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 annual payments for updates, maintenance and servicing of computer software used in the Canadian branch of a non-resident corporation can be considered to be "rent for the use in Canada of property" for purposes of paragraph 212(13)(a) of the Act.
Position:
No.
Reasons:
In this case there is a difference between rent on one hand and royalty or licence fee on the other. Since only "rent" is used in paragraph 212(13)(a), the annual payments for updates, etc. would not be considered to be rent for purposes of that paragraph.
November 14, 1997
Appeals Branch International Section
Appeals & Referrals Division S. Leung
Lorraine Tremblay, Director 957-2115
Attention: John Kingston
971822
XXXXXXXXXX
Paragraph 212(13)(a) of the Income Tax Act (the "Act")
We are writing in response to your memorandum of July 4, 1997 in which you requested our opinion on whether the payments made by XXXXXXXXXX as described in the following situation would fall within the category of "rent for the use in Canada of property" for the purpose of paragraph 212(13)(a) of the Act.
The facts of the situation is as follows:
XXXXXXXXXX
The issue is whether the annual payments made by XXXXXXXXXX to non-resident software suppliers for updates, maintenance and servicing of computer software is subject to withholding tax under Part XIII of the Act.
Since XXXXXXXXXX is a non-resident person, in order to impose Part XIII tax on the payments, the payments must fall within the purview of subsection 212(13) of the Act such that XXXXXXXXXX would be deemed for the purposes of section 212 of the Act to be a resident of Canada. In the situation at hand, the question is whether the annual payments paid by XXXXXXXXXX as described above would be considered to be "rent for the use in Canada of property" referred to in paragraph 212(13)(a) of the Act.
The Concise Oxford Dictionary defines "rent" as "tenant's periodical payment to owner or landlord for use of land or premises; payment for availability of telephone service, machinery, etc.". The definition of "rent" in the Black's Legal Dictionary (6th Edition) is "consideration paid for use or occupation of property; (in a broader sense) compensation or fee paid, usually periodically, for the use of any rental property, land, buildings, equipment, etc.".
Rent was referred to in several court cases in Canada. In M.N.R. v. Paris Canada Films Ltd.1 the judge said "... a lump sum payment for rights irrevocably ceded, tantamount to an assignment in perpetuity ... can hardly be reconciled with the customarily accepted notions attaching to rents or royalties, id est: limit of time, retention of a jus in re by the lessor, and periodical rentals by the lessee, either for fixed sums or an apportionment of receipts."
In The Queen v. Saint John Shipbuilding & Dry Dock Co. Ltd.,2 the judge commented:
"A rental can, of course, be paid in a lump sum but in my opinion the word is inseparable from the connotation of a payment for a term, whether fixed in time or determinable on the happening of an event or in a manner provided for, after which the right of the grantee to the property and to its use reverts to the grantor. Royalties, though a broad term, when used in the sense of a payment for the use of property, connotes a payment calculated by reference to the use or to the production or revenue or profits from the use of the rights granted.
...
Neither 'rental' nor 'royalties', in the ordinary connotation, in my opinion, includes a lump sum payment for the use of or for the privilege of using property indefinitely".
In Vauban Productions v. The Queen,3 it was stated:
"The term 'royalties' normally refers to a share in the profits or a share of percentage of a profit based on user or on the number of units, copies or articles sold, rented or used. When referring to a right, the amount of the royalty is related in some way to the degree of use of that right. This is evident from the various dictionary definitions of the word 'royalty' when used in connection with a sum payable.
Royalties, which are akin to rental payments, have invariably been considered as income since they are either based on the degree of use of the right or on the duration of the use, while a lump sum payment for the absolute transfer of a right, without regard to the use to be made of it, is of its nature considered a capital payment, although it may of course be taxable as income in the hands of the recipient if it is part of that taxpayer's regular business."
Paragraph 7 of Interpretation Bulletin IT-303 states that the Department considers that the words "rent" and "royalty" are used in a broad sense and are not necessarily restricted to periodic payments, but may in certain circumstances include single or lump sum payments. It continues to state that in general, a rent or royalty represents a payment made to the owner of property for the right to use such property for a given period of time.
From what was said above, it is clear that rent is generally a fixed payment (usually periodic) for the use of property for a given period of time, after which the right to use the property would extinguish (i.e., the right would be reverted back to the owner). In the situation at hand, if XXXXXXXXXX still has the right to use the computer program and the previous updates after it ceases to make the annual payments for the updates, maintenance and servicing,4 it would be hard to say that the annual payments are rents.
Even if the payments paid by XXXXXXXXXX annually to the software suppliers were for the right to use the existing computer program and the updates (i.e., when payments cease, XXXXXXXXXX cannot use the software any more), such payments would usually be called license fees or royalties instead of rents. It should be noted from the above quotes from different dictionaries and court cases that there are some differences between rent and royalty. Royalty usually refers to a payment based on the use, production, extraction or sale of certain property. It is commonly used in the oil and mining industries representing a payment made to the owner of the land where the oil well or mine is located or to the Crown for the right to extract oil and gas and mineral; in the music industry to the song writers or singers; in the literary circle to the authors of books and articles; or to the inventors of new property or technology. Rent, on the other hand, is usually used to represent a payment for the use of real or tangible personal property.
XXXXXXXXXX
In this regard, we found that only in rare and unique situations would the word "rent" be considered to mean "royalty".5
Conclusion
In summary, it is our view that in the situation at hand the annual payments made by XXXXXXXXXX for the updates, maintenance and servicing of computer software would not be considered "rent for the use in Canada of property" for the purpose of paragraph 212(13)(a) of the Act.
for Director
Reorganizations and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
ENDNOTES
1 (1962) C.T.C. 538; 62 D.T.C. 1338
2 (1980) C.T.C.352; 80 D.T.C. 6272; leave to appeal to S.C.C. denied.
3 (1975) C.T.C. 511; 75 D.T.C. 5371
4 Usually, payments for annual software updates are for the right to use the updates only and any non-payment for such updates would generally not affect the right to use the software program which was previously paid for. However, we note that the XXXXXXXXXX Tax Services Office stated in their memorandum of May 5, 1995 that XXXXXXXXXX "relinquishes the right to use the program once they cease to make the periodic payments". You may wish to verify the correctness of this statement.
5 In a U.S. case Robinson v. Horton, 197 La. 919, 2 So.2d 647, 649 where rent included a payment of royalty under a mineral lease (source: Black's Legal Dictionary, 6th Edition). In a Canadian case re Humberstone Coal co. Ltd.; ex parte National Trust Co Ltd., (1925) 3 D.L.R. 154; (1925) 2 W.W.R. 68, royalties paid to an owner of land in respect of coal mined thereon are "rent" within the meaning of the Bankruptcy Act, 1919 (Can.), c.36, s.52.
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