(d)-(j.1)

Paragraph 212(1)(d) - Rents, royalties, etc.

Cases

Vauban Productions v. The Queen, 75 DTC 3571 (FCTD), aff'd 79 DTC 5186, [1979] CTC 262 (FCA)

The non-resident taxpayer, which had acquired from another film distributor the exclusive right for a limited period of time to show certain films on the CBC French-language network, agreed in consideration for a lump-sum payment to supply copies of those films to the CBC and to grant it for the same period of time the exclusive right to show them on its television network. Such a contract was a lease of a motion picture film rather than an outright sale for purposes of a withholding tax exemption appearing in the former Canada-France treaty because the rights acquired by CBC were not as extensive as those acquired by the taxpayer: CBC acquired only the right to show the films on its own network and not to assign or lease them; and the taxpayer had the right to a return of the films at the end of the term was upheld. The application of s. 106(2) of the pre-1972 Act was conceded.

Addy J. stated (at p. 5371):

"The term 'royalties' normally refers to a share in the profits or a share or percentage of a profit based on user or on the number of units, copies or articles sold rented or used. When referring to a right, the amount of the royalty is related in some way to the degree of use of that right."

Words and Phrases
royalties

The Queen v. Farmparts Distributing Ltd., 80 DTC 6157, [1980] CTC 205 (FCA)

After finding that two lump-sum payments made by the taxpayer to an American company were not subject to Part XIII tax under s. 212(1)(d)(i), Heald J.A. went on to find (at p. 6162) that each payment was not a "rent, royalty or similar payment" as described in the preamble to s. 212(1)(d):

"The payments made by the respondent was a lump sum payment, a 'one-time' payment for the duration of the agreement (25 years), renewable for a further 15 years by the respondent without payment of any additional fee; the payment was to be made irrespective of the extent of use by the respondent under the agreements and was unrelated to the profits made by the respondent as the result of any use. The payments made herein seem to be quite unrelated to rentals, royalties or similar payments."

MNR v. C.I. Burland Properties Ltd., 68 DTC 5220 (SCC)

Municipal taxes which, under the terms of the real property lease between the non-resident taxpayer and a resident tenant, the tenant agreed to pay were found to be payments similar to rent made for the use in Canada of property and, therefore, were subject to withholding tax under s. 106(1)(d) of the pre-1972 Act, which applied to a "rent, royalty or a similar payment, including, but not so as to restrict the generality of the foregoing, any such payment ... for the use in Canada of property".

Words and Phrases
rent

United Geophysical Co. of Canada v. MNR, 61 DTC 1099 (Ex Ct)

In finding that payments made by the taxpayer to its U.S. parent for the use by it of equipment in its Canadian business represented "rent, royalty or a similar payment" under s. 106(1)(d) of the pre-1972 Act, Thurlow J. stated (at p. 1105):

"... In its ordinary usage, as opposed to its technical legal meaning, the word 'rent', besides referring to returns of that nature from real property, is broad enough to include a payment for the hire of personal property ... . The subsection ... include[s] a fixed amount paid as rental for the use of personal property for a certain time."

Words and Phrases
rent
Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency company's business not carried on as agent for shareholder 148
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) U.S. equipment rentals not attributable to Canadian services 135

See Also

The Principal Commissioner of Income Tax-6 v. M.Tech India P. Ltd., ITA 890/2015

right to customize did not render payment for software a royalty

The Assessee was engaged in the resale of software. The Revenue assessed on the basis that the payments made for the software were royalty payments under s. 9(1)(vi) of the Income Tax Act, 1961, which reads:

While consideration paid to acquire the right to use software is assessable as "royalty", payments made for purchase of software as a product is not for use or the right to use the software and is not assessable as "royalty".

The Assessee had entered into an agreement with an Australian company to purchase, market and resell softrware related to healthcare and hospitality to end users in India. The Assessee was entitled to use the software and source codes for a limited purpose to sell and promote the software for use by third parties, to demonstrate the software to third parties, and to customize the software for the purposes of end users (which latter clause was argued by the Crown to establish that the Assessee "could use the software and, therefore, the payments were royalties" (para. 6). Similar agreements were made with Malaysian and Hong Kong affiliates.

Bakhru J. stated (at para. 12)

In cases where an Assessee acquires the right to use a software, the payment so made would amount to royalty. However in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be for use of the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods… [Tata Consultancy Services v. State of Andhra Pradesh (2004) 271 ITR 401 (SC)]… Clearly, the consideration paid for purchase of goods cannot be considered as ‘royalty’. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/ material. In cases where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the product rather than consideration for use of the patent or copyright.

Bakhur J. further stated (at para. 15)

“In another case, Dynamic Vertical Software India P. Ltd [(2011) 332 ITR 222(Del)], this Court had reiterated the view that payment made by a reseller for the purchase of software for sale in the Indian market could by no stretch be considered as royalty.”

Patricia & Daniel Blais O/A Satronics Satellites v The Queen, 2010 TCC 361, 2010 DTC 1271 [at 3904] . (Informal Procedure)

The taxpayers sold individual customers access to the satellite network of an American firm ("NPS"). The Minister argued that the payments from the taxpayers to NPS were "rent" or "royalties" under s. 212(1)(d).

V.A. Miller J. cited R. v. Saint John Shipbuilding & Dry Dock Co. ([1980] C.T.C. 352 (F.C.A.)) for the proposition that a "rent" connotes a grant of property that lasts for a fixed or determinable term, reverting thereafter to the grantor. In the case of satellite television access, there was no property acquired from NPS, and nothing reverted to it, so the taxpayer's payments were not rent.

Furthermore, the payments were not royalties or similar payments (para. 22):

They were for NPS to activate the descrambler units held by the Appellants' customers for the subscription period. The payments were not contingent on the extent or duration of use, profits or sales by the Appellants or its customers..

Angoss International Ltd. v. The Queen, 99 DTC 567 (TCC)

A lump-sum payment made in order to receive a non-exclusive licence of source code, and described as a "licence fee", was found to be "similar" to a royalty notwithstanding the absence of periodicity. However, the payment was exempt from withholding tax under s. 212(1)(d)(vi).

Hasbro Canada Inc. v. The Queen, 98 DTC 2129 (TCC)

The taxpayer, which was a Canadian manufacturer and distributer of toys in Canada, paid fixed commissions expressed as a percentage of the purchase price of products acquired by it from the Far East, to an affiliated company resident in Hong Kong. Before going on to consider ss.212(1)(d)(ii) and (iii), Dussault TCJ. noted (at p. 2136) that "a royalty or similar payment is ... one made for the use of property, rights or information whereby the payments for such use are contingent upon the extent or duration of use, profits or sales by the user", and went on to find that because the purchase commissions were essentially for services rendered, they did not so qualify.

