4 September 1985 Income Tax Severed Letter

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.

September 4, 1985

C.G. Toussaint

Attention: XXXX

Dear Sirs:

This is in reply to your letter dated August 19, 1985, concerning the treatment of software licence payments under the Canada-United States Income Tax Convention (1980) (the new "Convention").

The Department's practice had been until July 1, 1983, to exempt payments made by residents of Canada to United States business entities in respect of computer software programs on the basis of Article XIII C of the former Convention. Our position was revised at that time as it became evident that the end-user of a software program acquired no copyrights in (rights to produce or reproduce) the software programs. The common licence agreement considered by the Department involved the granting of a non-exclusive licence to use the program for a limited or unlimited period of time. The word "copyright" in law as in ordinary and proper English usage means, the "exclusive right given by law for a certain term of years to an author, composer, designer, etc., to print, publish and sell copies of his original work". Copyright is therefore an incident of ownership in the nature of a right or incorporeal property and it must be distinguished from the physical thing (the copyrightable material) in which it subsists. It was therefore decided that payments made for the use of software programs could not be exempt under Article XIII C of the former Convention or under Article XII(3) of the new Convention because they are not copyright royalties or payments in respect of the right to produce or reproduce literary, dramatic, musical or artistic work.

As a result of the decision rendered by the Federal Court of Appeal in the Saint John Shipbuilding and Dry Dock Co. Ltd. case, 80 DTC 6272, amounts paid to a United States resident for the use in perpetuity of a computer software program do not represent a rental or royalty payment for the purposes of the former Convention and could be exempt from tax in Canada if they are not allocable to a permanent establishment in Canada. However, pursuant to the recently ratified new Convention, such payment made to a U.S. resident (on or after the first day of the United States resident's taxation year beginning after 1985) will be subject to a withholding tax in Canada of 10 per cent and the Canadian payor will be obligated to withhold that amount of tax.

In the case where the payer has acquired the right to reproduce and market the software programs, it is the Department's current view that such programs are generally not copyrightable in Canada; therefore the payment is not for the copyright but rather for the use of a secret process Any such payment made by a Canadian resident to a United States business entity will be also subject to a withholding tax in Canada of 10 per cent pursuant to paragraph 212(1)(d)(i) of the Income Tax Act and Article XII of the Convention.

We hope that this information will be of assistance to you.

Yours sincerely,

Director Provincial and International Relations Division

CGT/ jb Article XIII C - Canada-United States Income Tax Convention (New)