CRA rules that movies that are sublicensed through a Canadian distributor for use in Canadian homes are exempt under the US Treaty from Canadian withholding tax

While iTunes and Amazon continue to be the most prominent online content sales platforms, with their direct-to-home-users sales model, other content sellers work through intermediaries.  In an advance ruling, CRA considered a situation where a U.S. corporate group focused on the infrastructure side - obtaining permission from copyright holders, and setting up the back-end parts of an online sales platform - billing systems, content servers, etc.  The group's Canadian distributors handled the front-end - storefront, branding, and marketing - and sold the content to home users.  The relevant group member (a limited liability company with a qualifying US-resident member) received rulings that monthly fees collected through its billing system directly from the  Canadian home users were exempt from Part XIII withholding tax by virtue of the exemption for copyright royalties in Article XII of the Canada-US Income Tax Convention.

Two interesting points.

First, CRA accepted the taxpayer's representation (in the description of facts) that the LLC was the beneficial owner of the payments received from the Canadian individuals notwithstanding that all the LLC had to license was limited home-use distribution rights that it, in turn, had been licensed by the third-party holders of the copyright.  (This is consistent with the Velcro decision, where a licensee of IP from a related party was found to be the beneficial owner of royalties paid to it by a related sub-licensee.)  Furthermore, this representation was accepted notwithstanding that the individuals contracted directly with the Canadian distributors rather than with the LLC.  (There is no statement to the effect that the distributors contracted with the individual users as agent for the LLC.)

Second, no mention was made of the exclusion, from the exemption in Article XII for copyright royalties, where the royalties are "in respect of motion pictures" (or of the similar exclusion in s. 212(5)(a) of the Act from the copyright royalty exemption in s. 212(1)(d)(vi)), notwithstanding that the licensed "Digital Content" included movies. This likely reflects that CRA accepts that royalties paid for the home use of movies are exempt under the Convention - see 2011-0374421E5.   The LLC qualified for this exemption under Art. IV, para. 6 of the Convention because its sole member was a qualifying US resident.

Scott Armstrong.  See summaries of Ruling 2011-0416891R3 under Treaties - Article XII and ITA s. 212(4).