Words and Phrases
know-how substantially all

Entré Computer Centers Inc. v. The Queen, 97 DTC 846 (TCC)

Payments made by Canadian franchisees to the taxpayer that were calculated as a mark-up on the value of products sold by the taxpayer to them were found not to be royalties for purposes of s. 212(1)(d) notwithstanding that, in order to avoid the application of the Robinson Patman Act, the franchise agreement provided that the mark-ups "shall be deemed to be considered a license fee charged for the license granted by the Franchise Agreement to Franchisee to use the Proprietary Marks in connection with the Franchisee's operation of an Entré Computer Center at the Center Location".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 96

Viceroy Rubber and Plastics Ltd. v. MNR, 93 DTC 347 (TCC)

In finding that payments, styled lease payments, that the taxpayer made to the non-resident holder of moulds used in the taxpayer's business were, in fact, payments of the deferred purchase price for its acquisition of the moulds and, therefore, not subject to withholding tax, Brulé J. stated (p.354):

"In accordance with the Agreement herein, the appellant, lessee, will have the option to exercise a right to re-purchase from the lessor, Intel-Prop, the capital property (namely the moulds) at the expiration of the lease agreement [at] nominal value of one dollar ($1). Consequently, the arrangement appears in essence to amount to a deferred purchase such that the appellant essentially pays for the capital property by way of instalment payments over a three-year period ... [W]hile it appears as though the Agreement legally exhibits the form of a lease in substance it bears the characteristics of a sale."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance substance based on analysis of agreement 91

Grand Toys Ltd. v. MNR, 90 DTC 1059 (TCC)

The taxpayer agreed to act as the exclusive distributor in Canada of articulated figurines produced by a Hong Kong joint venture ("Panosh") and agreed to pay, for each order it placed, 103% of the ex Hong Kong factory price, plus "a buying commission and royalty ... of U.S. $0.52". Because the "royalty" was in no way related to the taxpayer's profits or gross sales of the units, and because there was no element of contingency in the quantum of the payments to be made, it did not constitute a payment in the nature of rents, royalties or similar payments.

Words and Phrases
royalty

Canpar Holdings Ltd. v. Saskatchewan (Minister of Energy and Mines) (1987), 60 Sask R 128 (C.A.)

Before finding that the percentages of net production profits from Canadian resource properties paid by the taxpayer to two other corporations constituted "any other payment in the nature of a royalty" for purposes of s. 8(1) of the Oil Well Income Tax Act (Saskatchewan), Sherstobitoff J.A. stated (p. 144):

"The relationship to a proprietary interest in land or in oil and gas has usually been the hallmark of a royalty."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income amounts received were revenue notwithstanding on-payment obligation 205

Vauban Productions v. The Queen, 75 DTC 5371, [1975] CTC 511 (FCTD), aff'd 79 DTC 5371, [1979] CTC 262 (FCA)

"The term 'royalties' normally refers to a share in the profits or a share or percentage of a profit based on user or on the number of units, copies or articles sold rented or used. When referring to a right, the amount of the royalty is related in some way to the degree of use of that right."

Words and Phrases
royalty

MNR v. Paris Canada Films Ltd., 62 DTC 1338, [1962] CTC 538 (Ex Ct)

Dumoulin J. stated (p. 1341):

"I incline to believe that a lump-sum payment for rights irrevocably ceded, tantamount to an assignment in perpetuity ... can hardly be reconciled with the customarily accepted notion attaching to 'rent or royalties', id est: limit of time, retention of a 'jus in re' by the lessor, and periodical rentals by the lessee, either for fixed sums or an apportionment of receipts."

He also noted that the use of the word "rental" in the agreement, although not conclusive, afforded "some indication" that the payments were in the nature of rent.

Words and Phrases
royalties rent

Warsh & Co. Ltd. v. MNR, 62 DTC 247 (TAB)

The taxpayer, which was a Canadian manufacturer of ladies' dresses, agreed in writing with a U.S. company that would have the exclusive Canadian rights in respect of the "Anne Klein" line of clothing in consideration for the payment of $6,500 per year plus 3% of its annual sales in respect of that line in excess of $150,000. There was oral testimony that the arrangement with the U.S. company included the provision of advice on the selection of fabric and the selection of styles, size and fitting of garments and trade intelligence generally.

Mr. Fordham found (at p. 249) that the "real purpose" of the agreement was to give the taxpayer the sole right to use the Anne Klein name in Canada and that "anything else was... purely incidental and not to be considered as meriting separate terms of payment". Accordingly, the full amount of the payment was subject to withholding under s. 106(1)(d) of the pre-1972 Act.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 63

C.I.R. v. Longmans Green & Co., Ltd. (1932), 17 TC 272 (K.B.D.)

The respondent agreed with the French author of a book that it would acquire the exclusive right of translation and publication in the English language of the book. In consideration for that acquisition, it agreed inter alia to pay to him 500,000 French francs plus, after the sale of 28,000 copies of the best edition, a sum for each volume equal to 500,000 French francs divided by 28,000. The English-language version of the book proved to be a failure (only 7,000 copies were sold) so that only the 500,000 French franc lump sum was payable by the respondent.

Finlay J. characterized the lump sum as being a royalty in respect of 28,000 copies, with the result that it was subject to tax as a "payment of or on account of any royalties or sums paid periodically for or in respect of ... copyright".

Administrative Policy

16 August 2017 Internal T.I. 2017-0701291I7 - Exclusive Distributorship Rights

lump sum non-contingent payment for distributorship right was not a royalty

In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. The Directorate found that the lump sum was not a royalty on general principles, stating:

[T]he Upfront Payment is not a “royalty” within the meaning of paragraph 212(1)(d) on the basis that it is a lump sum payment that does not depend on Canco’s profit or the degree of exercise by it of its exclusive distributorship right. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) Farmparts likely excluded application to product distributorship right/product name on product not a valuable use of trademark 477
Tax Topics - Income Tax Act - Section 56.4 - Subsection 56.4(1) - Restrictive Covenant a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was for a restrictive covenant 250
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(i) a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was subject to s. 212(1)(i) withholding 199
Tax Topics - Treaties - Income Tax Conventions - Article 12 lump sum paid for distributorship rights was not a royalty 231

13 February 2017 External T.I. 2015-0570011E5 - Compensation by non-resident-loss of rental income

compensation paid for lost rent subject to Pt. XIII tax

A non-resident lessor of Canadian lands receives annual compensation from a Canadian utility company pursuant to a court order that is intended to compensate for the loss of rental income that resulted from the utility’s construction of power lines on the lands. CRA stated:

According to [the surrogatum] principle, the tax consequences of compensation received by a taxpayer are determined according to what the amount is intended to replace. … When an amount is paid to a taxpayer in a year to compensate for the loss of rental income, [CRA] would generally consider the compensation to be rental income for that year. Rental income paid by a Canadian resident to a non-resident would generally be subject to a 25% withholding tax by virtue of paragraph 212(1)(d).

However, both the final taxation of such amounts as well as the withholding required by the payer of the amounts can be modified pursuant to certain elections available under section 216.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 216 - Subsection 216(1) damages can be eligible for a s. 216 election 93

3 October 2014 Internal T.I. 2014-0532051I7 - Rent and Part XIII Tax

non-commercial arrangement not subject to s. 247 but is subject to Part XIII/property taxes included in rent/no Part XII tax on imputed rent

A non-resident individual not carrying on business in Canada ("Owner") leases a Canadian property to a related resident individual ("Tenant") at less than fair market value rent (Scenario 1) – or for no rent at all but with the Tenant being responsible for all expenses including utilities and property taxes (Scenario 2). What is the incidence of Part XIII tax? Respecting Scenario 1, the Directorate stated:

[T]he fact that the amount of rent…is below… fair market value would… not…impact the amount subject to withholding tax under paragraph 212(1)(d). … [T]he transfer pricing rules in section 247… would generally not be applied to adjust the amount of rent under the circumstances… .

Respecting Scenario 2:

[P]roperty tax payments on behalf of the Owner… would be subject to withholding tax under paragraph 212(1)(d). …The payments by the Tenant for the utilities… would not be considered payments for the use of the Real Property but rather payments for the use of the services provided by the utility company…[and] would not be subject to withholding….

