(d)-(j.1)

Canco and NRco (which is a resident under Article IV of the Treaty, has no permanent establishment in Canada and deals at arm’s length with Canco) entered into a distribution agreement (the “Distribution Agreement”), pursuant to which NRco granted to Canco a right to promote, market and distribute a product manufactured by NRco (the “Product”) in Canada under a specified trade-mark that was registered in Canada in the name of NRco or its affiliate, in consideration for a non-refundable down-payment (the “Upfront Payment”) that was paid, in part, upon signing of the Distribution Agreement and, as to the balance, upon receipt of all governmental approvals for Canco to distribute the Product in Canada. NRco’s total compensation in respect of supplies of the Product (the “Supply Payments”) is the greater of (i) a percentage of a computed amount of Canco’s revenues from the sale of the Product and (ii) a specified “Minimum Payment” per Product sold.

NRco granted to Canco free of charge an exclusive licence to use the trade-mark for the commercialization of the Product in Canada under the Distribution Agreement, and Canco undertook to indicate the logo and company name of NRco on all packaging and promotional materials. Canco is required to meet sales targets and maintain a minimum level of promotional activity. Canco generally is prohibited from acquiring the Product from third parties, nor can it manufacture or sell competitive products.

Are the Upfront Payment and Supply Payments subject to Canadian withholding tax? After finding that the Upfront Payment was not a royalty on general principles, the Directorate turned to s. 212(1)(d)(i), and stated:

Farmparts ... stated that an exclusive right to buy and sell could, “under no circumstances, be said to constitute the use or the right to use” the product and was outside the scope of subparagraph 212(1)(d)(i).

While Farmparts Distributing creates uncertainty … to the extent any portion of the Upfront Payment could be allocated to the use of the patent or the trade-mark, such portion of the Upfront Payment would be subject to Canadian withholding tax. Under the Distribution Agreement, NRco grants to Canco free of charge an exclusive license to use the trade-mark for the commercialization of the Product in Canada. …

The Distribution Agreement does not contemplate an extensive use of the trade-mark, but only limited use in connection with the distribution, promotion and advertising of the product granted under the gratuitous license to use the trade-mark for the commercialization of the Product in Canada. Thus …we are not inclined to recommend challenging the Distribution Agreement. …

The Directorate went on to find that the Upfront Payment was subject to withholding under s. 212(1)(i) but for the Treaty exemption in Art. VII.

Furthermore:

[T]he Supply Payments … represent a purchase price for the product rather than payments for the use of various intellectual property associated with the products.

Canco is granted an exclusive licence, bearing a royalty, by NRCo (an arm's length resident of Ireland) in respect of patents and know-how for the production and commercialization of certain products. The licence agreement provides that Canco must make certain payments upon the occurrence of specified events respecting the extension of the term of the licence.

CRA stated (TaxInterpretations translation) that here there was " a series of lump sum payments to be made upon the occurrence of specific events, so that they do not qualify as royalties, per se ." However, having regard to the expansive effect of ss. 212(1)(d)(i) to (v), and given that " these payments relate to a licence respecting the use or right to use the patent in regard to XXXXXXXXXX, these payments are subject to tax under Part XIII … ."

However, the payments were exempt under Art. 12, subpara. 3(b) of the Irish Treaty.

Canco, which carried on a video production business in Canada made payments to USco for the use of a TV show concept (the "Format"), which it acquired in order to produce a Canadian version of a television program (the "Program"), originally created and produced in a country other than Canada. The payments made by Canco were calculated based on a percentage of the production costs of the Program. In finding that such payments were royalties in the general sense, CRA went on to find that they came within s. 212(1)(d)(i), stating:

[A] payment that, while not qualifying, in the strict sense of the term, as a royalty, may still be subject to Part XIII LIR tax if it qualifies as either:

(a) a similar payment; or
(b) a payment referred to in subparagraphs (i) to (v) of paragraph 212(1)(d).

…[I]if it turns out that they do not qualify as [the former,] they would be subject to Part XIII tax, subject to the application of the same exceptions or exemptions, as being payment referred to in subparagraph 212(1)(d)(i).

