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.
Ontario Tax Conference 1996 Round Table
Question 1 -Computer Software Payments to residents of the U.S. and the Netherlands
Revenue Canada has said that royalty payments to a non-resident for distribution rights would be exempt from Canadian tax where the applicable tax treaty definition of "royalty" does not include payments of this kind. (See Revenue Canada Document No. 9418695 dated July 29, 1994. CCH Tax Window Files) In these cases, the payments would generally be exempt from Canadian taxation pursuant to the business profits article unless attributable to a Canadian permanent establishment of the non-resident.
The definitions of "royalty" in the Canada-U.S. Income Tax Convention and in the Canada-Netherlands Income Tax Convention do not include payments for marketing and distribution rights.
U.S.
"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including motion pictures and works on film, videotape or other means of reproduction for use in connection with television), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, tangible personal property or for information concerning industrial, commercial or scientific experience, and, notwithstanding the provisions of Article XIII (Gains), includes gains from the alienation of any intangible property or rights described in this paragraph to the extent that such gains are contingent on the productivity, use or subsequent disposition of such property or rights."
Netherlands
"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including motion picture films and works on film, videotape or other means of reproduction for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience."
Questions
Are payments to a U.S. or Netherlands resident for rights in respect of the use of custom computer software in Canada that would otherwise be subject to tax under Part XIII of the Income Tax Act exempt from Canadian tax in all cases on the basis of being either:
(a) a payment for the use of, or the right to use, computer software exempt under Article XII of the applicable treaty, or
(b) a payment in respect of the production or reproduction of the software exempt under paragraph 212(1)(d)(vi) of the Income Tax Act, or
(c) a payment for marketing or distribution rights which is not a royalty as defined in the applicable treaty and so is exempt by the business profits article of the applicable treaty?
If not, what kinds of payments to a resident of the U.S. or the Netherlands for rights in respect of the use of custom computer software would be subject to tax under Part XIII of the Income Tax Act?
Department's Response
As preliminary comments, we note the following:
- You have asked about rights in respect of the use of software; however, Article XII of both the U.S. and Netherlands Conventions does not use the words "in respect of" before "the use of, or the right to use".
- It would be expected that payments for distribution rights would only be in respect of exclusive rights to distribute. Also, we assume that no part of the payment described in paragraph (c) of the question includes a payment for what is in fact the right to use the software. For example, an agreement may call for a Canadian distributor of custom computer software, who has an exclusive right to distribute by way of sublicense the right to use the software, to make periodic payments to a non-resident based on a certain percentage of the payments received by the distributor from the end-users to whom the distributor has sublicensed the right to use the software. Such payments would be considered to be blended payments, part of which would be allocated to the exclusive right to distribute the right to use the software, and the other part of which would be allocated to the property sublicensed, which is the right to use the software. The portion of the payment for the exclusive right to distribute would be a payment described in paragraph (c) of the question and the portion of the payment which is for the right to use the software would be a payment described in paragraph (a) of the question. If in the example the Canadian distributor had a non-exclusive right to sublicense the right to use the software, all of the payments to the non-resident would be considered to be for the right to use the software.
In response to your questions, while it should be recognized that all the facts of a particular case must be considered before a determination of the appropriate tax treatment is made, in general the types of payments described in paragraphs (a), (b) and (c) of the question would be exempt from tax in Canada unless the payments are attributable to a Canadian permanent establishment. We can not comment with respect to other payments which might be subject to tax in Canada without more information as to what kinds of payments are at issue.
Prepared by: Jane Stalker
Date: September 17, 1996
File: 963003
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