…[W]here rent does not represent a source of income (e.g., where below market rent is charged to a related person…) no income need be reported and no expense may be claimed by the owner… .[However] a non-resident does not have to have a source of income in order to be taxed on the payments or credits which such person receives from Canada.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) non-commercial arrangement not subject to s. 247 87
Tax Topics - Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit rents from personal rental property not required to be reported 100

27 March 2014 External T.I. 2013-0512921E5 - Withholding tax on relicensing fee

franchise renewal fees

After stating that "in general, a rent or royalty represents a payment made to the owner of property for the right to use such property for a given period of time," CRA indicated that it appeared likely that fees paid by Canco to a non-resident franchisor (Nrco) for the renewal of the franchise would be subject to Part XIII tax:

[I]t would be reasonable to consider that the relicensing fee is paid to Nrco for the right to use a franchise in Canada for a given period of time and consequently would be a "rent, royalty or similar payment"… .

14 January 2013 External T.I. 2012-0443561E5 F - Part XIII re: royalties paid for tv program

payments based on production costs of a television program were a royalty

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 came within the preamble (and before going on to find that they were exempted under s. 212(1)(d)(vi)), CRA stated:

The term "royalty" generally is used to denote a periodic payment based on use, production or sales [citing Angoss]. Thus ... a payment based on the production costs of a television program would so qualify.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) payments based on TV production costs came within s. 212(1)(d)(i) 180
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(vi) copyright exception applicable to use of TV format in producing a Canadianized TV production 106

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

procurement licence fees

A Canco entered into a franchise agreement with a USCo under which Canco had 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. Rejecting the taxpayer's contention that the PLF is consideration for a set of "procurement rights" distinct from the other franchise rights, CRA stated:

[I]t can be argued the PLF is a substitute for the obligation to purchase products and equipment from USCo that would otherwise have been given as consideration for the grant of the Franchise Rights. In our view, this links the PLF to the grant of the Franchise Rights. In addition, we are of the view that the Franchise Rights would not have been granted to Canco unless Canco agreed to deal with USCo with respect to the procurement of products and equipment or, alternatively, provide additional compensation to USCo if Canco wished to control the procurement function directly.

Regardless of whether or not the PLF is separate consideration, it is not a rent, royalty or similar payment. The PLF is based on the amount of product and equipment purchased rather than the amount of product and equipment sold. CRA stated:

There was no element of contingency in the payments in question and an element of contingency is the essence of a royalty payment.

Even though the PLF is not a royalty, portions of it may be subject to withholding taxes to the extent that they fall within any of subparagraphs (i)-(v) of s. 212(1)(d). The field auditor should apportion the PLF to the various franchise rights (based on "a valuation of the various rights") and determine whether each portion should be subject to Part XIII tax.

CRA indicated that some portions of the PLF probably fell under ss. 212(1)(d)(i), (ii), and (iv), based principally on the finding that the PLF is not separate consideration from the franchise fees and some portions of the franchise fees are caught by those subparagraphs. For example, the part of the PLF allocable to the parts of the Agreement dealing with "information," "know-how," "program" and "system" will be subject to withholding under s. 212(1)(d)(i).

24 May 2011 External T.I. 2007-0246981E5 - Subsection 212(1)

In consideration for the "Non-Resident's" grants of the right to manufacture and sell a trademarked product to the "Resident," who manufactures the product in Canada and sells the product wholesale to customers throughout the world, the Resident agrees to pay the Non-Resident the greater of a percentage of amounts invoiced to customers from sales of the product and a pre-determined fixed minimum amount. In concuding that this consideration was a royalty on general principles, so that it ws not necessary to refernce s. 212(1)(d)(i), CRA stated:

The payments in question are clearly in consideration for obtaining the rights to manufacture and sell the product and are based on a share of the profits that the Resident will realize from using such rights. Although the arrangement specifies that there is a minimum amount payable to the Non-Resident regardless of the level of sales of product by the Resident, it is our view that the payment will possess the requisite element of contingency since the amount payable by the Resident will not be ascertainable until the end of the period in which the level of the Resident's sales of the product are calculated. …[I]t is not uncommon for amounts referred to as royalties to provide for a minimum payment obligation. [See]: Shaw v. Shaw, 2006 CanLII 13776 (ONSC), Erck Eckrohrkessel GmbH v. CET Energy Systems Inc. 1995 CanLII 1592 (BCCA), 1994 CanLII 3000 (BCSC), and Mechanical Pin Resetter Co. Ltd. v. Canadian Acme Screw & Gear, Ltd. [1971] S.C.R. 628.

4 December 1995, November TEI Round Table, Q. 4, 953042

In response to a question as to whether compensation payments made under a securities loan from a related non-resident corporation should be viewed by as either "any payment for the use of or for the right to use in Canada any property" (under s. 212(1)(d)(i)) or "any payment that was dependent on the use of or production from property in Canada" (under s. 212(1)(d)(v)), CRA responded:

Where the borrower pays the non-resident lender a fee ("lending fee" or "borrowing fee") for entering into the arrangement, it is our view that the fee would generally be considered to be for the use of or the right to use property in Canada and as such would be subject to withholding tax pursuant to subparagraph 212(1)(d)(i) of the Act. It is a question of fact as to what provisions of Part XIII would be applicable to amounts that the borrower pays to the non-resident as compensation for any interest or dividends that the lender would have received had the securities not been lent ("compensation payments"). We in the Rulings Directorate have not had an actual arrangement referred to us for our views.

20 December 1995 T.I. 952682 (C.T.O. "Entry Fee Payments and Withholding Tax")

Discussion of factors bearing on whether surface lease payments are on account of capital (e.g., lump sum payments received as compensation for injurious affection of land that are treated as proceeds of disposition for purposes of s. 115(1)(b)(i)) or on account of income (subject to withholding tax under s. 212(1)(d)).

In RC's view, an entry fee payable pursuant to s. 19(1) of the Surface Rights Act (Alberta) would represent compensation for capital property (if the land was held on account of capital) which would be considered to be proceeds of disposition.

93 C.P.T.J. - Q.27

Royalties earned by non-residents not carrying on business in Canada from Canadian resource properties are subject to withholding tax under s. 212(1)(d) on the gross amount of the royalties before any deduction in respect of Crown charges.

81 C.R. - Q.24

An arrangement that is treated as a purchase for domestic purposes nonetheless may give rise to withholding tax under paragraph 212(1)(d).

IT-303 "Know-How and Similar Payments to Non-Residents"

IT-494 "Hire of Ships and Aircraft from Non-Residents"

Articles

Raj Juneja, "Taxation of equity derivatives", 2015 CTF Annual Conference paper

Non-application to equity swaps (p. 17:20)

The CRA has taken the position that where a Canadian resident borrower of a security pays a lending or borrowing fee to a non-resident as part of a securities lending agreement that is not governed by section 260, the fee would generally be considered to be for the use of or the right to use property in Canada and fall within 212(l)(d) [f.n.26...9530420...]. The CRA has been less clear in determining whether compensation payments for dividends or interest paid as part of such agreements would fit within paragraph 212(l)(d) and has generally indicated that this would be a question of fact.

However, paragraph 212(l)(d) should have no application to payments under a typical equity derivative. The relevant provisions in paragraph 212(l)(d) apply where the payments are for the use or the right to use property in Canada or are dependent on the use or production from property in Canada; but the payments (or adjustments) under a typical equity derivative are only in respect of notional or reference property and are not payments for the use of any property or based on any actual receipts by the party with the short position. Whether the party with the short position chooses to hold actual shares to hedge its position under the equity derivative should not affect this conclusion.

Scheuermann, "Income and Commodity Tax Aspects of Acquiring and Exploiting Technology", 1991 Conference Report, c. 45.

