24 August 1990 Ruling 901481 F - Payments for the Right to Reproduce Software Programs

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.

SUBJECT: Payments for the right to produce or reproduce computer software programs

This is in reply to your memorandum dated June 7, 1990 regarding the application of subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act") in respect of payments made to non-residents for the right to produce or reproduce computer software programs.

Please note that this memorandum does not apply to those computer software licensing agreements where residents of Canada (i.e. end-users) are granted only the right to use a computer software program for their own use.  Such persons are not granted rights to produce or reproduce the computer programs and thus, the exemption provided in subparagraph 212(1)(d)(vi) of the Act will not apply to those situations.  The answer to Question #41 of the roundtable discussions during the 1988 Canadian Tax Foundation Conference provides additional comments on the taxation of payments made under such software licensing arrangements.

On June 21, 1990, the Supreme Court of Canada handed down its decision in the case indexed as Apple Computer Inc. ("Apple") v. Mackintosh Computers Ltd. ("Appellant") and Apple Computer Inc. v. 115778 Canada Inc. ("Appellant").

The facts in this case can be summarized as follows:

Apple holds a registered copyright in two operating system programs for the Apple II+ computer, which it manufactures.  These programs were originally written in assembly language, and then converted into hexadecimal code. Finally, the programs were etched into a silicon chip.  By the use of a process known as "burning", the appellants copied the programs embodied in Apple's silicon chips.

In its decision of April 29, 1986, the Federal Court Trial Division ((1987) 1 F.C. 173) concluded that the programs embedded in Apple's silicon chips should be regarded as software rather than hardware and that the circuitry in the chip was an exact reproduction of Apple's assembly language program and was, therefore, protected by copyright under subsection 3(1) of the Copyright Act. The appellants appealed this decision to the Federal Court of Appeal ((1988) 1 F.C. 673) but their appeal was dismissed.  The appellants then appealed to the Supreme Court.

The main issue decided by the Supreme Court was whether a computer program, originating in copyrightable written form, continues to be protected by copyright when it is duplicated in the circuitry of a silicon chip.  The Supreme Court reaffirmed the decision of the Trial Division that the programs embedded in the silicon chip are a reproduction of the programs in assembly language and as such are protected by copyright under subsection 3(1) of the Copyright Act.

The relevant portion of subsection 3(1) of the Copyright Act reads:

     "For the purposes of this Act, "copyright" means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever...

     (a)  to produce, reproduce, perform or publish any transaction of  the work; ....

     (d)  in the case of a literary, dramatic or musical work, to make  any  record, perforated roll, cinematograph film, or other contrivance by means of which the work may be mechanically performed or delivered."

The Federal Court Trial Division decision implied that the computer program was a literary work and noted that the computer program in chip form would also be protected under paragraph 3(1)(d) of the Copyright Act.

Bill C-60 which received Royal Assent on June 8, 1988 amended the definition of "literary work" in the Copyright Act to include computer programs.  This amendment was first introduced on May 27, 1987 and it was intended to provide certainty that computer programs would be protected under the Copyright Act as literary works.  As a result of the decisions given in the Apple case, it would certainly appear that this amendment was not necessary.

The Supreme Court decision in the Apple case clarified that payments made in respect of the right to produce or reproduce computer software programs should be exempt from Part XIII tax by virtue of subparagraph 212(1)(d)(vi) of the Act.  Furthermore, these payments should be exempt from tax in Canada pursuant to Article XIIIC of the Canada-U.S. Income Tax Convention (1942) ("U.S. Convention") and paragraph 3 of Article XII of the U.S. Convention (1980).

The history of the Department's position in respect of the Part XIII income tax treatment for payments in respect of the right to produce or reproduce computer software programs is summarized as follows:

(a)     Prior to July 1, 1983, such payments were considered to be exempt from tax by virtue of subparagraph 212(1)(d)(vi) of the Act.

(b)     For the period July 1, 1983 until the date the Copyright Act was amended on June 8, 1988, it was the Department's view that computer programs were not copyrightable in Canada and   thus, did not qualify for the subparagraph 212(1)(d)(vi) exemption.  It was also the Department's position that such   payments would not be exempt under Article XIIIC of the U.S. Convention (1942) or paragraph 3 of Article XII of the U.S. Convention (1980) for the same reasons.

(c)     From June 8, 1988 to the present time, such payments were considered to be exempt from Part XIII tax by virtue of subparagraph 212(1)(d)(vi) of the Act.

With respect to issuing refunds of Part XIII tax paid or withheld on payments made for the right to produce or reproduce computer software programs during the period July 1, 1983 to June 8, 1988, we offer the following comments for your consideration.

     Based on the court decisions in the Apple case, it would appear that the Minister must refund any Part XIII taxes paid or withheld on or after January 1, 1988 in respect of such payments pursuant to subsection 227(6) of the Act if a refunds application is made in writing on or before December 31, 1990. In most cases, the refund will relate to the Part XIII taxes paid during the period January 1, 1988 to June 8, 1988.

     21(1)(b)

     It appears that U.S. residents can apply for competent authority consideration for refunds of Part XIII tax on these type of payments as far back as October 1, 1984 if their applications are made on or before December 31, 1990. See Article XXVI and XXX of the U.S. Convention (1980).

     21(1)(b)

     It should be noted that the time limit for requesting competent authority consideration in Canada's other income tax conventions is different than the limits of the U.S. Convention (1980).

21(1)(b)

The following dates prior to June 8, 1988 might be selected as the starting point for issuing refunds.  We have added various comments for each of the dates.

January, 1988

As a result of the Supreme Court decision in the Apple case, it is our opinion that by virtue of subsection 227(6) of the Act, the Department is required to issue refund for the period January 1, 1988 to June 8, 1988 where refund applications are made on or before December 31, 1990.

This date approximates the two year time limit found in many of Canada's income tax conventions for requesting competent authority consideration.

May 27, 1987

This is the day on which the Canadian Government introduced draft legislation to amend the Copyright Act to include computer programs under the definition of "literary work". The purpose of the proposed amendments was to provide certainty that computer programs are subject to copyright protection. Thus, an argument can be made that the subparagraph 212(1)(d)(vi) exemption be effective from the date on which the Government made its intentions known.

April 29, 1986

21(1)(b)

Although each of the above dates has its own merits for being the starting point to issue refunds, we recommend the date of January 1, 1988 be selected for the following reasons:

(i)     This date is supported by the law under subsection 227(6) where refunds applications are made on or before December 31, 1990.

21(1)(a)

21(1)(a)

If you wish to discuss any of the above comments, please do not hesitate to contact the writer.

DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch