8 May 1984 Income Tax Severed Letter B-5158 F

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 to reply to your memo of March 6, 1984 with respect to the above-captioned matter.

We have examined Miss Critelli's letter and the copy of the software license agreement which was submitted for review.

It is apparent that the agreement in question is a term agreement with the result that the use payment for software made thereunder will be subject to tax pursuant to subparagraph 212(1)(d)(i) of the Income Tax Act at the reduced rate of 15% of the gross amount thereof provided for in article XI of the Canada-U.S. Convention. In our view the property characterization of the payment in question is, for the purposes of the Convention. We would in this regard refer to the comments concerning the nature of rentals of Mr. Justice Thurlow in the case of The Queen v. Saint John Shipbuilding and Drydock SC DTC 6272.

We note from the breakdown of payments referred to in schedule 'D' that only of the total fee a XXX has been allocated to the basic software license. The balance of the fee has been allocated to services, technical and user documentation, rights to modify, and product split modification.

Is our view, amounts paid for the right to modify the software and for product split modification are term use payments subject to tax on the same manner as the basic software license. The XXX is for additional CPS capability referred to in paragraph 3 of the license agreement would also, if paid, be similarly taxed.

Generally, payments for system support (which might include on-site training, installation, education seminars and ongoing technical advice) would be considered payments for services to be rendered, which are normally not subject to withholding tax but which may be subject to the requirements of section 153 of the Income Tax Act and section 105 of the Income Tax Regulation (requiring a withholding of 15% in respect of amounts paid to non-residents in respect of services rendered in Canada). Amounts thus withhold from payments for services rendered in Canada are on account of a possible Part I tax liability of the U. S. resident, but these amounts may be refunded if the provisions of Article I of the Canada - U. S. Convention exempt such payments from Canadian tax and the U. S. resident files a Canadian return of income for the year.

The technical and user documentation fees, as well as any fees paid for services not provided in Canada, would, to the extent that they are reasonable in the circumstances, be exempt from Canadian withholding tax pursuant to Article I of the Canada-U. S. Convention provided that the U. S. licensor does not maintain a permanent establishment in Canada to which the said payments are properly allocable.

If we may be of further assistance, please advice.