Fryers, "'Net Serve! One to Come!' (The Net Profits Interest in the Oil and Gas Industry - An In-Depth Analysis)", 1988 Canadian Petroleum Tax Journal, Spring 1988, p. 121

Discussion of the meaning of "royalty".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 17

Subparagraph 212(1)(d)(i)

Cases

The Queen v. St. John Shipbuilding & Dry Dock Co. Ltd., 80 DTC 6272, [1980] CTC 352 (FCA)

In obiter dicta it was suggested that lump-sum payments for a non-exclusive licence to use computer programs in the design of ships were covered by s. 106(1)(d)(i) of the pre-1972 Act.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 122

The Queen v. Farmparts Distributing Ltd., 80 DTC 6157, [1980] CTC 205 (FCA)

right to buy and resell product not a right to use

Although the portions of a one-time payment attributable to the acquisition of a trade name and logo clearly came within s. 212(1)(d)(i), and a concept or plan of merchandising replacement muffler systems came, within s. 212(1)(d)(i) as being for the right to use a "plan" or, perhaps, a "process," and also for the right to use "property," the portion of the payment attributable to obtaining the exclusive right to buy and resell a type of pipe bending machine within specified provinces could not be said to relate to the use of or the right to use the machine, and did not come within s. 212(1)(d)(i). However, the full amount of the payment was exempt from withholding tax because the Minister had failed to establish what portion of the payment was allocable to the taxable elements.

The fact that the lump sum payment was made irrespective of user meant that it did not constitute rent, royalty or a similar payment, and it accordingly also did not fall within the preamble to s. 212(1)(d). It was noted that if a payment falls within subparagraphs (i) to (x), then it need not qualify as a "rent, royalty or similar payment".

Words and Phrases
use plan

Quality Chekd Dairy Products Association v. MNR, 67 DTC 5303 (Ex Ct)

The taxpayer, which was a U.S.-resident corporative association of dairy companies, received a fee from a Canadian member that was, in part, a royalty for the use in Canada of a certification mark and, in part, consideration for know-how provided by it to the Canadian member, namely, providing assistance on production, quality control, advertising and marketing. Gibson J. found (at p. 5305) "that the 'know-how' provided by the appellant to Kellough Brothers Dairy Limited should be categorized as services rendered, or at least and in any event not 'property' within the meaning of the word as it is employed in section 106(1)(d)(iii) of the Act and also not 'other thing' as those words are also so employed there, applying as I do the ejusdem generis rule of construction ...". Because the Minister had failed in his pleadings to adduce evidence as to the proper apportionment of the payment between the two matters, the full amount of the fees was not subject to withholding under s. 106(1)(d).

See Also

Zainul and Shazma Holdings Ltd. o/a Holiday Inn Hinton v. The Queen, 2004 DTC 3015, 2004 TCC 527 (Informal Procedure)

A lump-sum "application fee" paid by the taxpayer to a non-resident corporation, which carried on a business of granting Holiday Inn franchises, at the time of the taxpayer's (ultimately successful) application for a Holiday Inn franchise was not subject to Part XIII tax. O'Connor J. accepted the submission of the taxpayer that the words "including, but not so as to restrict the generality of the foregoing, any payment" in the preamble suggested that payments in s. 212(1)(d)(i) could not be broader than those implied by the opening words (referring to "rent royalty, or similar payment"); and that the application fee was not a rental or royalty but, rather, some form of compensation to the non-resident for the extensive review performed by it in dealing with the application. Furthermore, he accepted the taxpayer's submission that s. 212(1)(d)(i) did not apply even if read more broadly, because the taxpayer's rights to use the franchisor's property arose only after the Licence Agreement was executed, and after the time of payment of the application fee, so that that the application fee was not paid for the "use" of any property.

Brad-Lea Meadows Ltd. v. MNR, 90 DTC 1269 (TCC)

An Arizona corporation without share capital ("Best Western") which was formed by a number of independent motel owners as a non-profit association to assist its members in meeting the competitive challenge presented by large motel chains, provided services to new members of the association with respect to their inital affiliation with Best Western. The Canadian taxpayer paid such an "affiliation fee" to Best Western to reimburse Best Western for the cost of providing such services, including training with respect to various matters respecting the conduct of the taxpayer's motel business. Brulé J. stated that he could not "find any authority or descriptive words which show an affiliation fee to be a royalty" and found, because the assessment of the Minister did not separate out any of the items comprising the affiliation fee, that none of the affiliation fee was subject to withholding tax.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 64

Grand Toys Ltd. v. MNR, 90 DTC 1059 (TCC)

Payments which the taxpayer made to a non-resident joint venture arguably as the consideration for an exclusive distributorship, did not constitute amounts described in s. 212(1)(d)(i), but, rather, were capital payments. Although in Wain-Town, it was found that a royalty may be part of a purchase price, in that case the royalty was contingent on the use of a franchise, whereas here the alleged royalty amount was predetermined.

ITC of Canada Ltd. v. Min. of Rev., [1979] CTC 277 (S.C.O.)

An Ontario corporation which was engaged in the business of importing films or videotapes from its U.S. parent and making them available to Canadian television broadcasters was "using" them, notwithstanding that it was not broadcasting them. [s.22(1)(l)(iii) of the Corporations Tax Act, S.O. 1972]

Words and Phrases
use

Technical Tape Corp. v. MNR, 64 DTC 428 (TAB)

The taxpayer entered into a written agreement for the provision to it in the United States by an American company of technical advice and assistance in consideration for payments of $50,000 per annum (for the first two years of the agreement) and 0.75% of net sales (for the balance of the agreement). Mr. Davis found that the fixed payments were not in the nature of rents or royalty payments, whereas the variable payments were in the nature of royalties for the use of know-how (which was a form of property being used by the taxpayer in Canada.) Accordingly, the latter payments were subject to withholding under s. 106(1) of the pre-1972 Act as "rent, royalty or a similar payment... for the use in Canada of property".

Administrative Policy

16 August 2017 Internal T.I. 2017-0701291I7 - Exclusive Distributorship Rights

Farmparts likely excluded application to product distributorship right/product name on product not a valuable use of trademark

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 license 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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) lump sum non-contingent payment for distributorship right was not a royalty 99
Tax Topics - Income Tax Act - Section 56.4 - Subsection 56.4(1) - Restrictive Covenant a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was for a restrictive covenant 250
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(i) a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was subject to s. 212(1)(i) withholding 199
Tax Topics - Treaties - Income Tax Conventions - Article 12 lump sum paid for distributorship rights was not a royalty 231

18 November 2013 Internal T.I. 2011-0399581I7 F - Application of section 212(1)(d) ITA

seriatim benchmark lump sums, although not royalties, came within s. 212(1)(d)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(viii) cost-sharing agreement with catch-up payment provisions qualified 83
Tax Topics - Treaties - Income Tax Conventions - Article 12 contingent payments came within broad Treaty definition of royalty 126

14 January 2013 External T.I. 2012-0443561E5 F - Part XIII re: royalties paid for tv program

payments based on TV production costs came within s. 212(1)(d)(i)

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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) payments based on production costs of a television program were a royalty 127
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(vi) copyright exception applicable to use of TV format in producing a Canadianized TV production 106

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

fee for purchase right

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).

27 August 2012 External T.I. 2011-0416181E5 - US internet publisher - CDN resident advertiser

clicks fees to website

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).

2 August 2012 External T.I. 2011-0422781E5 - Part XIII tax-fee to use on-line trading program

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."

