6 September 1995 External T.I. 9518895 - WITHHOLDING TAX

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.

Principal Issues:

Whether payments for research and development will be exempt from withholding under the proposed amendments to Article XII of the Canada-US Income Tax Convention announced on March 17, 1995.

Position TAKEN:

New subparagraph (c) to paragraph 3 of Article XII will exempt certain royalty payments from being subject to withholding tax. Our position with respect to the payments for R&D expenses remains as outlined in IC 87-2.

Reasons FOR POSITION TAKEN:

	Technical explanation to the proposed amendments 	prepared by the U.S. Treasury Department.

951889
XXXXXXXXXX A. Seidel

Attention: XXXXXXXXXX

September 6, 1995

Dear Sirs:

This is in reply to your letter dated July 11, 1995 with respect to payments for research and development ("R&D") to a resident of the United States of America (the "US") and the proposed amendments to the Canada-US Income Tax Convention (the "Treaty") announced on March 17, 1995.

The technical explanation of the proposed amendments to the Treaty which was prepared by the U.S. Treasury Department indicates that the addition of subparagraph (c) to paragraph 3 of Article XII will result in "royalties paid for the use of, or the right to use, patents and information concerning industrial, commercial and scientific experience, other than payments in connection with rental or franchise agreements" being exempt from withholding tax. The technical explanation goes on to state that "The negotiators agreed that royalties paid for the use of, or the right to use, designs or models, plans, secret formulas, or processes are included under subparagraph 3(c) to the extent they represent payments for the use of, or the right to use, information concerning industrial, commercial or scientific experience. In addition, they agreed that royalties paid for the use of, or the right to use, "know-how", as defined in paragraph 11 of the Commentary on Article 12 of the OECD Model Income Tax Treaty, constitute payments for the use of, or the right to use, information concerning industrial, commercial or scientific experience". It is therefore our view that proposed subparagraph 3(c) of Article XII of the Treaty will apply only to payments for the use of, or the right to use, the benefits that have arisen as a result of R&D and not to the R&D expenditures themselves.

The proposed amendments to paragraph 3 of Article XII of the Treaty will not affect the Department's position with respect to payments for R&D expenses as stated in paragraphs 34 to 39 of Information Circular IC 87-2.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch