20 March 1996 External T.I. 9531735 - MEANING OF "FRANCHISE OR RENTAL AGREEMENT"

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 a payment to a U.S. resident under a licensing agreement for the right to use, on a one-time basis, commercial information that consists of basically a customer list, would constitute a "Franchise or Rental Agreement".

Position:

No.

Reasons:

The phrase "Franchise or Rental Agreement", as per the technical notes to the Protocol, contemplated a much broader type of agreement. (see statement of principal issues for more details);

									953173
XXXXXXXXXX							Jim Wilson
(613) 957-2123

Attention: XXXXXXXXXX

March 20, 1996

Dear Sirs:

Re: Meaning of "Franchise or Rental Agreement"

We are writing in response to your letter of December 4, 1995 wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. As discussed, we regret that an advance income tax ruling can not be given. However, we can provide an opinion with respect to the Part XIII tax implications on the following type of transaction.

FACTS

1.A taxable Canadian corporation ("Canco"), as that term is defined in subsection 89(1) of the Income Tax Act ("Act"), carries on business in Canada.

2.Canco's business consists of direct marketing to customers all of whom reside outside of Canada. Canco engages in sophisticated direct marketing techniques in order to bring its services to the attention of potential customers. These techniques include direct mail and telephone solicitations.

3.Sophisticated direct marketing techniques are utilized by many North American businesses as a means of developing marketing leads to potential customers. Information in the form of customer lists is useful for identifying potential customers and is available for a fee which is paid for a limited right to use the information. Information contained in customer lists can include a wide variety of commercial information about potential customers including:

(a)name;

(b)address;

(c)sex;

(d)age;

(e)types of products or services which the customer has acquired in the past;

(f)reactions to past offers; and

(g)an indication of financial capability.

(collectively referred to herein as the "Commercial Information")

4.In order to obtain information about potential customers for its direct mail campaigns Canco utilizes information which it already owns and it acquires Commercial Information from others for a fee.

5.Canco enters into various licensing agreements for the use of Commercial Information. In some cases, industry practice has resulted in the use of the phrase "rental agreement" to describe the licensing agreement, despite the fact that the substance of the agreement is a limited right to use Commercial Information for a specific purpose (i.e. a license) and not an exclusive right to the use and enjoyment of the Commercial Information for a specific period of time as would be characteristic of a true rental arrangement.

6.In each licensing agreement the owner of the Commercial Information will have the exclusive right to license Canco to use its property for a specific purpose. Canco would not be free to use or reproduce the Commercial Information other than for the purpose for which it was licensed by the owner. Any use by Canco outside of the license it receives would be actionable as a breach of contract.

7.As mentioned above, Canco would be required to pay a fee for the use of the Commercial Information. The fee in each case will be based upon Canco's use of the Commercial Information. At no time would Canco acquire ownership of the Commercial Information but as part of the agreement it would be able to continue to deal with those persons who respond to its solicitations.

8.In any given transaction Canco will generally:

(a)be required to pay for the names and information being made available with respect to each potential customer on a per name basis for a one time mail out;

(b)receive Commercial Information on a magnetic tape (or other electronic means) which allows for the electronic storage of recorded data in a machine readable form;

(c)be entitled to copy or reproduce the commercial information into a data file (the "Temporary Master File") solely for the purpose for which the information will be supplied;

(d)be entitled to merge the Commercial Information with other information it owns or has acquired the right to use from others only for the purpose of a single solicitation;

(e)be entitled to utilize a special computer utility program which it owns to purge the Temporary Master File to remove duplicate names;

(f)be entitled to reproduce the names and addresses of the potential customers either on mailing labels or envelopes and upon the promotional materials to be placed in the envelopes;

(g)be required to key-code the names added to the Temporary Master File so it can determine which customers responded to the offer; and

(h)be entitled to retain and add to its permanent master file the names and address of any person who responded to the offer.

Our Comments

Where Canco has entered into a licensing agreement for the non-exclusive right to use Commercial Information as described in paragraph 3 above under those circumstances where Canco would not be considered to have acquired ownership of the Commercial Information and the terms of the agreement do not allow Canco unlimited or ongoing use or reproduction of the Commercial Information, it is our view that such a licensing agreement would not be considered a "franchise or rental agreement" for purposes of subparagraph 3(c) of Article XII of the Canada - United States Income Tax Convention (the "Convention"), as recently amended by paragraph 1 of Article 7 of the Protocol signed on March 17, 1995 amending the Convention. Consequently, provided that the U.S. resident owner of the Commercial Information is a resident of the United States under Article IV of the Convention and did not acquire the Commercial Information, or, become a resident of the United States, for the purpose of obtaining the benefits of the Convention, then, pursuant to subparagraph 3(c) of Article XII of the Convention, we are of the opinion that any fees paid by Canco to the U.S. resident for the Commercial Information would be exempt from Part XIII tax.

As it is anticipated that Canco will be entering into licensing agreements on a continuous basis with different U.S. residents, we would suggest that Canco contact the Vancouver Tax Services Office with respect to the procedures it should undertake to request a waiver from its withholding tax obligations.

We trust you will find the above comments to your satisfaction. A refund of your $481.50 deposit should follow shortly.

Yours truly,

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