A Canco enters a Franchise Agreement with a USCo under which Canco has the exclusive right in Canada to use USCo's trade-marks, brands, know-how and other information. Canco is required to pay a "Procurement License Fee" ("PLF") for its right to purchase inventory and equipment directly from suppliers rather than through USCo at a markup, with the PLS being based on the value of products and equipment purchased. CRA stated that a portion of the PLF (apportioned based on "a valuation of the various rights" in the Franchise Agreement) could be allocated to trade marks and know-how. Unlike a royalty, a payment does not have to be correlated to the degree to which a particular property is used to fall within s. 212(1)(d)(i).

The right to distribute private label merchandise (merchandise produced under the specifications provided by USCo or a specific third party) is similar to the distribution right at issue in Farmparts, and consequently is not within the meaning of s. 212(1)(d)(i).

A US website publisher, which qualifies for benefits under the Canada-US Income Tax Convention and does not have a server or other permanent establishment in Canada, enters into an arrangement with an independent Canadian-resident promoter (the "Promoter") under which the Promoter will sell advertising space on the website to Canadian advertisers. A Canadian advertiser would agree to pay the Promoter a fee of, say, $100 for every 1,000 "clicks" generated on the advertiser's ad. The Promoter would retain, say, $20 of this fee and remit the remaining amount to the US publisher.

Before going on to consider the application of s. 212(1)(d)(iii)(A) and the provisions of the Convention, CRA found that the fees should be characterized as being for services of the US publisher (as its employees would by uploading the ads to the website and carrying out various maintenance functions), so that no withholding tax would be exigible under s. 212(1)(d)(i).

The taxpayer inquired about whether Part XIII tax is payable in respect of a "licence fee" paid to a non-resident for access to "an on-line marketplace trading platform" similar to eBay, and in particular whether such fees are royalties. CRA replied that the OECD Model Convention provides that a fee for the use of computer software is not characterized as a royalty for treaty purposes, and stated that such a fee would not be a royalty unless the bilateral tax treaty in issue "includes an intellectual property clause specifically providing that payments for digital property are considered taxable as a royalty."

The position of Revenue Canada that a payment for the use of, or the right to use, software in Canada is caught by s. 212(1)(d)(vi) applies even if the payment is made as a lump sum rather than periodically. An exception applies where the software is purchased.

In a situation where ... systems/operating software is sold in a manner that is similar to the sale of shrink-wrap computer software and is sold subject to a general licensing agreement which does not identify the particular end-user or the amount of the license fee, it is our view that such systems/operating software would not be subject to tax under Part XIII ... as it would be considered to be a sale of tangible property".

Payments made by a Canadian resident to a non-resident for shrink-wrap or packaged computer software will be treated as proceeds from the sale of tangible property to which Part XIII tax will not apply. Payments for the use or the right to use custom computer software continue to be viewed as being subject to Part XIII tax. The primary distinguishing characteristic of custom computer software is that it is generally licensed under an agreement which identifies the licensee and sets out the fee (royalty) to be paid for the use of the software.

Discussion of application of Part XIII to annual "maintenance" fees paid by Canadian customers to foreign software developers. "It may be reasonable to allocate the maintenance payment to its components in proportion to the cost to the non-resident of providing the various products and services that comprise maintenance."

Where a Canadian resident enters a software licensing agreement with a non-resident for use of a computer program and also enters into a maintenance agreement, payments for services under the maintenance agreement will be subject to withholding tax unless the acquisition of the services is optional and failure to enter into or renew the maintenance contract would not cause the loss of the licensing rights, and the payments for the services are reasonable in relation to the fee for the use of the software.

In order for payments for software services provided by the supplier of the software not to be considered payment in connection with the use of the computer software, the acquisition of the services should be optional, and the payments therefor should be reasonable in relation to the software licence fee. Computer software updates represent modifications, improvements and additions to the software originally licenced and therefore are subject to Part XIII tax rather than being regarded as payments for services.

A Canco enters a franchise agreement with a USCo under which Canco has the exclusive right in Canada to use USCo's trade-marks, brands, know-how and other information. Consideration to USCo includes a fixed monthly fee, a percentage of gross receipts, and a "Procurement License Fee" ("PLF"). The PLF is for Canco's right to purchase inventory and equipment directly from suppliers rather than through USCo at a markup, and is based on the value of products and equipment purchased.