Income Tax Technical News, No. 23, 18 June 2002

Notwithstanding its revised position on the terms of the Royalties Articles in most treaties, CCRA continues to be of the view that Part XIII tax applies to payments made by a user of computer software pursuant to a contract that requires that the source code or program be kept confidential, as the payments are for the use of a secret formula or process and, thus, represent a payment for the use of or right to use in Canada any property ... or other thing whatever - unless the payment is in respect of "shrinkwrap" software, or the exception in s. 212(1)(d)(vi) applies.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 89

6 June 1994 External T.I. 5-933748 -

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.

23 January 1998 980005

The distinction between shrink-wrap software and customs software was explained as turning, in part, on whether the purchaser/licensee was aware of the licence agreement at the time of acquisition of the software.

26 April 1995 T.I. 950216

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".

13 September 1994 T.I. 931968 (C.T.O. "Withholding Tax - Computer Software Royalties")

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.

20 April 1994 1994 Western District Taxation Office Roundtable Q. 2, 7-940974 -

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."

93 C.R. - Q. 29

A payment to a non-resident for the use of, or the right to use, a custom computer software program for a period of indefinite duration is subject to tax under s. 212(1)(d)(i). "Canada has no bilateral agreements currently in force wherein such payments are exempted from tax."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 48

6 March 1991 T.I. (Tax Window, No. 1, p. 12, ¶1136)

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.

6 April 1990 T.I. (September 1990 Access Letter, ¶1441)

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.

Articles

Turro, "U.S. Government Grapples with Treatment of Income from Software, while Industry Interests Battle among Themselves", Tax Notes International, Vol. 8, No. 25, June 20, 1994, p. 1615.

Boidman, "Continuing Cross-Border Software Controversy", Tax Management International Journal, February 11, 1994, p. 90.

K.J. Murray, "Computer Software: Canadian and Cross-Border Issues", 1993 Conference Report, C. 27

Discussion of possibility that the "purchase" by a Canadian licensee of a custom software modification will be exempt from Canadian withholding tax; and of allocating a payment referable both to rights and services.

Chapin-Fortin, "Revenue Canada Hard on Software", CA Magazine, December 1993, p. 30.

Subparagraph 212(1)(d)(ii)

See Also

Hasbro Canada Inc. v. The Queen, 98 DTC 2129 (TCC)

The taxpayer, which was a Canadian manufacturer and distributer of toys in Canada, paid fixed commissions expressed as a percentage of the purchase price of products acquired by it from the Far East, to an affiliated company resident in Hong Kong. After noting that s. 212(1)(d)(ii) was based on the definition of royalty suggested by the OECD Fiscal Committee, i.e., it referred to the concept of know-how, Dussault TCJ. found that, here, the information (concerning negotiations, price quotations, delivery schedules, shipment arrangement, etc.,) provided to the taxpayer did not represent know-how, and stated (at p. 2137) that "it does not seem to me that skills in trade practices in a particular area of the world or general business acumen in handling day-to-day commercial transactions for others can be the subject matter of know-how".

Administrative Policy

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

procurement licence fee

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.

21 September 2012 External T.I. 2012-0457951E5 - Fee for 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....

11 April 1995 External T.I. 5-941967 -

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.

16 March 1993 T.I. (Tax Window, No. 30, p. 15, ¶2478)

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).

Subparagraph 212(1)(d)(iii)

See Also

Hasbro Canada Inc. v. The Queen, 98 DTC 2129 (TCC)

The taxpayer, which was a Canadian manufacturer and distributor of toys in Canada, paid fixed commissions expressed as a percentage of the purchase price of products acquired by it from the Far East, to an affiliated company resident in Hong Kong. Although the purchase commissions were found to be dependent on sales of goods by manufacturers to Hasbro that were described in s. 212(1)(d)(iii)(B), by the same token they were excluded by the postamble: the phrase "in connection with" was clearly broader in its scope than the phrase "dependent on". Furthermore, at least some portion of the payments made was made for services in connection with the negotiation of a contract, and accordingly all the payment were exempt from withholding tax as the Minister had not designated which portion should be taxable under s. 212(1)(d)(iii).

Administrative Policy

24 September 2015 External T.I. 2013-0495611E5 - Withholding on incentive payments to non-residents

no withholding on payments based on sales warranties sold by dealers

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 100 - Subsection 100(1) - Remuneration no withholding on payment to non-resident employee of 3rd party 135
Tax Topics - Income Tax Regulations - Regulation 200 - Subsection 200(1) T4A reporting of payments to non-resident employee of 3rd party 72

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

procurement licence fee

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.

27 August 2012 External T.I. 2011-0416181E5 - US internet publisher - CDN resident advertiser

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.

11 April 1995 External T.I. 5-941967 -

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.

2 March 1995 Memorandum 943366 (C.T.O. "Withholding Tax on Oil Marketing Fees")

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.

16 March 1993 T.I. (Tax Window, No. 30, p. 15, ¶2478)

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.

Subparagraph 212(1)(d)(iv)

Administrative Policy

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

allocation to exclusivity payments

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).

Subparagraph 212(1)(d)(v)

Administrative Policy

21 April 2015 External T.I. 2013-0494251E5 - 128.1(4) and Part XIII tax on future payments

client list utilization payments to U.S. resident

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(4) - Paragraph 128.1(4)(b) right to client list utilization payments 111
Tax Topics - Treaties - Income Tax Conventions - Article 12 client list utilization payments to U.S. resident 172

4 December 2012 Internal T.I. 2011-0431871I7 - Part XIII and Procurement Fees

procurement licence fee

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.

Subparagraph 212(1)(d)(vi)

See Also

Rogers Communications Inc. v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 35, [2012] 2 S.C.R. 283

media streams do not entail "production or reproduction" notwithstanding the temporary copying

The Supreme Court found that Internet streaming of musical works falls within the exclusive right in s. 3(1)(f) of the Copyright Act "in the case of any literary, dramatic, musical or artistic work, to communicate the work to the public by telecommunication." (In light of ESA, this means that Internet streaming does not result in the "production or reproduction" of the work.)

The appellants, who provided online music services, sought to overturn certification of a Copyright Board tariff that would have imposed fees on the basis that the appellants were making use of the respondent's s. 3(1)(f) rights. In accordance with its decision in ESA, the Court granted the appeal in respect of the appellants' download services.

The Court denied the appeal in respect of the streaming services on the basis that streaming is analogous to more traditional methods of communication to the public by telecommunication, such as radio and television broadcasts. While Internet streaming involves many private (i.e. point-to-point) transmissions, the combination of all such transmissions must be regarded as communication to the public.

Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 34, [2012] 2 S.C.R. 231

games downloading governed by reproduction rather than performance branch of copyright

The Society of Composers, Authors and Music Publishers of Canada ("SOCAN") would negotiate with individual game publishers (collectively represented by the Appellant, the Entertainment Software Association ("ESA")) for rights to use SOCAN members' musical works in the games. Traditionally, these games would be distributed on physical media such as CDs. SOCAN sought a tariff from the Copyright Board on digital copies of games sold online, on the basis that such an online sale amounted to communicating the works to the public by telecommunication - a right that SOCAN's members held under s. 3(1)(f) of the Copyright Act, and which had not been licensed to game producers.

The Court granted the ESA's appeal and quashed the tariff on the basis that s. 3(1)(f) applies to "communication" by way of a performance, and not to reproductions. Abella and Moldaver JJ. stated (at para. 42):

The introductory paragraph [in s. 3(1)] defines what constitutes "copyright". It states that copyright "means" the sole right to produce or reproduce a work in any material form, to perform a work in public, or to publish an unpublished work. This definition of "copyright" is exhaustive, as the term "means" confines its scope.

