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.
XXX
This is in reply to your round-trip memorandum of November 24, 1983, wherein you requested our comments on whether Article XIV of the Canada-Italy Income Tax Convention (the Convention) applies to exempt XXX from tax in Canada in respect of the income he derived under the Shareholders Agreement dated July 16, 1981.
Under the Shareholders Agreement XXX agreed:
XXX
Our Comments:
In substance, the Shareholder's Agreement effects the sale of know-how (information) by XXX. (In our view, the services which agreed to provide are incidental to the foregoing, notwithstanding that the provision of such services might constitute carrying on business in Canada.) On this basis, the comments in paragraphs 10 through 19 of IT-303 are relevant. It would appear to us that subparagraph 212(1)(d)(i) of the Act is applicable in respect of the XXX Article XII of the Canada-Italy Income Tax Convention (the Convention) defines “royalties” as payments of any kind received as consideration for the use of, or the right to use, any copyright..., patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience (emphasis added). That Article also reduces the rate of tax applicable to royalties (as defined) to 10% of the gross amount thereof.
XXX
No information is available as to whether XXX has a fixed base regularly available to him in Canada for the purpose of performing his activities. While “fixed base” is not defined it is roughly synonymous with “permanent establishment” (which is defined in Article V of the Convention). (We note that the OECD Commentary states that a “fixed base” would cover the office of an architect or lawyer.) XXX it would of course be a question of fact, whether (and to what extent) the payments were effectively connected thereto for the purposes of Article XII(5) of the Convention.
In conclusion, in our view, the payments to XXX are subject to tax under paragraph 212(1)(d) of the Act and, assuming that XXX for the purposes of the Convention, the rate of tax would be reduced from 25% to 10% of the gross amount thereof.
We apologize for our delay in responding.
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