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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
931968
XXXXXXXXXX O. Laurikainen
(613) 957-8953
Attention: XXXXXXXXXX
September 13, 1994
Dear Sirs:
Re: Canadian Withholding Taxes - Computer Software
This is in reply to your letter concerning the above issue. We apologise for the delay in replying.
Unless as otherwise stated all references to statute are to the Canadian Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").
As your inquiry concerns completed transactions we are unable to provide an opinion. Your inquiry should be directed to the Revenue Canada district office serving the region where payment(s) arise along with complete details of what is in fact sold or licensed to your Canadian customers and the relevant (license) agreements under which the product is distributed. However, we are able to provide the following general comments.
As a result of a study Revenue Canada has recently taken the position that payments made by Canadian residents to non-residents for shrink-wrap or packaged computer software are to be treated as proceeds from a sale of tangible property to which withholding taxes under Part XIII of the Act do not apply. Where an amount has been withheld under Part XIII of the Act in respect of a payment for shrink-wrap or packaged computer software, an application in writing may be made to the district office of Revenue Canada to which the withholding taxes were paid, for a refund of such amount withheld. Such application must be made within two years from the end of the calendar year in which the amount withheld was paid to the Receiver General of Canada.
Revenue Canada continues to be of the view that payments for the use or the right to use custom computer software are subject to Part XIII withholding tax pursuant subparagraph 212(1)(d)(i) of the Act and that the rate of such tax is reduced to 10% on any payment made to a resident of the United States pursuant to Article XII of the Canada - U.S. Income Tax Convention (1980) (the "Convention").
Shrink-wrap or packaged computer software is generally packaged under a plastic or shrink-wrapped cover. The package containing the software usually includes a general licensing agreement. In such cases, there is documentation advising the user that opening the package or using the software constitutes acceptance of the terms of the licensing agreement. The price for shrink-wrap or packaged software is generally not set out in the license agreement but rather is separately set out on an invoice.
The primary distinguishing characteristic of custom computer software is that it is generally licensed under an agreement which identifies the licensee and sets out the fee (royalty) to be paid for the use of the software. Generally the licensee must acknowledge his acceptance of the terms of the license agreement by signing it.
It would appear from the information you have provided that the computer software licensed to your client XXXXXXXXXX was custom computer software. If this is the case, it would have been appropriate for your client to have deducted Canadian withholding tax from the gross amount of the payment for the use of such software at the reduced rate of 10% as provided under the Convention.
Pursuant to the Protocol (signed on August 31, 1994) amending the Convention, payments for the use of, or the right to use, computer software (including custom computer software) derived by a resident of the United States from a resident of Canada shall be exempt from taxation in Canada. The exemption in the Protocol will have effect with respect to amounts paid or credited on or after the first day of the second month next following the date on which the Protocol enters into force. The Protocol will enter into force upon the exchange of instruments of ratification, which has yet to take place.
We hope the above comments are of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1994
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© Sa Majesté la Reine du Chef du Canada, 1994
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