CRA indicated that the PLF is not consideration for a set of "procurement rights" distinct from the other franchise rights. Consequently, although the PLF is not a royalty, amounts should be withheld on the portions of the PLF that fall within ss. 212(1)(d)(i), (ii) and (iv) (the apportionment of which which should be determined based on a "valuation of the various rights").

The portions applicable to the following items provided by USCo come within s. 212(1)(d)(ii):

• site selection criteria
• guidance criteria
• specifications, procedures and system standards
• access to an Operations Manual
• trade secrets
• training materials (but not training itself, which is more properly considered a service that USCo provides to Canco)

CRA also stated:

[T]he PLF is calculated with reference to the sale of goods and is therefore described within clause 212(1)(d)(ii)(B). Although Section XXXXXXXXXX of the Agreement refers to the sales made to Canco by third-party vendors, the decision in Hasbro supports an argument that the reference to sales of goods or services need not be read as a reference to sales of goods or services of the party that pays for the information.

In response to a question as to whether the payment by a Canadian insurance broker (Aco) to a US insurance broker (Bco) of a percentage of the commissions earned by Aco, as a result of Bco providing Aco with information respecting US customers of Bco who wanted coverage for Canadian assets, would be subject to withholding under Reg. 105 or s. 212(1)(d), CRA stated (before going on to indicate that exemption likely would be available under Art. XII of the Canada-US Income Tax Convention):

In general, payments made to a non-resident for information concerning industrial or commercial experience fall within subparagraph 212(1)(d)(ii) of the Act....[T]he Canadian payor would be required to withhold and remit tax of 25% of the gross payments....

Where a Canadian corporation, in the business of securing tenants for Canadian landlords, pays a finder's fee to a non-resident corporation equal to 50% of the fee earned by the Canadian corporation as the result of a referral made by the non-resident corporation, such finder's fee would be subject to withholding tax under s. 212(1)(d)(ii) or (iii), although if the non-resident corporation is resident in the United States, the finder's fee generally would be exempt under paragraph 1 of Article VII of the Canada-U.S. Convention.

The provision by a non-resident engineering company of the conclusions of its research by means of a training course given outside Canada to Canadian-resident engineers for a fixed registration fee, would not be subject to 212(1)(d)(ii).

A Canadian resident manufacturing corporation ("Canco") pays the non-resident employees, of non-resident dealers selling its products outside Canada, incentive payments ("Incentive Payments") for each warranty registered on its products. Are the Incentive Payments subject to withholding? CRA stated:

Given the breadth of the expression "in connection with" and of the term "property", even if the Incentive Payments were payable as consideration for a service described in any of clauses 212(1)(d)(iii)(A) to (C), they should not be subject to Part XIII withholding tax based on the exception in the post amble to subparagraph 212(1)(d)(iii) since they appear to have been made either for services performed in connection with the sale of property or the negotiation of a contract.

Under a franchise agreement with a USCo, Canco is required to pay USCo a fixed monthly fee, a percentage of gross receipts, and a "Procurement License Fee" ("PLF"). The PLF is for Canco's right to purchase inventory and equipment directly from suppliers rather than through USCo at a markup, and is based on the value of products and equipment purchased.

A portion of the PLF applicable to training services would otherwise have been caught by s. 212(1)(d)(iii) before giving effect to their exemption under Articles XI(4) and VII of the Canada-US Convention. CRA stated:

The decision in Hasbro would support an argument that a portion of any payment of the PLF allocable to training programs provided to Canco's employees would be dependent on sales of goods for the purposes of clause 212(1)(d)(iii)(B), even though the sales of products and equipment are by third-party vendors to Canco.

A US website publisher, which qualifies for benefits under the Canada-US Income Tax Convention and does not have a server or other permanent establishment in Canada, enters into an arrangement with an independent Canadian-resident promoter (the "Promoter") under which the Promoter will sell advertising space on the website to Canadian advertisers. A Canadian advertiser would agree to pay the Promoter a fee of, say, $100 for every 1,000 "clicks" generated on the advertiser's ad. The Promoter would retain, say $20 of this fee and remit the remaining amount to the US publisher.

