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 reply to your memorandum of July 21 asking if the provisions of subsection 212(5) are applicable re payments made to a U.S. resident by the purchaser of videotapes. The Canadian purchaser is in the film (videotape) rental business.
Following the adverse decision rendered in the Peliculas Sari S.A. case (80 DTC 1766), the Department adopted the position (see Greenie dated October 30, 1981) that subsection 212(5) does not apply where the Canadian resident has acquired all of the rights in a film (videotape). In this context, “acquisition of all of the rights in the film or videotape means not only acquiring ownership of a videotaped cassette, etc. but ownership of the underlying tape or film from which the cassette was produced; i.e., ownership as envisaged in paragraph 2 of IT-441. Consequently, although the purchaser of the cassette might be entitled to c.c.a. thereon (see para. 9(b) of IT-283R), the payment he makes therefore is a payment for a right in or to the use of the master film or tape such that subsection 212(5) is applicable.
Nevertheless, the payment for the purchase of the videotape cannot be said to be a rental or royalty payment (see Saint John Shipbuilding 80 DTC 6272 at page 6275), with the result that the provisions of Article I of the Canada-U.S. Tax Convention are applicable. The U.S. resident supplier is therefore taxable only to the extent that profits from the sale of the tapes are attributable to a permanent establishment in Canada.
Under the proposed Canada-U.S. convention, such payments would appear to be subject to a 10% rate of tax.
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