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 3 -Payments to U.S. Residents for Information re Industrial, Commercial or Scientific Experience
Paragraph 212(1)(d) of the Income Tax Act imposes tax on payments to a non-resident for information concerning industrial, commercial or scientific experience where the amount payable is dependent in whole or in part on the use to be made of or the benefit to be derived from the information, on production or sales of goods or services, or on profits.
Paragraph 3(c) of Article XII of the Canada-U.S. Income Tax Convention exempts such payments made to a U.S. resident from Canada tax except where the information is provided in connection with a rental or franchise agreement.
The Technical Explanation to the Third Protocol says that a licence of a secret formula to manufacture a particular product together with the right to use a trade mark for the product and to market it at a non-retail level would not, by itself, constitute a franchise or rental agreement.
Questions
(a)Is the reference in the Technical Explanation to the right to market being at the non-retail level significant? In other words, if the right to market were for the retail level only or for retail and non-retail levels would the agreement described in the Technical Explanation be a rental or franchise agreement?
(b)Would a licence of information concerning industrial, commercial or scientific experience combined with a licence of computer software for use in dealing with the information be considered to be "in connection with a rental agreement"?
(c)What is Revenue Canada's understanding of the essential characteristics of a franchise agreement?
Department's Response
As a preliminary comment, we note that it is Revenue Canada's position that subparagraph 212(1)(d)(i) of the Act may apply to payments for the use of information where paragraph 212(1)(d)(ii) does not.
(a) It is a question of fact as to what constitutes a franchise or rental agreement. Therefore, the example in the Technical Explanation to the Protocol should stand on its own and each other situation will be considered based on its own facts.
(b) Again, it is a question of fact whether or not such an arrangement would be considered to be "in connection with a rental ...agreement". We cannot provide further comments because of the limited information given to us.
(c) To date Revenue Canada has not formulated a position on the essential characteristics of a franchise agreement for the purpose of subparagraph 3(c) of Article XII of the Canada-U.S. Income Tax Convention.
Prepared by: Jane Stalker
Date: September 17, 1996
File: 963004
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