17 September 1980 Income Tax Severed Letter RCT-0544C

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 in reply to your twelve memoranda of August 12 requesting our opinion on Part XIII withholding tax applicable to various agreements between Canadian and United States of America residents.

We have examined the agreements you submitted with a view of extracting the salient points and providing you with general comments which apply to the contracts you sent us and will be beneficial in analyzing similar agreements. We will be pleased to discuss any aspect of the agreements should there remain uncertainties after you have reviewed the following comments:

Payments to use Software

It us our view that the payments by a person resident of Canada for the use of a computer software system would come within the requirements of subparagraph 212(1)(d)(i) of the Income Tax Act if paid to a non-resident of Canada. The various magnetic tutor tapes and documentation manuals making up the system are considered to be literary works that are subject to copyright protection. For purposes of Article XIIIC of the Canada - U.S. Tax Convention (Convention) the payments would be viewed as royalty payments for the use of copyrights and are, therefore, not subject to Part XIII by reason of that provision of the Convention. The question as to whether or not a single payment can fall within paragraph 6(a) of the Convention's protocol is expected to be answered by the Supreme Court of Canada. In any event, should such a payment not fall within the term "rentals and royalties" it would be exempt by Article 1 of the Convention providing the U.S. resident has no permanent establishment in Canada a fact we are assuming throughout this memorandum.

Exclusive Right to Market Computer Software in Canada

A payment for the above right does not fall within subparagraph 212(1)(d)(i) of the Act. In this respect we refer you to the Federal Court of Appeals decision in Her Majesty The Queen v. Farmparts Distributing Ltd., [[1980] C.T.C. 205] 80 D.T.C. 6157.

Interest Element in Periodic Payments

Paragraph 212(1)(d) of the Act would apply to tax the interest portion of periodic payments.

Services Rendered in Canada

Most of the agreements require the U.S. resident to provide services, such as installation and training. Section 105 of the Income Tax Regulations require the withholding of 15% of amounts paid by a person to a non-resident of Canada for services rendered in Canada. However, we understand that most District Taxation Offices waive the section 105 withholding requirement where a non-resident can satisfy the Department that there definitely will be no tax liablility. The payment for services would enter into the calculation of the supplier's industrial and commercial profits where they relate to services performed in Canada and would only be subject to Canadian tax if they have a permanent establishment in Canada.

In our opinion, where expenses to be reimbursed are specified in the contract, e.g. travel, lodging, telephone, etc., no withholding would apply on that portion of the payment since such payment would not be "amounts in respect of services rendered in Canada" within the meaning of section 105 of the Regulations.

Payments to Reproduce Artistic Works

A royalty in respect of a copyright in respect of the reproduction of any artistic work would be exempt from Part XIII tax by virtue of subparagraph 212(1)(d)(vi) of the Act. Such a payment would also fall within the provision of Article XIIIC of the Convention.

Some of the agreements suggest the payments are in respect of trade marks. To the extent, if any, such payments are in respect of a trade mark they will be subject to withholding tax pursuant to subparagraph 212(1)(d)(i) of the Act. Consequently, it will be necessary to establish what portion of the payments relate to trade mark.