Although the inquiry asked only about the witholding tax treatment of the amount remitted by the Promoter to the US publisher, CRA stated that it considered the gross amount of the fees to be paid or credited by the Canadian advertisers to the US publisher, on the basis that it considered that the Promoter would be receiving the fees from the Canadian advertisers as agent for the US publisher.

After finding that the fees should be characterized as being for services of the US publisher (as its employees would by uploading the ads to the website and carrying out various maintenance functions), so that no withholding tax would be exigible under s. 212(1)(d)(i), CRA went on to indicate that s. 212(1)(d)(iii)(A) would apply as

there would be a sufficient link between the Fee, which is based on the number of Customer "clicks" on an ad, and the benefit to be derived from the services to be performed by US Publishers such that clause 212(1)(d)(iii)(A)... would apply....The benefit to be derived from the services to be performed by US Publishers would, in our view, be the opportunity for interested Customers to view information about the Advertisers which could lead to sales.

However, given CRA's interpretation of the fees as being consideration for services, they would not constitute royalties under Article XII of the Canada-US Income Tax Convention, and they would not be taxable under Art. VII as business profits.

Where a Canadian corporation, in the business of securing tenants for Canadian landlords, pays a finder's fee to a non-resident corporation equal to 50% of the fee earned by the Canadian corporation as the result of a referral made by the non-resident corporation, such finder's fee would be subject to withholding tax under s. 212(1)(d)(ii) or (iii), although if the non-resident corporation is resident in the United States, the finder's fee generally would be exempt under paragraph 1 of Article VII of the Canada-U.S. Convention.

Marketing fees would be exempt from Part XIII tax to the extent that they were paid for services performed by the non-resident in connection with the sale of crude oil or the negotiations of a contract for the resident.

Payment for services of a non-resident engineer at an hourly rate of $125 would not appear to dependent upon the "use to be made of" or the "benefit to be derived from" such services.

Where a Canadian company enters into a contract with a non-resident engineering company to provide technical assistance which will be rendered outside Canada, with the information derived from the technical assistance to be used in Canada, and a portion of the cost being allocated to the technical assistance services, this would be characterized as a contract for services.

In suggesting that a portion of a Canco's franchise fees paid to a USCo were subject to withholding under s. 212(1)(d)(iv), CRA stated:

[S]ubparagraph 212(1)(d)(iv) applies to any portion of the payment of the [fees] allocable to the exclusive aspect of the licenses granted to Canco under Section XXXXXXXXXX (i.e., the exclusivity of the use of the Marks, the accounting software and materials, the advertising and promotional material and the exclusive access to the site selection criteria, guidance criteria, specifications, procedures and system standards, the Operations Manual and trade secrets).

Shareholders of Canco sell their shares, which are not taxable Canadian property, to an arm’s-length third purchaser for a purchase price that includes an earnout payment that relates to the goodwill of the business (EBITDA over a two-year period), with the earnout being paid in the third year following the closing. Although the resident shareholders rely on the CRA administrative position in IT-426R, there are also non-resident shareholders. Does s. 212(1)(d)(v) require that the purchaser withhold tax on the earnout payment made to the nonresident shareholders -= and, if so, would a Treaty exemption be available?

After repeating the first four conditions of IT-426R, CRA noted that in 2005-0145311C6 (2005 APFF Roundtable), CRA indicated that an amount payable under an earnout feature in a sales agreement is subject to s. 212(1)(d)(v), but indicated that, in a situation where the shares are TCP, it would not generally apply s. 212(1)(d)(v) to the TCP, assuming that the first four conditions in IT-426R, para. 2 were met. This answer to the first question rendered the second question moot.

For shares that are not TCP, as indicated in the 2005 answer, the fair market value of the right to receive an amount under the earnout clause should generally be included in the proceeds of disposition where the four conditions of paragraph 2 of IT-426R are met.

In the situation provided, s. 212(1)(d)(v) should not apply.

At the time of his emigration from Canada to the US, "Mr. X" was entitled to the "Payments" from a Canadian resident who had purchased a client list for a business previously carried on by Mr. X. The Payments were based on the purchaser's use of the client list and, until emigration, had been included in Mr. X's income under s. 12(1)(g). How does Part XIII apply?

