21 June 1983 Income Tax Severed Letter A-7917

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.

Dear Sir:

This is to reply to your letter of March 18, 1983, in which you refer to our meeting of March 14, concerning the taxation of various payments relating to computer software.

You wish to know

• 1. Whether a royalty paid by a Canadian subsidiary to its U.S. parent for the right to market (i.e. license Canadian customers to use a program) is the same as "royalties for the right to use copyrights" as used in Article XIII (C) of the current Canada/U.S. tax treaty.
• 2. Whether a royalty paid by a Canadian subsidiary's data centre for each program used remotely by a customer would constitute "royalties" for the right to use copyrights". In this case, a single program is simultaneously transferred from the data centre's computer to a number of different customers' terminals and the program is not licensed to the customer but the use of the program is included in the service fee charged to the customer.
• 3. Whether software is or is not a "literary work" under Article XIII (C) of the Canada/U.S. tax treaty.

We will answer your questions in the order in which they appear above.

• 1. We understand that the right to license Canadian customers to use a software programme, referred to in 1. above is acquired either for a specified term or is determinable unilaterally in the parent company's discretion. In our opinion, a payment made to a U.S. parent for the acquisition or exercise of such a right is not in respect of any copyright which may subsist in the work. Such a payment is properly in respect of a distributorship or franchise, and accordingly is taxable in Canada by virtue of subparagraph 212(1)(d)(i) of the Income Tax Act. Articles I, II and XI of the Canada - U.S. Income Tax Convention, and Article 6(a) of the Protocol to the said Convention, effectively reserve unto Canada the right to tax such payments at the reduced rate of 15% of the gross amount thereof.
• 2. A royalty paid to the U.S. parent by a Canadian subsidiary for the right to permit access to the program by the Canadian subsidiary's customers would not, in our opinion, be a payment on account of any copyright which may subsist in the program. In our view, the payment thus made is properly in respect of the use of property by the licensee which effectively remains rested in the licensor.
• 3. Although the matter is not altogether free from doubt, the better view would seem to be that software programs marketed in object code (directly usable in a machine) are not "literary" work susceptible for copyright protection in Canada.

We hope that the foregoing comments will be of assistance to you.