of the Act. However, they would be subject to Part I tax in Canada on any business income attributable to such a permanent establishment and could nevertheless be liable to withhold Part I tax in Canada on any business income attributable to such a permanent establishment and could nevertheless be liable to withhold Part XIII tax from amounts paid to non-resident producers for use in Canada of motion picture films.  Paragraph 212(13)(a) of the Act can deem the non-resident distributor to be resident in Canada for the purposes of section 212 of the Act where the payment can be considered rent.  In our view a payment would be rent if it has the attributes of being fixed in amount and it is compensation for use of the film for a certain period of time. It would be necessary to view the relevant contracts to make this determination.  However, it appears that it would not be difficult to structure a contract in such a manner that the payments could not be considered rent.

21(1)(b)

In addition it may be useful to recognize that the authority for imposing taxation cannot be founded on an income tax convention or agreement with another country, as your analysis seemed to suggest, but only on the Income Tax Act and Regulations.  The purpose of a convention is to avoid double taxation and not to provide additional taxing provisions.  In the case of motion picture film royalties paid to the United States for instance, subsection 212(5) of the Act imposes a tax of 25% which rate is then reduced to 10% pursuant to Article XII of the Canada-U.S. Income Tax Convention (1980) (the "Convention"). Accordingly, should the Department of Finance see fit to introduce legislation to reduce the rate of tax imposed on motion picture film royalties under the Act below 10%, the Convention would not override.

Yours truly,

for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental  Affairs Branch