CRA noted that the portion of the post-emigration Payments that were dependent on the use of or production from the client list in Canada would be subject to Part XIII tax under s. 212(1)(d)(v), and as "royalties" under Art. XII, para. 4 of the Canada-US Tax Convention would be exempt from Part XIII tax as being for the use of information concerning industrial or commercial experience.

A Canco enters a franchise agreement with a USCo under which Canco has the exclusive right in Canada to use USCo's trade-marks, brands, know-how and other information. Consideration to USCo includes a fixed monthly fee, a percentage of gross receipts, and a "Procurement License Fee" ("PLF"). The PLF is for Canco's right to purchase inventory and equipment directly from suppliers rather than through USCo at a markup, and is based on the value of products and equipment purchased.

Regarding s. 212(1)(d)(v), CRA stated:

If [as CRA contends] the PLF is characterized as consideration for the Franchise Rights, it would be difficult to conclude that any portion of the PLF would fit within the wording of this subparagraph because the PLF is dependent upon the volume or the price of the products and equipment purchased by Canco, not the degree to which Canco uses or has production (i.e., sales or profits) from the Franchise Rights.

2011-0404511C6 confirmed CRA’s longstanding position in IT-303SR, so that the exception in s. 212(1)(d)(vi) applied to all payments for copyright in respect of a literary, dramatic, musical or artistic work, unless that payment was for a right referred to in s. 212(5). This would indicate that payments made, for example, by a Canadian broadcaster to acquire the rights from a non-resident to broadcast live sport or artistic events in Canada (“broadcast rights payments”) would fall within s. 212(1)(d)(vi), unless the s. 212(5) exception applied.

However, Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada [2012] 2 S.C.R. 231 drew a clear distinction between the right to perform in public and the right to produce or reproduce a copyrighted work. Does this change the CRA view expressed in 2011?

CRA noted that the 2012 ESA decision dealt with one of the enumerated rights accorded to copyright holders under s. 3 of the Copyright Act, namely, s. 3(f), which accords the copyright holder the sole right to, “in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication.” There, the Supreme Court found that the enumerated rights in s. 3 essentially protect three basic rights: the right to perform, the right to produce, and the right to reproduce, a work; and found that the communication right under s. 3(f) came within the performance aspect of copyright, and not that of production or reproduction.

Accordingly the ESA decision establishes that broadcasting relates to the performance of a work, not to its production or reproduction. The 2011 IFA response therefore ceased to be correct and, as a result, CRA was thereafter required to assess broadcast rights payments as being subject to tax under s. 212(1)(d).

Should the application of the s. 212(1)(d)(vi) exception be based on an apportionment of a royalty payment between copyrights and trademarks agreed to by arm’s length parties in a royalty agreement respecting property that is protected by both trademark and copyright (a “mixed contract”)? CRA responded:

An apportionment of a royalty payment agreed to by arm’s length parties under a mixed contract, to the extent that it is reasonable and realistic, in the sense that it is reflective of the actual consideration paid for a copyright described under subparagraph 212(1)(d)(vi), will generally be accepted by the CRA. …

In determining if an apportionment provided under a mixed contract is reflective of the obligation of the parties under subsection 212(1), consideration would be given, amongst others, to the terms of the mixed contract and to whether the parties have divergent interests in respect of this apportionment. Where the payor is economically indifferent to the apportionment, the apportionment provided under the terms of the mixed contract might not be reasonable, realistic and reflective of the tax obligation of the recipient under subsection 212(1)(d) and the CRA might determine that a different portion of the payment is subject to withholding tax.

A group of corporations, formed and resident in the United States (collectively, “USIP”), own the copyright to artistic work (the “Copyright Property”). An arm’s length corporation (USCo), along with its Canadian subsidiary (Canco) receives a grant (under the “Licensing Agreement”) of the right to use the Copyright Property in connection with the manufacture, sale and distribution of products (manufactured by USCo). At the same time as Canco purchases its products for distribution and sale in Canada from USCo it (along with USCo) pays a fee under the Licensing Agreement for the rights to manufacture, sell and distribute the products that use the Copyright Property. Does s. 212(1)(d)(vi) apply to Canco’s licence fees? CRA responded:

[W]here a payor has entered into a legal agreement with a non-resident for the right to use copyrighted property in connection with the manufacture, sale and distribution of any artistic work in Canada, a royalty or similar payment for that right would be considered to be “on or in respect of a copyright in respect of the production or reproduction of any...artistic work” in subparagraph 212(1)(d)(vi) even if the payor does not manufacture the artistic works, which it distributes under that legal agreement. As such, in our view, such a payment would be exempt from Part XIII tax under subparagraph 212(1)(d)(vi).

A Canadian company pays a non-resident for the use of the photographs in connection with television in Canada (for example in a backdrop to a film clip used in a television program that is to be used or reproduced in Canada). Before finding that s. 212(5) would not apply, CRA stated that it remained its assessing position that "any payments in respect of a copyright of a literary, dramatic, musical or artistic work (unless it is payment that falls under subsection 212(5) of the Act)" would not be reassessed for Part XIII tax, so that here, the payments were exempt.

Forco, a non-resident tax-exempt organization and a qualifying person (presumably under Art. XXIXA.2 of the Canada-U.S. Convention) will incorporate Canco under Part 2 of the Canada Not-for-profit Corporations Act and become the sole member and grant a non-transferable, non-exclusive licence to Canco to market and sublicense Forco's Custom Software to sub-licensees under an Agreement to sell the Custom Software in Canada.

Under the Agreement, Canco will be authorized to: use the Custom Software to support the sub-licensees and for demonstration purposes; and reproduce the Custom Software to the extent necessary for safekeeping purposes and reproduce the associated documentation including promotional material for marketing. A Custom Software order will be placed by Canco with Forco for each sublicense granted in Canada, so that Forco will send authorized copies of the Custom Software and associated documentation to Canco for delivery to the sub-licensee.

Ruling that the related licence fee paid by Canco to Forco will be exempt under s. 212(1)(d)(vi), as "payment for distribution rights in this case are considered copyright royalties as the right to distribute is viewed as a component of the right to reproduce the software or is ancillary to such a right."

Would copyright royalties paid by a resident of Canada to a resident of Belgium respecting the production or reproduction of a musical work to be utilized in a cinematic production be exempted under Part XIII? CRA confirmed its position in 2011-0404511C6 that (TaxInterpretations translation):

[S]ubparagraph 212(1)(d)(vi) exception applies to exempt from the application of Part XIII tax any amount that a person resident in Canada pays or credits to a non-resident person as or in payment in whole or in part of a royalty or similar payment respecting copyright for the production or reproduction of a literary, dramatic, musical or artistic work unless subsection 212(5) applies to such amount. subparagraph 212(1)(d)(vi) applies to exempt from the application of …Part XIII any sum that a person resident in Canada pays or credits to a non-resident person as or in payment in whole or in part of a royalty or similar payment respecting copyright for the production or reproduction of a literary, dramatic, musical or artistic work unless subsection 212(5) applies to such sum.

Turning to s. 212(5):

[I]f it were demonstrated that, in fact, a payment is specifically paid as or in payment in whole or in part for copyright respecting the production or reproduction of a musical work, it will be excluded from the field of operation of subsection 212(5) even if the musical work was produced or reproduced as part of a film.

Canco, which carried on a video production business in Canada made payments to USco for the use of a TV show concept (the "Format"), which it acquired in order to produce a Canadian version of a television program (the "Program"), originally created and produced in a country other than Canada. The payments made by Canco were calculated based on a percentage of the production costs of the Program. After finding that such payments were royalties under the s. 212(1)(d) preamble, CRA went on to find that they came within the s. 212(1)(d)(vi) exception, stating in this regard that its position in 2011-0404511C6 still applied,

A Canadian company, which manufactures and distributes equipment in Canada, acquires the right to reproduce and distribute software in the manufacturing and sale of devices in Canada, with the non-resident licensor retaining the computer software copyright. After indicating that the question whether fees paid under the licence agreement were royalties was a question of fact, CRA stated:

The term ‘custom computer software' generally describes computer software the use of which is subject to a specific computer software license agreement. As a condition to the end-user acquiring the right to use the computer software, the end-user is required to enter into a computer software license agreement with respect to the use of the software. ... We consider payments for "custom computer software" to be a payment of a royalty for Canadian tax purposes. Therefore, the fees paid pursuant to the computer software license agreement, for the right to use, reproduce and distribute computer software in the manufacture of devices in Canada, fall within the meaning of a "royalty" for Canadian tax purposes and are subject to tax under paragraph 212(1)(d) of the Act. ... However ... [the exemption in] subparagraph 212(1)(d)(vi) generally applies to software as the Copyright Act defines "literary work" to include a computer program.

