25 March 1982 Income Tax Severed Letter B-3340

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.

Dear Mr. McCammon:

We are responding to your letter of February 3 to Mr. D. L. Cumming of Specialized Audit Division concerning licence fees for library services paid to non-residents. This confirms our telephone conversation with Mr. L. Lawson of your office.

The Customs Interim memorandum D34-82 defines a library service as "any single or series of pre-recorded tapes or records which have produced for distribution.

• (a) to radio stations, either directly or thought an intermediary, for use in radio broadcasting in the form imported or for use in the production of other material for radio broadcasting; or
• (b) to persons for use in broadcasting over public address systems or intercom systems located in public or commercial establishments or conveyances.

The Memorandum also prescribes methods by which the value of duty of library services is to be determined at the time these re brought across the border. The Canadian licencee-user of library services usually agrees as follows pursuant to a typical "Contract for Licence":

• (a) The above contained in the tapes (library service) are leased only so that all rights, title and interest remain in the Licensor;
• (b) In consideration of a negotiated fee, the licencee obtains the unlimited and exclusive right to the use of the shows in their market for the duration of the contract, and
• (c) At the expiry of the contract, the tapes must be returned to the licensor XXX has informed you that payments to United States licensors of library services are currently subject to withholding tax.

You would like being informed as to:

• (a) the nature of withholding taxes,
• (b) their application in regard to the library service payments and,
• (c) the effect, if any, that the method of valuing library services for Custom purposes has upon the treatment of these payments for purposes of the Income Tax Act (the Act).

Due to the nature of your request, our comments are in general terms. The Act imposes a tax on income on the basis of its source or the residence of the recipient. A resident of Canada pays taxes on income from all sources, both inside and outside Canada. On the other hand, a non-resident of Canada is subject to tax only on his taxable income earned in Canada. Basically, taxable income earned in Canada consists of income from employment or a business carried on in Canada consists of income from employment or a business carried on in Canada, or gains from the sale of certain capital properties (eg. real estate etc.). A non-resident will also pay taxes or certain income with a source royalties, estate income and so on. Generaly, a non-residnet is liable to a 25% tax rate on investment income mentioned above paid by a resident of Canada, unless a lower rate is provided by a bilateral tax treaty. In order to collect the tax payable by the non-resident and to remit the tax withheld to the Government of Canada on behalf of the non-resident. It is this tax that usually is referred to as the non-resident withholding tax (first part of your question).

In addition to rents and royalties, the Act provides that certain types of payments are also subject to the mentioned withholding tax. One of these payments is that "for the use of or for the right to use in Canada any property, inventory, trade name, patent, trade mark, design or model, plan, secret formula process or other thing whatever". A licence fee for library services falls under this provision of the Act (para. 212(1)(d)(i)). (second part of your question).

Since you referred to U. S. resident licensors, we might point out that Article XIIIC of the Canada-U.S. Income Tax Convention exempts from non-resident withholding tax certain payments arising in Canada are paid to a U. S. resident who is not engaged in a trade or business in this country through a permanent establishment (normally a fixed place of business). This Article reads:

• Art XIII C. (Royalties) Royalties for the right to use copyrights or in respect of the right to produce or reproduce any literary, dramatic, musical, or artistic work (but not inclusive of rents or royalties in respect of motion picture films) derived from sources within one of the contracting States by a resident or corporation or other entity of the other contracting State not engaged in trade or business in the former State through permanent establishment shall be exempt from tax imposed by such former State.

If the library services are copyrighted as indicated to us by Mr. Lawson during our telephone conversation, and the licence fees are those described in the above Article (i.e. "royalty for the right to use copyrights or in respect of the right to produce or reproduce any literary, dramatic, musical, or artistic work...") the licence fees are exempt from withholding tax by virtue of the Convention.

You may wish to note fro future reference that the new Canada-U. S. Tax Convention, which has not yet been ratified, contains new provisions with respect to royalties. Under the new convention, it would appear pursuant to paragraph 2 of Article XII that payments as described above made after the date the new treaty become effective would be subject to withholding tax a rate of 10%.

With respect to the third part of your enquiry, we might comment that, generally speaking, the method of valuing library service for Custom purposes has little bearing on the treatment of licencee fee payments for purposes of the Act.

We trust that the above will be of assistance.