As a digital download is meant to create a permanent copy on the users' machines, it is a reproduction rather than a performance. As "in this case...there is only one activity at issue: downloading a copy of a video game containing musical works" (para. 41), that activity should be regarded as being protected by the reproduction rather than performance branch of copyright.

The specific rights listed in para. (a) through (i) illustrated rather than expanded the scope of protected rights. For example, whereas para. (f) was an example of a performance-related right, "the rental rights [of a sound recording] in s. 3(1)(i)...can fit comfortably into the general category of reproduction rights" (para 42).

After noting that the SOCAN members generally would already have negotiated the licensing of their (reproduction) copyright to the games publishers, so that they in effect were seeking a second (telecommunication) royalty (even though such entitlement clearly did not arise where the games instead were distributed through CD sales), the Court also emphasized the importance of the principle of technological neutrality - Parliament should be presumed not to intend to impose additional costs to interfere with new, more efficient technologies such as digital distribution (para. 9).

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Legislative History 266

Syspro Software Ltd. v. The Queen, 2003 DTC 931, 2003 TCC 498

distributor reproduced software

The taxpayer, which was a distributor of software licensed to it by a non-resident, was entitled to exemption for royalties paid by it to the licensor given that each time it or its sub-distributors earned revenue from the software (through entering into a software sublicence agreement) there was a reproduction of the software.

After noting the broad meaning in the phrase "in respect of" Garon C.J. stated (at p. 934):

"The words 'a copyright in respect of the production or reproduction of any ... work' must therefore be given a broad meaning and would, in my view, encompass any other right connected with the right to produce or reproduce the work, including the right to distribute the work."

He also noted (at p. 935) that s. 212(i)(d)(vi) "exempts from Part XIII tax payments relating to the right to produce or reproduce among other things, a literary work but it does not embrace the right 'to use' for instance, the literary work by the payer for its own internal purposes and not with a view of selling the Software to third parties."

Angoss International Ltd. v. The Queen, 99 DTC 567 (TCC)

licensing of source code used in manufacturing

A lump-sum payment made for a non-exclusive licence to source code to be used by the taxpayer in manufacturing software to be sold by it was exempt under s. 212(1)(d)(vi) and under Article XII, para. 3 of the Canada-U.S. Income Tax Convention.

Apple Computer, Inc. v. Mackintosh Computers Ltd.; Apple Computer, Inc. v. 115778 Canada Inc., [1990] 2 S.C.R. 209

computer program protected by copyright

A computer program, which originated in copyrightable written form, continued to be protected by copyright when it was replicated in the circuitry of a silicon chip.

Administrative Policy

5 January 2018 External T.I. 2017-0697811E5 - Paragraph 212(1)(d)(vi)

distributor is not required to produce goods in respect of which it pays a copyright royalty

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).

5 November 2014 External T.I. 2013-0506191E5 - copyright photographs

payments for photos before incorporation into TV program were exempt

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(5) payments for photos before incorporation into TV program were exempt 103

2014 Ruling 2012-0462801R3 - Application of Part XIII

distribution fees for delivering custom software copies in substance for right to reproduce copyright

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."

1 May 2014 External T.I. 2013-0514291E5 F - Redevances sur une oeœuvre musicale dans un film

copyright royalty for music used in film is exempt notwithstanding s. 212(5) exclusion

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(5) s. 212(5) exclusion does not apply to copyright royalty for music used in film 108

14 January 2013 External T.I. 2012-0443561E5 F - Part XIII re: royalties paid for tv program

copyright exception applicable to use of TV format in producing a Canadianized TV production

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,

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) payments based on production costs of a television program were a royalty 127
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) payments based on TV production costs came within s. 212(1)(d)(i) 180

23 November 2012 External T.I. 2012-0441091E5 - Software License Agreement

licence of custom sofware reproduced in manufactured goods

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.

23 August 2012 External T.I. 2011-0427181E5 - Computer Software Licence Fee

distribution right implicated copyright

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.

3 May 2011 IFA Roundtable, 2011-0404511C6 - 212(1)(d)(vi)

exemption extends beyond reproduction to performance rights

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.

2011 Ruling 2011-0399141R3 - Software Distribution, Medium

distribution of software

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)."

13 June 2003 External T.I. 2003-0018975 -

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.

30 October 2002 External T.I. 2002-014754 -

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)."

29 May 1998 Memorandum 973007

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.

16 February 1996 T.I. 951272 (C.T.O. "XIII - Payments for Right to Broadcast")

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.

17 August, 1995 T.I. 941982 (C.T.O. "7661-1 Part XIII Software Distributor Royalties")

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".

3 August 1994 T.I. 910885 (C.T.O. "Withholding Tax Computer Software Royalties")

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.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 62

1994 Canadian Tax Foundation "Comments on Withholding Tax Rules on Imported Software" 9430560

"The right to make back-up copies as provided by the Copyright Act is not considered a right to produce or reproduce ... . In addition, where a Canadian resident only acquires the right to make additional copies of customer software for its own use, the Department would expect that the portion of the payment, if any, for such a right would be nominal in comparison to the portion the payment for the right to use the program."

26 February 1993 T.I. (Tax Window, No. 29, p. 19, ¶2448)

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).

14 October 1992 Rulings Tax Seminar Central Region 9230057

"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."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 65

October 1992 Central Region Rulings Directorate Tax Seminar, Q. L (May 1993 Access Letter, p. 231)

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.

17 August 1995 T.I. 941982

"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 ... ."

12 March 1992 External T.I. 5-910839 -

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 ...".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 17 - Subsection 17(1) 62

4 March 1992 Memorandum (Tax Window, No. 17, p. 11, ¶1781)

Where a Canadian resident acquired the rights to manufacture and sell games under licence from a non-resident, payments in respect of the design and packaging material that are covered by the Copyright Act, and in respect of the rules of instruction, would be exempt, whereas the copyright exemption would not apply to designs that are registered under the Industrial Design Act or in respect of the title of the game (a trademark).

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 12 27

13 February 1992 Memorandum (Tax Window, No. 16, p. 22, ¶1744)

Payment made to a non-resident for the right to produce or reproduce computer software is not subject to withholding tax; however, payments for the right to use a computer program are not within the exemption. Such payments instead were characterized as for the use or the right to use a secret formula or process.

4 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 15, ¶1086)

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.

1990 Answers Provided by Scarborough District Office (May 1990 Access Letter, ¶1200, Q. 03)

Where a foreign owner of a computer program grants the right to a Canadian resident to produce or reproduce computer software in Canada for distribution to Canadian end-users, any payment to the foreign owner after June 8, 1988 (the effective date of the inclusion of computer programs in the definition of literary work under the Copyright Act) in respect of the right to produce or reproduce such programs for distribution after that date will be exempt.

88 C.R. - F.Q.41

Where the end-user of a computer program has the right to make copies for his own personal use such a taxpayer is not making use of a copyright but is merely exercising his right to use under the licence agreement. However, any payment made to a foreign owner of a computer program in respect of the right to produce or reproduce such programs for distribution to Canadian end-users will be exempt.

86 C.R. - Q.13

Software, notwithstanding Apple, does not qualify for copyright protection.

Articles

Brown, "The Canadian Income Tax Treatment of Computer Software Payments", 1994 Canadian Tax Journal, Vol. 42, No. 3, p. 593.

