28 May 1990 Income Tax Severed Letter RRRR215 - Computer software payments

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.

TO Head Office FROM Specialty Rulings
' Non-Resident Taxation Division DE Directorate
Source Deductions Programs Foreign Section
G. Middleton
Attention: B. Latourell 957-2129

FILE
DOSSIER 7-4345

SUBJECT: Computer Software Payments
OBJET:

This is in reply to your memorandum of September 13, 1989 in which you asked for our views

After reviewing the Agreement, we contacted directly to clarify our
understanding of some of the provisions contained therein. Based on our
review and discussions with our understanding of the situation is as
follows:

1.

2.

3.

4.

5.

Key Issues

In our view, the key issues in this matter is whether the costs incurred
by fall within the exemption provisions of subparagraph 212(1)(d)(vi)
of the Act which reads:
"... a royalty or similar payment on or in respect of a copyright in
respect of the production or reproduction of any literary ... work."

As a result of amendments to the Copyright Act which received Royal Assent on June 8, 1988, a computer software program is included under the definition of a "literary work".

Furthermore, as a result of the decision in the court case of Nowegijick, [[1983] C.T.C. 20] 1983 DTC 5041 (S.C.C.), the phrase "in respect of" has been given the widest possible scope to convey some connection between two related subject matters.

Source Code Disclosure Fee

The source code disclosure fees would ordinarily be subject to tax under subparagraph 212(1)(d)(i) of the Act; however, to the extent such fees are reasonable, they may be exempt from Part XIII tax by virtue of subparagraph 212(1)(d)(vi).

Per-Unit License Fees

Non-Recurring engineering ("NRE") Charges

Based on our understanding of the facts in this particular situation, we feel that the provisions of paragraph 212(1)(d) do not apply to these services to the extent that the amount paid for these services is considered to be reasonable. Furthermore, provided that such services were rendered in the U.S., there would be no requirement to withhold tax under subsection 105(1) of the Regulations.

With respect to the wording in paragraph 28 of the Special Release to IT- 303, we will request our Publications Division to amend the first sentence to read "Royalties and similar payments in respect of a copyright in respect of the production or reproduction of a literary, dramatic, musical or artistic work are not subject to withholding tax under paragraph 212(1)(d) by virtue of subparagraph 212(1)(d)(vi)".

If you have any questions, please do not hesitate to call us.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch