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.
Principales Questions:
Interpretation de 212(1)(d)(vi) dans le cas de production et reproduction d'un logiciel dont un droit d'émettre des sous-licences a été octroyé.
Position Adoptée:
Il nous apparaît que la redevance payée est en totalité ou presque attribuable au droit d'émettre des sous-licences plutôt que d'être attribuable au droit de produire ou de reproduire (ce droit étant dans les faits inexistants ou accessoires).
Raisons POUR POSITION ADOPTÉE:
Le paiement est établi en fonction des revenus générés par l'émission des sous-licences ou des copies distribuées et non en fonction des copies produites ou reproduites, par conséquent, il nous apparaît que les paiements sont attribuables au droit d'émettre des sous-licences. Les faits ont préséances sur toutes documentations pouvant exister surtout lorsque les parties ne transigent pas à distance.
5-941079
XXXXXXXXXX Carole Pronovost
Attention: XXXXXXXXXX
November 7, 1994
Dear Sirs:
Re: Right to produce or reproduce computer programs
Exemption from withholding tax pursuant to subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act")
This is in response to your letter dated April 19, 1994, wherein you asked us to confirm that certain payments for the right to produce or reproduce computer programs are exempt from withholding tax pursuant to subparagraph 212(1)(d)(vi) of the Act. You described a "basic scenario" and 7 other scenarios which represented variations of the arrangements in the basic scenario. The facts of the basic scenario are summarized below.
Basic scenario
A taxable Canadian corporation ("Canco") is in the business of providing and licensing computer programs to end-users in Canada. Canco is a wholly-owned subsidiary of a U.S. corporation ("Usco"). Usco develops computer programs in the United States, then sends a copy to Canco who maintains these on a database in Canada. Canco has an agreement with Usco to produce or reproduce copies of the computer programs and to distribute or sub-license these copies to its customers in Canada. In exchange, Canco pays Usco a royalty based on the fees it receives from its customers.
When a Canadian customer of Canco agrees to licence one of the programs, the customer indicates which programs he requires and how they are to be organized for his specific computer installation. Canco prepares a set of computerized instructions, outlining how the different programs from the database are to be linked/sequenced. Using these instructions, Canco copies the necessary programs from the database onto a tape in the format requested by the client.
The customer is granted a licence to use the computer programs for a fee and Canco pays the royalty to Usco.
The computer programs are protected by copyright owned by Usco.
It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments. These may or may not apply to your particular fact situation.
Nature of the rights
A payment made by a resident of Canada to a non-resident owner of a computer program in respect of the production or reproduction (making copies) of the program in Canada for distribution to other persons would generally be exempt from tax in Canada by virtue of subparagraph 212(1)(d)(vi) of the Act. Generally, the copying of computer software would be considered to be the reproduction of a literary work for the purposes of the provision.
In the basic scenario described above, the question at issue in our view is whether the payment to the non-resident is effectively "a royalty or similar payment on or in respect of copyright in respect of the production or reproduction of a literary work" for the purposes of the said subparagraph or whether it is in respect of something else. Whether the payments fall within the exemption could only be determined following a complete review of the relevant facts. The actual rights that a taxpayer would obtain with respect to computer software would depend on the specific agreement entered into between the taxpayer and the "owner" of the software, and cannot be determined with certainty without reference to the agreement. These rights could include the right of production or reproduction in respect of a copyright. It could also include the right to distribute or sub-licence the use of the computer programs. Where the consideration paid to the non-resident is in respect of more than one right, the consideration must be allocated to the various rights to determine what portion of the payments to the non-resident proprietor, if any, is subject to Part XIII tax.
In many cases, it is difficult to determine the precise nature of a payment to a non-resident, particularly where the agreement is not specific and where there is more than one right acquired. A payment to a non-resident that varies as a function of the income generated from the distribution or sub-licensing of the software may be in reality a royalty or a similar payment in respect of the right to sub-licence and distribute, and, quite conceivably, depending on the circumstances, no part of the payment to the non-resident should be attributed to the production or reproduction. In your situation, the payments made by the resident of Canada to the non-resident owner of the computer program are based on the sub-licencing income of the resident, and therefore the payment does not appear to be attributable to the right to produce or reproduce the masters. Even when the resident reproduces the "masters" as a result of a sub-licensing agreement, we might still be inclined to consider that the payments in question are not really in respect of the reproduction, but rather in respect of the licensing fees collected in sub-licensing the "masters", particularly if the payment to the non-resident remains unchanged regardless of who provides the reproduced copy in accordance with the agreement.
Alternatively, a payment to a non-resident that is based on the number of units of software produced or reproduced may indicate that the payment is in respect of copyright in respect of production or reproduction. In every situation, the nature of the payments must be determined by reference to the particular facts and circumstances surrounding the payments. As noted earlier, it is not possible to qualify the nature of a payment in a hypothetical situation, particularly where the parties are not dealing with each other at arm's length.
You also enquired whether our interpretation would be different if a non-resident owner of a computer program produces the requested computer program from its database in the format requested using a series of sequential instructions, and a copy of the formatted program is sent by electronic mail to be used by a resident of Canada. The fact that the reproduction of the computer software program is carried out by the non-resident owner suggests, in our view, that the payment is not "...on or in respect of a copyright in respect of the production or reproduction..." such that subparagraph 212(1)(d)(vi) of the Act may not be relevant. In this regard, we would like to stress that although a transaction may be evidenced by a written agreement it may be necessary to examine not only the legal documentation between the parties, but also the circumstances surrounding the payments to determine their true nature, particularly where the parties are not dealing at arm's length.
If the payment does not fall under the subparagraph (vi) exemption and is made to a resident of country with which Canada has an income tax convention, the provisions of the convention must be examined to determine whether the payment is exempted from tax in Canada. As you may already know, the Protocol amending the Canada-U.S. Income Tax Convention (1980) (signed August 31, 1994) provides that Article XII of the Convention will be amended to extent the exemption in paragraph 2 thereof to include payments for the use of, or the right to use computer software (i.e. including custom computer software). The Protocol will enter into force upon the exchange of instruments of ratification, and shall have effect for tax withheld at source 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.
Finally, please note that where the Canadian payer and the non-resident payee are not dealing with each other at arm's length, subsection 69(2) of the Act will have application if the payment is in excess of a reasonable amount.
We regret the delay in responding.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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