7 January 1991 Income Tax Severed Letter - Withholding Tax on Payments to Non-residents

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.

Dear Sirs:

Re: Withholding Tax on Payments to Non-Residents

This is in response to your letter of November 2, 1990 concerning the obligation to withhold tax on payments made to non-residents in respect of rights associated with computer software programs.

Payments made by a person resident in Canada, to a non-resident owner of a software program under a licence agreement, in respect of copyright in respect of the right to produce or reproduce the program in Canada for distribution to other persons, are exempt from tax in Canada under Part XIII of theIncome Tax Act(the “Act”) by virtue of subparagraph 212(1)(d)(vi) of the Act. In such circumstances, it would not be necessary to review the provisions of a treaty since Canada has no right to tax such payments under its domestic tax law.

Prior to the coming into force, on June 8, 1988 of Bill C-60, An Act to Amend the Copyright Act (“Bill C-60”), it was the Department's view that computer software programs were not “literary works” for the purposes of theCopyright Actand on that basis were not copyrightable in Canada. Therefore, payments in respect of a licence to produce or reproduce computer software, in the Department's view, could not be in respect “of a copyright” for the purposes of subparagraph 212(1)(d)(vi) of the Act.

As a result of the Supreme Court of Canada decision in Apple Computer Inc. v. Mackintosh Computers Ltd. and Apple Computer Inc. v. 115778 Canada Inc. (“Apple”), handed down on June 21, 1990, the Department reconsidered its position on computer software licence payments in respect of copyright in respect of production or reproduction of computer programs that were made before June 8, 1988. In our view, the decision in Apple indicates that computer programs were copyrightable in Canada prior to the amendment to the definition of “literary work” in Bill C-60. Accordingly, computer software licence payments made to non-residents in respect of the production or reproduction of such programs were in fact in respect of copyright prior to June 8, 1988 and subparagraph 212(1)(d)(vi) of the Act would have excluded them from being subject to withholding tax under paragraph 212(1)(d) of the Act. In summary, the June 8, 1988 date no longer has any significance with respect to whether a payment in respect of copyright in respect of the production or reproduction of computer software would be subject to withholding tax under Part XIII of the Act.

Whether or not a particular taxpayer qualifies for a refund of Part XIII tax as a result of Apple will depend upon his particular circumstances. It is too late to request a refund under subsection 227(6) of the Act. However, it appears that U.S. residents may still be in a position to apply for competent authority consideration for refunds of Part XIII tax under Articles XXVI and XXX of the Canada-U.S. Income Tax Convention (1980) (the “Convention”) if they were denied a tax credit in the United States in respect of the Canadian taxes withheld.

Whether or not a particular payment or part thereof is a payment described in subparagraph 212(1)(d)(vi) of the Act is a question of fact. Therefore it is difficult to draw any definitive conclusions from a limited set of facts. It is generally necessary to review the agreement pursuant to which a payment is made. However, we are prepared to offer the following comments concerning the general fact situations you presented:

• 1. Since, as you point out in your letter, “copyright” means the sole right to produce or reproduce the work or any substantial part thereof in any material form whatever, we fail to see why any payment for the right to modify the program would be a payment in respect of copyright or even why it would be necessary to pay for the right to make the modification. The payment would generally be for the right to produce or reproduce a part of the program or an interpretation of the program, after the modification.
• 2. Where a single payment is made both in respect of copyright in respect of the production or reproduction of a particular program and for the use of that program, a reasonable allocation of such amount attributable to the use of the software should be determined. That portion of the payment which is for the use of the program would be subject to Canadian withholding tax under subparagraph 212(1)(d) of the Act. However, where such payment is made to a resident of the United States, the withholding tax would be reduced under Article XII of the Convention to 10%.
• 3. Payments made by a distributor operating in Canada to a non-resident under an arrangement whereby the Canadian distributor acquires either the right to sell (sublicence) in Canada to the end users of the computer programs the right to use the programs or the right to sell (sublicence) in Canada such a right to other distributors, are subject to Part XIII tax by virtue of subparagraph 212(1)(d)(i) of the Act and such payments do not fall under the exemption provided under subparagraph 212(1)(d)(vi) of the Act. Again, such payments made to a resident of the United States will qualify for the reduced rate of 10% under Article XII of the Convention.

We trust the above will be of assistance to you.