7 August 1986 Income Tax Severed Letter RCT-0814 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 in reply to your memorandum of July 3, 1986 requesting two rulings with respect to the application of paragraph 212(1)(d) of the Income Tax Act (the "Act") to the above named taxpayer.

You specifically request that we rule as follows:

1. that the agreement between XXX and XXX is not perpetual, and

2. that, in view of the Apple computer, Inc. case, heard in the Federal Court of Canada, Trial Division in January and February, 1986, the payments for use of computer software are exempt from withholding under subparagraph 212(1)(d)(vi) of the Act since they are in respect of a copyright of a literary work.

Our Comments

As discussed with you during our telephone conversation of August 16, 1988 to

Rulings Directorates only give formal Advance Rulings to taxpayers and their representatives in respect of proposed transactions as set forth in Information Circular IC 70-6R. We are however prepared to express our opinion or present our views on various matters arising in District Offices relating to the Income Tax Act. In this respect, as discussed with you, the Apple Computer case referred to above is presently under appeal and thus is not considered as a precedent at this time. As far as the Department is concerned, Canadian residents who make rental or royalty payments of any kind whatever, whether under limited or perpetual agreements, to U.S. residents for the right to use computer software to which the new Canada-U.S. 1980 Convention applied are required to withhold federal income tax at the appropriate rate.

With respect to whether or not the contract between XXX and XXX is perpetual, as indicated in your Fact 9, the Department has stated previously that a contract with termination clauses is not perpetual. Thus as the subject contract contains such clauses it is not a perpetual contract. Where payments the computer software licence are in the nature of rents and royalties that are properly subject to withholding tax of 15% under Article XI of the XXX Canada-U.S. Convention and after October 11, 1984 to withholding tax of 10% under Article XII of the new Canada-U.S. Convention.

As a final comment we note, because of the volume, that it would be virtually impossible for this section to review all computer software licensing contracts, thus our review of the contracts submitted has only been cursory.