5 June 1989 Income Tax Severed Letter AC57796 - Withholding Tax on Films/Videotapes

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.

19(1)                                 5-7796
                                        K.B. Harding
                                        (613) 957-2129

Dear Sirs:

This is in reply to your letter of March 23, 1989 wherein you requested our opinion on several questions concerning withholding tax on films or videotapes.

The question of whether something qualifies as a motion picture is a question of fact and in making such a determination in a particular fact situation various legal and other dictionaries would have to be consulted.

In our view, a master negative film of a motion picture would constitute a motion picture film for purposes of paragraph 212(5)(a) of the Income Tax Act (the "Act"). We have also taken the position that, where a videotape, videocassette or videodisk is produced from a master videotape of a motion picture film, the right to produce or reproduce the videotape, videocassette or videodisk represents a right in or for the use of the underlying motion picture film and is subject to withholding tax by virtue of subsection 212(5) of the Act.

Where a film for the big screen is reproduced by a U.S. company onto a master videotape and a U.S company leases or licenses the master videotape to a Canadian company to produce or reproduce the motion picture film onto videocassette for distribution to resident video stores for ultimate private (home) use, we confirm that payments for such use represent payments for a right in or to the use of the underlying motion picture film and are subject to withholding tax pursuant to paragraph 212(5)(b) of the Act subject to overriding provisions of a bilateral income tax convention or agreement.

It is our view, based on the comments set out in paragraph 3 of the Technical Explanation to the Canada-U.S. Income Tax Convention (Convention) which states "...copyright and other like payments in respect of the production or reproduction of any literary, dramatic, musical or artistic work, including royalties from such works on videotape...for private (home) use..." (underlining for emphasis), that the underlined words include motion picture film.

Although it is our position that payments for motion pictures are not generally treaty-exempt, motion pictures that are on videotape and are provided for private (home) use would fall within the exemption set out in paragraph 3, Article XII of the Convention. Accordingly, we confirm that where a videotape, videocassette or videodisk is produced or reproduced for private (home) use, the payment for the right to produce or reproduce such an item will be exempt from Part XIII tax by virtue of paragraph 3 of Article XII of the Convention even where the videotape, videocassette or videodisk is based on a motion picture.

In our view, subsection 212(5) of the Act is broad enough to encompass any use or reproduction in Canada of motion pictures whether on videotape or otherwise. Further, it is our opinion that the phrase "a film videotape or other means of reproduction for use in connection with television" as used in the Act will generally be construed in a broad manner: that is, it will not be limited to television broadcasting as in the Convention.

In a commercial setting where a U.S. company licenses Canco to produce or reproduce videotape cassettes from a master videotape for private (home) use, you indicated that there may be more than one Canadian distributor and you are concerned whether the exemption provided under the Convention will apply when Canco does not sell the cassette directly to the private home. In our view, as long as Canco can ensure that the videotape cassette can only be used for the private (home) use, he will be entitled to the deduction provided in paragraph 3 of Article XII of the Convention.

It is also our view that the contractual relationship (i.e. lease, sale or something else) between the Canadian video store and the ultimate home user will not affect Canco's exemption from withholding tax in the fact situation presented.

If you have any specific questions with respect to particular situation we would suggest you proceed by way of an advance ruling request.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch