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.
Subject: Subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act")
This is in response to your memorandum dated April 14, 1988 wherein you have requested our interpretation of subparagraph 212(1)(d)(vi) of the Act as it applies to payments made by XXX for the use of XXX if in association with XXX. In our opinion, XXX do constitute artistic works in the broad sense of the term. Accordingly, any payment for the production or reproduction of this work would be exempted from Canadian withholding tax by subparagraph 212(1)(d)(vi) of the Act.
In assessing whether the artistic work has been produced or reproduced, it is essential to determine whether additional copies have been made. Since the costume is manufactured by XXX are of the opinion that no copies have been produced by XXX the costumes are merely worn by employee of XXX. Accordingly, we are of the view that any portion of the royalty which is paid to obtain the privilege of wearing the costumes would not be exempted by subparagraph 212(1)(d)(vi) of the Act. Where however, a portion of the payment is for the privilege of photographing, filming or video taping an employee dressed as a cartoon character and later displaying him in any kind of promotional material, the character has been reproduced and the exemption will apply. There would be no difference whether the medium was television, newspaper or any other form of advertising. The portion of the payment which is made for reproduction can only be determined on the basis of an audit, however, it is our view that such portion would be relatively small in most case.
In conclusion, since it would appear that royalties are paid primarily for the privilege fo dressing employees as XXX we are of the view that majority of this payment does not qualify for exemption from Canadian withholding tax under subparagraph 212(1)(d)(vi) of the Act. This portion of the royalty would be subject to withholding tax at a tax rate of 10% as provided by Article XII of the Canada-U.S. Income Tax Convention.
We trust that you will find our comments helpful.
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