The taxpayer asked whether withholding tax would apply to a bundled "licence fee" for the exclusive right to market and distribute a non-resident corporation's software in Canada, for the right to sublicense the right to download the software in Canada, and for ongoing software upgrades and support.

Relying on Syspro, CRA indicated that the rights to distribute software would generally implicate the exclusive right in copyright to make reproductions of a literary work, and therefore fall within the s. 212(1)(d)(vi) exemption. CRA also indicated that copyright is generally understood to include allowing end-users to download software onto their computers.

Ongoing upgrades and support are services, so fees paid for them would not fall within s. 212(1)(d)(vi). However, pursuant to regulation 105, the services must be rendered in Canada for non-resident withholdings to apply.

In response to a question that noted that subsequent to the issuance on 19 September 1985 of a Special Release amendment to IT-303 which "generally concluded that the exemption in subparagraph 212(1)(d)(vi) was limited to payments which are considered under the Copyright Act of Canada to be in respect of a production or reproduction of a literary, dramatic, musical or artistic work" (see 13 June 2003 T.I. 2003-0018975 and 29 May 1998 Memorandum 973007), CRA stated:

The Agency is currently following IT-303SR and at this time, pursuant to subparagraph 212(1)(d)(vi) of the Act, will not be reassessing to tax under Part XIII any payments in respect of a copyright of a literary, dramatic, musical or artistic work (unless it is payment that falls under subsection 212(5) of the Act). As such any payments in respect of the copyright of a literary, dramatic, musical or artistic work, including the right in respect of the translation, performance, telecommunication or broadcast of one of the aforementioned works will not be subject to withholding tax unless that payment is for a right in or the use of a motion picture film or a film or video tape for use in connection with television that is to be used or reproduced in Canada.

Canco pays royalties (including a lump sum advance royalty that is non-refundable irrespective of revenues generated) to the U.S. holder of copyright to a play for the right to adapt the play into French and perform it in Quebec. In finding that the royalties were exempt under s. 212(1)(d)(vi), CRA stated:

9730076 and 2003-0018975 … no longer represent the position of the CRA. The practice of the CRA is to the effect that a royalty or similar payment respecting a copyright is not subject to any withholding tax under Part XIII … .

an indirect Canadian subsidiary of a non-resident corporation ('Corp A") has been the Canadian distributor of products manufactured by Corp A, including embedded custom software to which Corp A has the copyright. In consideration for separate licensing fees paid to Corp A, there will commence to be a "separate acquisition of [equipment] Software in digital or CD-ROM media from Corp A;" and the Canadian distributor will license such software to third party customers. It also will continue to acquire products with embedded or pre-loaded software from other subsidiaries of Corp A which distribute Corp A's products.

"Payments for software acquired for distribution to end-users, in the various mediums, whether downloaded electronically, delivered on physical media, or embedded or pre-loaded in integrated circuits or ROM, are exempt under subparagraph 212(1)(d)(vi) because the custom software in this case, are in fact a reproduction of the original copyright software and thus, meets [sic] the requirements of subparagraph 212(1)(d)(vi)."

Bars paid fees to display artistic or dramatic works that arrived at the bar by a satellite transmission, DVD, video-cassette or through the internet, on the basis of an amount for the right to show the materials, plus an additional amount per screen at the establishment. CCRA indicated that there was a clear distinction between a copyright to produce or reproduce a work and a copyright to communicate a work to the public by telecommunication, and that the exception in s. 212(1)(d)(vi) did not apply to the latter.

Where a foreign corporation ("Forco") has licensed to its Canadian subsidiary ("Canco") a master copy of software and granted Canco the right to reproduce the software in Canada and distribute copies to its Canadian customers, royalties received by Forco based either on the number of copies of the software distributed by Canco or on the amount of license fees earned by Canco likely would be exempt under s. 212(1)(d)(vi) - unless s. 247(2) was applied to allocate a portion of the total royalties to amounts described in s. 212(1)(d)(iv) (on the basis that "generally in an arm's length arrangement, a licensor would be expected to agree not to reproduce or distribute or permit any other person to reproduce or distribute copies of the software in a particular geographical area specifically assigned to the licensee. In such cases, a portion of the payments derived by the licensor under the agreement would be considered in respect of such undertaking and would fall under subparagraph 212(1)(d)(iv)."

