1 February 2012 External T.I. 2011-0431571E5 - Canadian resource royalty received by US resident

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.

Principal Issues: What is the correct amount of Canadian withholding tax on oil royalty payments made from a Canadian company to a resident of the US.

Position: 25%

Reasons: Resource royalties do not meet the definition of royalties under paragraph XII(4) of the treaty and therefore are not eligible for reduced rate of withholdings under paragraph XII(2). Canada's right to tax is provided under Article VI

XXXXXXXXXX
				2012-043157
				W. Doiron

February 1, 2012

Dear XXXXXXXXXX :

Re: Canadian resource royalties received by US resident

This letter is in response to your email in which you request what is the correct amount of Canadian withholding tax on oil royalty payments made from a Canadian company to a resident of the United States ("US").

The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

General comments

Subparagraph 212(1)(d)(v) of the Income Tax Act ("Act") requires that a non-resident person shall pay an income tax of 25% on payments that were dependent on the use of or production from property in Canada that a company resident in Canada pays to the non-resident person as a royalty or similar payment. Based on the limited information provided, the 'oil royalty payments' in question would be subject to 25% tax under subparagraph 212(1)(d)(v) of the Act.

However, where the recipient of the payment is a US resident, the Convention Between Canada and The United States of America With Respect to Taxes on Income and on Capital ("Canada-US Convention") may apply to reduce the rate of the tax.

Paragraph 2 of Article XII of the Canada-US Convention allows for royalties arising in Canada and paid to a resident of the US to be taxed in Canada at a maximum rate of 10% of the gross amount of the royalties, if the US resident is considered the beneficial owner of the royalties. In order to qualify for the 10% limitation under paragraph XII(2), the royalties must meet the definition of eligible royalties as stated in paragraph 4 of Article XII of the Canada-US Convention. Paragraph XII(4) states as follows:

"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including motion pictures and works on film, videotape or other means of reproduction for use in connection with television), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, tangible personal property or for information concerning industrial, commercial or scientific experience, and, notwithstanding the provisions of Article XIII (Gains), includes gains from the alienation of any intangible property or rights described in this paragraph to the extent that such gains are contingent on the productivity, use or subsequent disposition of such property or rights."

The income from the oil royalty payment you have described is not included in the definition of royalties under paragraph XII(4). As a result, the payments in question do not qualify for the treaty benefits under paragraph XII(2).

The treatment of an oil royalty payment is covered under paragraph 2 of Article VI of the Canada-US Convention which states as follows:

"For the purposes of this Convention, the term "real property" shall have the meaning which it has under the taxation laws of the Contracting State in which the property in question is situated and shall include any option or similar right in respect thereof. The term shall in any case include usufruct of real property, rights to explore for or to exploit mineral deposits, sources and other natural resources and rights to amounts computed by reference to the amount or value of production from such resources; ships and aircraft shall not be regarded as real property."

While paragraph VI(1) establishes Canada's right to tax income from real property derived by a US resident, there are no provisions in Article VI which provide for any limitation in the taxation of such amounts. As a result, the US resident is subject to the full 25% tax rate. Based on the limited information provided, the US resident would not be required to file a return under Part I of the Act where the only Canadian source of income is the royalty that is taxed under Part XIII of the Act.

We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch