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.
941869
XXXXXXXXXX T. Murphy
Attention: XXXXXXXXXX
July 29, 1994
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
At the 1993 Round Table (parts (b)&(c) of question 29), the Department stated that the taxation of payments to non-residents for the right to (1) use "packaged" or "shrink-wrap" computer software and (2) distribute computer software were under study.
XXXXXXXXXX the study has been completed. XXXXXXXXXX we have set out below our response to the specific queries under study at the time of the 1993 Round Table as well as a clarification to part (d) of question 29.
(b)The Department will treat a transaction whereby a non-resident grants a resident of Canada the right to use packaged or shrink-wrap computer software as a sale of tangible goods. Furthermore, the Department takes the view that Part XIII of the Act does not apply to the proceeds received by a non-resident from a resident of Canada in respect of such transaction.
(c)It would be necessary to review the relevant agreements to make a determination if the payment is for the right to distribute, and in the Department's experience where such a deamination has been made, the payment to a non-resident for the right to distribute computer software is generally taxable under paragraph 212(1)(d). However, where such payment is made to a resident of a country with which Canada has an income tax convention, the provisions of the convention must be examined to determine whether such payment is exempted from tax in Canada. In this respect it is the Department's view that such payments made to a resident of the United States would not fall under the definition of "royalties" in Article XII of the Canada-U.S. Income Tax Convention (1980) (the "Convention") and would therefore be exempted from tax in Canada under Article VII of the Convention unless the related income is attributable to a permanent establishment (as defined in Article V of the Convention) that the United States resident has in Canada.
It should be noted that a distributor of computer software may act as agent for the non-resident. The relevant agreements must be examined to determine whether this is the case. Where a distributor is acting as agent for a non-resident and such agent is not deemed to be a permanent establishment of the non-resident, a payment made to the agent will be treated under Part XIII of the Act as if it had been made to the non-resident. If the amount paid is one to which withholding tax applies (e.g. a payment for the use of, or the right to use custom computer software) and it has been paid to the agent without the appropriate Part XIII withholding being made, then the agent is required to withhold.
(d)Copyright is defined in subsection 3(1) of the Copyright Act as "...the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever...." The agreements granting the right to change the program and distribute it as a part of another program would have to be examined. If it was determined that the payment by the resident of Canada to a non-resident is in respect of a copyright in respect of the production or reproduction of the first program, it would be exempt from tax by virtue of subparagraph 212(1)(d)(vi). The comments in paragraph (c) above would apply to the portion, if any, of the payment for the right to distribute such computer software.
If you need further clarification of the above response, please contact Ken Major, Chief, Foreign Section.
With respect to the Silden case, the Rulings Directorate has determined that it cannot ignore the explicit comment of the Federal Court of Appeal that "...the text of the provision (subsection 15(2)) is so clear that the rulings of the Department of National Revenue giving it a different interpretation should be ignored." The matter has been referred to the Department of Finance and we will not issue rulings or opinions while the issue is under consideration. We understand that the Audit Directorate has not concluded their review of the Silden case.
XXXXXXXXXX
Yours truly,
Acting Director
Manufacturing Industries, Partnerships
and Trusts Section
Rulings Directorate
Policy and Legislation Branch
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