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.
Paragraph 212(1)(d)
This is in reply to your memorandum of October 31, 1984.
We understood that XXX a Canadian corporation, pays 'rental' fees to XXX, a U. S. resident firm, for the use of certain XXX. You have supplied a copy of a lease agreement, dated July 18, 1978, covering the arrangements between the two named companies. It is your opinion, based on are view of the documentation, that the amounts paid to XXX by XXX are subject to the provisions of subparagraph to XXX by XXX are subject to the provisions of subparagraph 212(1)(d)(i) of the Act being rent or other similar payment for the use in Canada of property or a process. If this is the case then XXX is subject to a liability to pay the full amount that should have been withheld in respect of the rental fees paid to XXX as provided by subsection 215(6) of the Act.
The taxpayers auditors, XXX have stated in a letter dated October 16, 1984. "Not withstanding the wording of the agreement dated July 18, 1978, the payments by XXX are not in nature of rent, or royalty for the use of property as contemplated under the Income Tax Act".
Our Comments
We are puzzled by the XXX comments. The agreement in question is clearly a rental arrangement. As indicated by you, Article 2.3 of the Agreement provides that the XXX remain the personal property of XXX and are to be returned if the agreement is terminated or the XXX are taken out of service from the XXX. The agreement itself is labelled XXX Lease Agreement "tnd the terms Lessee, Lesser, lease, and Rental Fee are used throughout it. In addition to the form of the agreement itself, it would appear that whether the "use payments" are in respect of tangible property or in respect of a secret proceed (i.e. intangible property), they would be considered rentals or royalties under the former Canada - U.S. Convention.
We therefore agree with your position that the payments made by XXX to XXX under the agreement for the period under review are subject to the provisions of subparagraph 212(1)(d)(i), and are properly taxable as rentals or royalties under the provisions of Article XI of the former Canada - U. S. Convention at a rate of 15% of the agrees amount (under the new Convention, effective Nov. 1/84, this rate is reduced to 10%).
We are returning the exhibits enclosed with your memorandum.
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