D'Aurelio, "International Issues: A Revenue Canada Perspective", 1990 Conference Report, c. 44, under "Copyright Royalties"

Subparagraph 212(1)(d)(viii)

Administrative Policy

18 November 2013 Internal T.I. 2011-0399581I7 F - Application of section 212(1)(d) ITA

cost-sharing agreement with catch-up payment provisions qualified

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) seriatim benchmark lump sums, although not royalties, came within s. 212(1)(d) 146
Tax Topics - Treaties - Income Tax Conventions - Article 12 contingent payments came within broad Treaty definition of royalty 126

Articles

Biasio, "Cost Sharing in the 1990s and Beyond: Part 2", International Tax Planning, 1997 Canadian Tax Journal, Vol. 45, No. 1, p. 131.

Tremblay, "Canadian International Tax Considerations", 1997 International Tax Planning, Vol. VI, No. 1, p. 364.

Subparagraph 212(1)(d)(ix)

Administrative Policy

2007 Ruling 2006-0211991R3 - Part XIII Tax

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.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 5 bareboat charter not giving rise to PE in Canada 144

8 February 1993 Memorandum (Tax Window, no. 29, p.18, ¶2421)

Where a Canadian resident has chartered a fishing vessel from a non-resident to be supplied from a Canadian port, with the cargo to be delivered to Canadian ports, the rental payments for the vessel must be pro-rated between the time the vessel is used in international waters and the time that it is used in Canadian waters.

Paragraph 212(1)(h) - Pension benefits

Cases

The Queen v. Sun Life Assurance Co. of Canada, 80 DTC 6333, [1980] CTC 418 (FCA)

The tax imposed by s. 212(1) "must be paid 'on every amount' irrespective of its capital or income nature." An argument that in order to be taxable an amount paid or credited to a non-resident must have the characteristics of income, was rejected.

Forest v. The Queen, 80 DTC 6149 (FCTD)

Non-resident individuals who, pursuant to the terms of a registered pension fund plan and after resigning from their positions with their Canadian employer, elected to have the amount of their contributions plus interest paid as a premium to or a contribution under a Canadian registered retirement savings plan rather than having those amounts paid to them, were held not to have obtained an unconditional entitlement to the funds. S.212(1)(h) did not apply since the funds were paid to their RRSPs rather than to them.

Administrative Policy

13 February 2015 External T.I. 2014-0541961E5 - RPP and CPP payments-former employee of Consulate

CPP payments attributable to employment services performed while contributing

Registered pension plan and Canada pension plan payments received by a Canadian citizen working for at a Canadian consulate and Canadian embassy who was a U.S. resident for Treaty purposes and whose duties of employment had been performed exclusively in the U.S. while a non-resident were exempted under s. 212(1)(h)(v) and (vi). CRA noted that "although paragraph 115(2)(d) deems a non-resident person, such as this hypothetical taxpayer, to be employed in Canada, such deeming provision only applies for the purposes of subsection 2(3) and does not apply for the purposes of subparagraph 212(1)(h)(vi)," and further stated, respecting the CPP payments:

The CPP is considered by the Canadian courts to be a pension plan, and we are of the view that CPP benefits are attributable to services rendered by a person.

IT-76R2 "Exempt Portion of Pension when Employee has been a Non-Resident"

Paragraph 212(1)(i)

See Also

Pangaea One Acquisition Holdings XII S.À.R.L. v. The Queen, 2018 TCC 158

lump sum paid for non-resident's concurrence in share sale was for restrictive covenant

A non-resident shareholder (“Pangaea”) of a Canadian corporation (“Public Mobile”) was required under the terms of the unanimous shareholder agreement to agree to any sale of the Public Mobile shares. A resident shareholder paid Pangaea a lump sum for its agreement to execute a share purchase agreement.

In confirming CRA’s view that this was a restrictive covenant payment that was subject to Part XIII tax under s. 212(1)(i), Smith J found that the agreement of Pangaea to waive its veto right was an agreement that “affected” the disposition of property (the Public Mobile shares), as contemplated under the restrictive covenant definition. He further rejected Pangaea’s submission that, as it had disposed of its veto right, the exclusion from the definition for an agreement that disposes of the taxpayer’s property applied, stating (at para. 62):

I find that there is no evidence of a conveyance or disposition of the Appellant’s veto right — even if it can properly be characterized as “property”. … [T]here was no evidence of an assignment of the veto right to a third party.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56.4 - Subsection 56.4(1) - Restrictive Covenant agreement with another shareholder to enter into a share sale with a 3rd party was a restrictive covenant 208

Administrative Policy

16 August 2017 Internal T.I. 2017-0701291I7 - Exclusive Distributorship Rights

a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was subject to s. 212(1)(i) withholding

In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. After finding that the lump sum very well might not be subject to withholding under s. 212(1)(d), the Directorate stated:

[P]aragraph 212(1)(i) is broad enough to apply to it on the basis that the Upfront Payment is an amount that would, if NRco had been resident in Canada throughout the taxation year in which the amount was received, be required by subsection 56.4(2) to be included in computing NRco’s income for the taxation year. Subsection 56.4(2) includes in a taxpayer’s income an amount in respect of a restrictive covenant. The definition of a “restrictive covenant” in subsection 56.4(1) is broad and contemplates all undertakings or waivers that affect or are intended to affect the acquisition or provision of property. In our view, the undertakings of NRco under the Distribution Agreement would satisfy the definition of a “restrictive covenant”.

The Directorate went on to find that the sum likely was Treaty-exempt notwithstanding the applicability of s. 212(1)(i) under domestic law.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(i) Farmparts likely excluded application to product distributorship right/product name on product not a valuable use of trademark 477
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) lump sum non-contingent payment for distributorship right was not a royalty 99
Tax Topics - Income Tax Act - Section 56.4 - Subsection 56.4(1) - Restrictive Covenant a lump sum paid to a non-resident for granting an exclusive right to distribute its product in Canada was for a restrictive covenant 250
Tax Topics - Treaties - Income Tax Conventions - Article 12 lump sum paid for distributorship rights was not a royalty 231

Paragraph 212(1)(j.1) - Retiring allowances

Cases

The Queen v. Albino, 94 DTC 6071 (FCTD)

In 1973, the taxpayer agreed to participate in an "incentive performance plan" of his employer under which the taxpayer was granted "share equivalent units" from time to time which "vested" between five and ten years after the date of granting and which provided for payments being made only upon the taxpayer ceasing to be an employee. Given that one of the two objectives of the plan was to provide an incentive for important employees to remain with the company (the other being to provide an incentive for such employees to continue devoting their energies towards the continued growth of the company), a lump-sum in excess of $600,000 received by the taxpayer when he was terminated by the company in 1987 was a retiring allowance rather than remuneration under ss.6(3) and 5(1) and, therefore, was subject only to tax in accordance with s. 212(1)(j.1) of the Act.

Administrative Policy

20 March 2015 External T.I. 2014-0534301E5 - Canadian Withholding Tax on Retiring Allowance

retiring allowance paid to non-resident for loss of non-resident employment

A lump sum payment in respect of a loss of employment is made by Canco to a non-resident of Canada (the "Taxpayer") who had been seconded to a wholly-owned French subsidiary of Canco ("Franceco"). The payment is equal to the cost of early termination of the employment of the taxpayer with Franceco. Would this retiring allowance be taxable under s. 115(2)(e)(i) or s. 212(1)(j.1)?

