24 August 1990 Ministerial Correspondence 59744 F - Withholding Tax on Payments to U.S. Residents for the Right to Use 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.

August 24, 1990

Dear Sirs:

This is in reply to your letter of March 5, 1990 concerning Canadian withholding tax on payments made to the United States residents for the right to use computer software programs in Canada.

Our understanding of the facts is as follows:

1.     

2.     

3.      24(1)

4.

5.     

6.     

Your have asked us to provide you with a letter which states that payments made by Canadian customers to 24(1) for the right to use its software programs are not subject to Canadian withholding taxes.

We are unable to provide you with such a response because it is our opinion that these payments are in fact, subject to Canadian withholding tax at the rate of 10%.  The rationale for this opinion is summarized as follows:

Subparagraph 212(1)(d)(i) of 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 programs in Canada.

The term "royalties" is defined in paragraph 4 of Article XII of the Canada-United States Income Tax Convention (1980) (the "Convention") and in our view, it includes payments described above for the use of computer software programs.  Paragraph 2 of Article XII provides that the rate of Canadian withholding tax charged on such royalties shall not exceed 10 per cent of the gross amount of the payments.  For additional information on Article XII of the Convention, we are enclosing a copy of the Article plus the technical explanation on the Article.

On the other hand, of a non-resident owner of a computer software program grants rights to a Canadian resident to produce or reproduce that program in Canada for distribution to other persons, any payment made in respect of such rights would not be subject to tax in Canada by virtue of the exemption in subparagraph 212(1)(d)(vi) of the Act.

We trust this explanation of Canadian law adequately explains our position.

Yours truly,

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