3 September 1988 Income Tax Severed Letter 97-2773 F - XXX Exemption from Withholding Tax undersubparagraph 212(1)(d)(vi) of the Income Tax Act(the "Act")

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.

This is in reply to your memorandum of April 25, 1988 concerning the treatment of amounts paid by XXX a Canadian corporation, to XXX a resident of the United States.

Paragraph 212(1)(d) provides for 25% withholding tax on any payment made for the use of or for the right to use in Canada any property, invention, trade mark, patent, trade mark, design or model, plan, secret formula, process of anything whatever. We have reviewed a copy of the License Agreement made between the two parties. It is our view that the payments made by XXX, under the License Agreement would fall within the provisions of subparagraph 212(1)(d)(i) of the Act. The question arises as to whether amounts paid to XXX may encompass more than one of the items fisted in subparagraph 212(1)(d)(i) above.

The payments made under the License Agreement would appear to fall within the words design or model but nay also fall within the cords trade marks, patents and copyrights. In order to determine whether the payments in question fall within the definition of one or more of the above words, it could be necessary to review the payments to determine bat the amounts are paid for. It will also be necessary to apportion these payments between those made for copyrights and fall within the exemption of subparagraph 212(1)(d)(vi) and those which do not.

In order to make that determination we offer the following comments.

1. Subsection 46(1) of the Copyright Act read as follows with respect to the period ending June 7, 1988

"This Act does not apply to designs capable of being registered under the Industrial Design Act, except designs that, though capable of being so registered, are not used or intended to be used as models or patterns to be multiplied by any industrial process.

Under the licensing agreement between XXX and XXX it would appear that most of the items set out in paragraph 2 would probably fall under the Industrial Design Act and not the Copyright Act. However, this is a matter which can only be verified after reviewing the nature of the payments and considering any comments by the taxpayer or its representatives as to why the Industrial Design Act does not cover most of the items covered by the License Agreement.

2. We have taken the position that the licencing of designs only for use in conjunction with the production, distribution and sale of ceramic giftware and tableware items that a court would hold that section 46(1) of the Copyright Act would not apply to cause the licensor to lose any copyright protection. This was based on the decision rendered in the Royal Doulton Tableware Limited case (1984, Fed. Court No. 7-3942-81).

3. A trademark is a word, symbol or picture or a combination of these used to distinguish the goods and services of a person or organization from the goods or services of others in the market place. We have taken the position that an original logo or design may qualify as an artistic work for the purpose of acquiring copyright protection. Where a logo or design intended to be used to identify a particular organization from another organization it would constitute a trademark. Slogans, titles, short phrases are not considered as literary works since a work must contain a basic minimal amount of original creative authorship. In addition, a title or short phrase used to identify goods or services would constitute trademarks. To the extent that the payments qualify as the right to use trademarks they would be subject to withholding tax pursuant to subparagraph 212(1)(d)(i).

4. Interpretation bulletin IT-303 and Special Release IT-303 outlines the department s general views covering the treatment of payments covered by paragraph 212(1)(d)(i) and may be useful in making your determination.

5. Section 46 of the Copyright Act was amended effective June 6, 1966 and we are enclosing a copy of the revised section in case it may have application for subsequent years.

It would appear that in addition to the relief provided under subparagraph 212(1)(d)(vi) of the Act that the tax treaty with the United States would appear to offer further relief to the taxpayer. Paragraph 3 of Article XII of the Canada-U.S. Income Tax Convention (Convention) provides that copyright royalties and other like payments in respect of the production or reproduction of any literary or artistic work arising in Canada and beneficially owned by a resident of the United States shall be taxable only in the United States. Should it be determined that a portion of the payments made to XXX by XXX under the present licence agreement, have been granted for the right to reproduce specific designs on articles, then such payments (i.e. other like payments) would appear to be exempt under the Convention since they appear to fall within the meaning of literary or artistic work as defined in the Copyright Act.

For purpose of the Copyright Act the term "artistic work" is defined as "includes paintings, drawings, maps, charts, plans, photographs, engravings, sculptures, works of artistic craftsmanship and architectural works of art". The term "literary work" is defined in that Act as "includes tables, compilations, translations and computer programs".

It is our opinion that a final determination of the nature of the payment can only be decided on the facts of each case. We are of the view that we should take the position that all payments are subject to withholding tax under the Act except where the taxpayer establishes his claim for exemption under the Copyright Act or paragraph 3 of Article XII of the Convention. In that case, it will be necessary to review the arguments to determine if any specific case should fall within such exemptions.

We trust these comments will be useful to you in responding to XXX.