Given that s. 3(1)(a) of the Copyright Act referred to the right to "produce, reproduce, perform or publish any translation of the work", a royalty paid for the right to perform a dramatic work did not qualify under s. 212(1)(d)(vi) and under Article 12, paragraph 3 of the Canada-U.S. Convention.

A payment made for the right to broadcast a live scripted production staged in the U.S. would not be exempt under s. 212(1)(d)(vi) nor under paragraph 3 of Article XII of the Canada-U.S. Convention.

Where a Canadian subsidiary ("Canco") of a non-resident corporation ("Forco") imports computer hardware from Forco that is pre-loaded with software and Canco provides a back-up copy of the software to the ultimate Canadian customer, fees pay by Canco to Forco for the right to reproduce the software for such back-up purposes will not be exempt under section 212(1)(d)(vi). "It is our understanding that the making of a back-up copy of a computer software program does not constitute an infringement of copyright under the Copyright Act and accordingly a payment that entitles one to make such copy would not be in respect of copyright".

An arrangement whereby Canco is licensed by USco the right to produce or reproduce computer software in consideration for a royalty based on the number of copies of software made, and Canco enters into a services agreement with USco under which Canco subcontracts to USco the physical reproduction of the software for cost plus a small mark up, is viewed by RC as representing in substance the acquisition of Canco of copies of software manufactured by USco for a fee equal to the supposed royalty plus the charge paid for each copy on the cost plus basis. Accordingly, neither amount would be in respect of copyright in respect of production or reproduction of software, and would not be exempt under s. 212(1)(d)(vi).

RC describes its recently formulated position on the distinction between royalties for custom computer software programs and consideration for the right to use shrink-wrap software, and also notes that payments made to a resident of the U.S. for the right to distribute computer software generally will be exempt under Article VII.

The printing of cartoon characters on bedspreads, sheets and pillow cases would be considered "production or reproduction" for purposes of s. 212(1)(d)(vi).

"We would definitely recommend that the Department challenge any arrangement where a Canadian distributor supposedly enters into an agreement with a non-resident person to acquire the right to produce or reproduce video tapes and then turns around and enters into another contract with the same non-resident, or a person related or connected to that non-resident, to have the video tapes reproduced by such a person."

RC will challenge any arrangement where a Canadian distributor supposedly enters into an agreement with a non-resident to acquire the right to produce or reproduce video tapes and then turns around and enters into another contract with the same non-resident or a related person to have the video tapes reproduced by such person.

"Where a payment is made to a non-resident for the right to make a copy of a computer software program for back-up purposes such payment would not in our view qualify as a payment 'on or in respect of copyright in respect of the production or reproduction ...' of the software ... . It is our understanding that the making of a back-up copy of a computer software program does not constitute an infringement of copyright ... ."

With respect to the withholding tax status of royalties to be paid by a Canadian licensee to an arm's length U.S. licensor, RC stated that "provided a copy of a computer software program that is supplied to an end user by Canco has been produced or reproduced by Canco, it is our view that a software licence fee paid or credited (against the Advance) by Canco to Usco in respect thereof would be exempt from Part XIII ... withholding tax ...".

Payments made for the right to use a computer program, for the right of a distributor to sell or sublicense a computer program to end-users or subdistributors, or for the right to modify a program are not within the exemption.

Canco is granted an exclusive licence, bearing a royalty, by NRCO (an arm's length resident of Ireland) in respect of patents and know-how for the production and commercialization of certain products. The agreement also provides for their collaboration in the joint development of the "product" and for the sharing of expenses from the effective date, with provision for cross-contributions in the event that their expenses are unequal.

As the conditions in IT-303, para. 30 were satisfied, the exception in s. 212(1)(d)(viii) was applicable.

Payments made pursuant to a bare boat charter were rental payments for the use of or the right to use corporeal property and accordingly were exempt under s. 212(1)(d)(ix) to the extent that they were in respect of the use of the ship outside Canada.