CRA first found that s. 212(1)(j.1) would apply, so that it would not be taxable pursuant to s. 115(2)(e)(i) and that the exclusion in s. 212(1)(j.1) would not apply because "it would not be reasonable to regard such… payment as being attributable to services rendered to…Canco." However it would be exempt under Art. XV of Canada-France Convention, as not being in respect of employment exercised in Canada, or Art. XXI as not being derived from sources in Canada.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(2) - Paragraph 115(2)(e) - Subparagraph 115(2)(e)(i) retiring allowance paid to non-resident for loss of non-resident employment 54
Tax Topics - Treaties - Income Tax Conventions - Article 15 retiring allowance paid to French individual for loss of non-resident employment 71
Tax Topics - Treaties - Income Tax Conventions - Article 22 retiring allowance paid to French individual for loss of non-resident employment 71

Paragraph 212(1)(l) - Registered retirement savings plan payments

Administrative Policy

10 October 2014 APFF Roundtable, 2014-0534821C6 F - Question 2 - APFF Round Table

non-resident survivor spouse must obtain SIN to make exempt transfer

At the 2013 APFF Roundtble, CRA indicated that a non-resident annuitant making a contribution to an RRSP or RRIF is required to provide a social insurance number to the issuer of the plan pursuant to s. 237(1.1) and Reg. 214.1(1), including where ss. 212(1)(l) and 212(1)(q) apply. How does a non-resident who is not eligible to obtain a SIN effect a tax-free transfer to an RRSP or a RRIF? CRA responded (TaxInterpretations translation):

The definition of "RRIF" in section 146.3 expressly…requires the holding of a SIN in connection with the registration of a RRIF.

[I]f a non-resident surviving spouse does not have or cannot obtain a SIN, that person will not be allowed to make a tax-free transfer to an RRSP or a RRIF in accordance with paragraphs 212(1)(l) and 212(1)(q). … [T]he CRA does not intend to provide any administrative relief to the non-resident surviving spouse who does not hold or cannot obtain a SIN so as to effect a tax-free transfer to an RRSP or a RRIF, as described above.

11 October 2013 Roundtable, 2013-0495281C6 F - Question 9 - APFF Round Table

transfer to RRSP or RRIF of surviving non-resident spouse: SIN required; payment can be made directly to RRSP/RRIF of surviving spouse in accordance with joint instructions even where no specific non-will designation is made

Has the position in 2002-0141355 - that an RRSP can be transferred to the RRSP of a surviving non-resident spouse, who can open an RRSP, even if he or she does not have a Social Insurance Number ("SIN") – changed? CRA responded:

Where an amount under an unmatured RRSP of a deceased annuitant is paid to the deceased's legal representative and the surviving spouse is the beneficiary of the estate, we consider that the spouse did not receive the amount in the RRSP due to the annuitant's death and the payment does not constitute a refund of premiums as defined in subsection 146(1). In such a situation, subsection 146(8.1) deems the amount paid to the deceased annuitant's legal representative as being received by the surviving spouse as a benefit that is a refund of premiums, and not by the legal representative, to the extent that the amount would have been a refund of premiums if it had been paid under the plan to the beneficiary spouse of the annuitant's estate and that it is designated jointly by the legal representative and the surviving spouse in prescribed form T2019 filed with the Minister. …

In this particular situation, it is our view that the holding of a SIN by the non-resident spouse is necessary in order to proceed with the registration of an RRSP of which he or she is the annuitant and to file the information return required by virtue of subsection 214.1(1) of the Income Tax Regulations (the "ITR"). Indeed, it is our understanding that a surviving spouse is required, pursuant to subsections 237(1.1) and 214.1(1) ITR, to provide a SIN to the issuer of an RRSP who, in the year of the transfer of a refund of premiums to which paragraph 60(l) applies, must complete an information return in prescribed form with respect to amounts paid as contributions under the plan. …

Our positions relating to the transfer of a RRIF to a non-resident surviving spouse are similar to those … above regarding the transfer of an RRSP at death. …

With respect to the payment made as a result of the death of the spouse of a non-resident who has not been designated as a beneficiary in the RRSP contract but who is the beneficiary of the deceased spouse's estate, we are of the view that the tax-neutral transfer provisions in subparagraphs 212(1)(l)(i) and (ii) generally cannot be applied since the payment should generally be made under the deceased annuitant's RRSP to the legal representative of the deceased annuitant and not directly transferred to an RRSP of which the surviving spouse is the annuitant.

Notwithstanding the foregoing, to the extent permitted by the provisions of the will, we will, however, accept that the sums paid by the issuer, in accordance with the joint instructions of the legal representative of the deceased annuitant and the surviving spouse, directly to the RRSP or RRIF of the surviving spouse or for the purchase of a qualifying annuity of which he or she is the annuitant, cannot be subject to Part XIII tax pursuant to subparagraphs 212(1)(l)(i) and (ii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8.1) deemed receipt of refund of premiums for amount paid to executor, with deemed benefit to recipient spouse 258
Tax Topics - Income Tax Act - Section 146.3 - Subsection 146.3(6.1) transfer of RRIF by executor to RRIF of surviving spouse 306
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - lParagraph 212(1)(q) direct transfer to RRIF of surviving non-resident spouse 280

lParagraph 212(1)(q)

Administrative Policy

11 October 2013 Roundtable, 2013-0495281C6 F - Question 9 - APFF Round Table

direct transfer to RRIF of surviving non-resident spouse

Upon the death of a RRIF annuitant, Part XIII does not appear to provide an exemption similar to that provided for an RRSP (paragraph 212(1)(l)) under which no tax is imposed when the funds are transferred to the RRSP or RRIF of the non-resident surviving spouse. In order to benefit from the rollover to an RRSP or RRIF for the non-resident spouse, is it required to utilize the election in s. 217, which allows the choice of applying Part I instead of Part XIII, necessary? CRA responded:

Under paragraph 212(1)(q), any payment out of or under a RRIF that would, if the non-resident person had been resident in Canada throughout the taxation year in which the payment was made, be required by section 146.3 to be included in computing the non-resident person’s income for the year is subject to an income tax rate of 25%.

An amount that would be required to be included in a taxpayer's income, including because of subsection 146.3(6.1), if resident in Canada, is deemed to have been paid to the taxpayer as a payment under a RRIF by virtue of paragraph 214(3)(i). This amount is therefore subject to Part XIII tax pursuant to paragraph 212(1)(q), except where the amount has been directly transferred by the payer, on behalf of the surviving spouse, into an RRSP or RRIF of which the surviving spouse is the annuitant or for the purpose of purchasing an eligible annuity contract and to the extent that the amount so transferred would have been deductible under paragraph 60(l) if the non-resident spouse had resided in Canada throughout the year. To be valid, the transfer must be made under an authorization in the prescribed NRTA1 form.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(l) transfer to RRSP or RRIF of surviving non-resident spouse: SIN required; payment can be made directly to RRSP/RRIF of surviving spouse in accordance with joint instructions even where no specific non-will designation is made 510
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8.1) deemed receipt of refund of premiums for amount paid to executor, with deemed benefit to recipient spouse 258
Tax Topics - Income Tax Act - Section 146.3 - Subsection 146.3(6.1) transfer of RRIF by executor to RRIF of surviving spouse 306

Paragraph 212(1)(r) - Registered education savings plan

Administrative Policy

3 June 2014 External T.I. 2013-0504641E5 - RESP payments to a non-resident person

RESP withholding is non-refundable

Where a non-resident person subject to paragraph 212(1)(r) receives educational assistance payments from an RESP, that person cannot file a Canadian income tax return under Part I of the Act with respect to the payments. The income tax paid pursuant to paragraph 212(1)(r) constitutes a final and non-refundable tax, and an election under section 217 cannot be made by the non-resident taxpayer in order to be refunded Part XIII tax withheld at source.