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.
Western District Taxation Office Roundtable
Question 2
NON-RESIDENTS - COMPUTER SOFTWARE MAINTENANCE FEES
Canadian customers of foreign software developers often pay an up-front fee for the use of custom computer software (the "license payment"), followed by annual payments described as "maintenance". The maintenance may include telephone support and periodic upgrades of the software and manuals. The supplier charges a flat price for the annual maintenance, with no breakdown as to the components of the fee. What is Revenue Canada's current policy as to the applicability of Part XIII tax in respect of maintenance payments?
Department's Position
The overall arrangement would have to be examined. Consideration would have to be given to whether the up-front fee was reasonable and whether a portion of the annual maintenance fee could be considered to be for use of the custom computer software. Once the actual maintenance payment has been determined, it must be allocated to its various components and the components analyzed to determine whether Part XIII tax applies. It may be reasonable to allocate the maintenance payment to its components in proportion to the cost to the non-resident of providing the various products and services that comprise maintenance.
Once a proper apportionment of the maintenance payment has been made it will be necessary to determine whether Part XIII or other sections of the Act apply to the components of such payment. Any portion of the payment which is allocated to the software updates should in our view be treated consistent with the treatment accorded to the "license payment". The portion of the payment allocated to manual updates would generally be incidental to any software update and the cost of providing such insignificant. Accordingly, it may be appropriate to allocate only a very small portion of the payment to manual updates. The portion of the payment allocated to telephone support would likely not fall under Part XIII of the Act if the amount of the payment is not based on the use made of the service by the Canadian customer or its sales or profits and would be business income of the non-resident from a source outside Canada if the employees of the software developer who provide the service do so from outside Canada.
Olli Laurikainen
April 20, 1994
File: 7-940974
Applicable Sections: paragraph 212(1)(d)
Subject: Withholding tax - Payments to non-residents for computer software maintenance.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1994
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1994
Email this Content