20 February 1985 Income Tax Severed Letter 9A-0973 F

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 XXX

This is in reply to your letter of November 26, 1984 in which you ask whether the provisions of section 212 of the Income Tax Act (the "Act") apply in the circumstances described.

A Canadian company in the business of cable television pays to a United States resident company a periodic rent for the use of a microwave signal. The U.S. company does not have a permanent establishment in Canada and is also in the cable television business.

You are of the view that the periodic payments are for a service (and not for the use of a film or video tape), and therefore are not subject to Part XIII withholding tax.

We disagree. In our view, the periodic payments would fall within the scope of subsection 212(5) of the Act, and such payments are not exempt from withholding tax pursuant to the provisions of Article XII of the 1980 Canada-U.S. Income Tax Convention (the "Treaty"), although the Treaty reduces the rate of tax to 10%. This assumes that the microwave signal is transmitting works on film or videotape, whether the transmission originates in Canada or in the U.S. Pursuant to Article XIIIC of the 1942 Canad-a-U.S. Income Tax Convention, use payments for television programs originally recorded on videotape are exempt from withholding tax. This letter exemption continues under the Treaty for the period set out in Article XXX(5) contained therein.

Incidentally, the "use payment" contemplated in subsection 212(5) of the Act are in respect of intangible property, i.e., the underlying artistic production or work, and not in respect of the tangible film or videotape, as you suggest.

We trust these comments will be of assistance.