25 March 1986 Income Tax Severed Letter RCT-0408 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.

Decision Summary Services, Public Utilities & Exempt Corporations Section

Reference:

Paragraph 212(1)(d) of the Income Tax Act.

Subject:

Exigibility of Part XIII Tax in respect of payments made by Canadian residents for computer services in the U.S.

Situation:

A United States corporation (USco) with no permanent establishment in Canada, is in the business of providing processing services to customers resident in Canada (Canco). Canco has a computer terminal located in its Canadian plant which enables it to use USco's computer in the U.S. through telephone lines which are rented from Bell Canada. This set-up permits Canco to "dial up" the computer in the U.S. through the telephone system. Canco transmits certain data such as machine tool specifications and makes a request for details of a particular application. USco's computer then transmits the data back to Canco through its terminal which produces a punched paper or mylar tape. The tape is essentially a list of instructions in machine readable form which enables Canco to run a machine tool.

Canco is charged various amounts based on measurement criteria such as:

(a) connect line time (b) usage of the mass storage unit (c) program storage fee, and (d) a charge based on a unit of measure called a central computer unit.

Items (b), (c) and (d) are calculated based on the volume of computer resources needed to process Canco's data.

The tape is Canco's property and may be used as often as desired or until a new tape is required due to wearing out or obsolescence. USco has no ownership rights to this tape. Canco also owns blank tapes and the machinery required to produce the tape.

Issue:

The issue is whether or not Part XIII tax is exigible in respect of payments made by Canco for the use of USco's computer facilities accessed through a terminal in Canada.

Decision:

The decision is that Part XIII tax is not exigible in respect of the payments in question.

Reasons:

The payment in question may be regarded as "rent" or a "similar payment" as provided by the preamble to paragraph 212(1)(d). However, the following is noted with regard to the only two relevant provisions thereof:

(1) Under subparagraph 212(1)(d)(i), the payments must be for the use of or the right to use in Canada any property. Since Canco's payment relates to the use of (or the right to use) USco's computer and programs located in the U.S., the "in Canada" requirement is not met. Therefore, withholding tax is not required under this subparagraph.

(2) A respectable argument may be made that USco is providing services of the nature described by subparagraph 212(1)(d)(iii). However, while the payments may be in the nature of rent, the consideration for such services is not dependent in whole or in part on the items specified by any of clauses 212(1)(d)(iii)(A), (B) or (C). the consideration is based essentially on the access time so that withholding tax is not required under this subparagraph. With regard to the foregoing, it should be noted that the tape may be used as often or as little as desired. Thus, the consideration is not dependent on use (but on access time), nor does it depend on the benefit derived therefrom, or production, sales or profits.