Article 12

Cases

MCA Television Ltd. v. The Queen, 94 DTC 6375 (FCTD)

MacKay J. found that the reference in Article XIIIC of the 1942 Canada-U.S. Convention to "motion picture films" referred only to products which originally were created for theatrical exhibition rather than for television viewing, in light of evidence that those in the industry did not consider television movies and other made-for-television productions to be "motion picture films" and in light of its determination that the phrase "motion picture films" should be given the meaning intended by the parties to the Convention in 1950 when that Article was incorporated by the Protocol amending the 1942 Convention.

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

Thurlow, C.J. stated (p. 6275) that "'royalties' ... connotes a payment calculated by reference to the use or to the production or revenue or profits from the use of the rights granted" and that "neither 'rentals' nor 'royalties', in the ordinary connotation ... includes a lump sum payment for the use of or for the privilege of using property indefinitely." Accordingly, lump sum payments made by a Canadian shipbuilder for technical data contained on tapes pursuant to non-exclusive licence that placed no relevant restrictions as to how many times or over what period of time the shipbuilder could use the data in its own operations, did not represent "rentals and royalties" for purposes of paragraph 6(a) of the Protocol to the 1942 Canada-U.S. Convention.

Words and Phrases
royalties rentals

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

Addy, J. stated (respecting Article 13 of the 1951 Canada-France Tax Convention): "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."

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

A lump-sum payment made by a Canadian film distributor to a New York company for the acquisition of exclusive rights to exploit films was characterized as being a payment for the outright purchase of such films, and therefore for purposes of the old Canada-U.S. Income Tax Convention did not have the character of a royalty.

Western Electric Co. Inc. v. MNR, 69 DTC 5204 (Ex Ct), briefly aff'd 71 DTC 5068 (SCC)

A U.S.-resident subsidiary of American Telephone and Telegraph Co. ("Western Electric") provided a mass of confidential technical information to a subsidiary of Bell Canada ("Northern") in consideration for payments calculated as a percentage of the sales price of products manufactured with the use of that information. In finding that such payments were "rents or royalties for the use of ... secret processes ... and other like property" for purposes of paragraph 6(a) of the Protocol to the 1942 Canada-U.S. Convention, Dumoulin J. indicated that he was in substantial agreement with the Crown's submission that the confidential information that was so supplied was, if not "secret processes", of precisely the same nature: it was valuable, jealously guarded proprietary information.

See Also

Director of Income Tax v. A.P. Moller Maersk, Civil Appeal No. 2960 of 2017 (Supreme Court Of India, Civil Appellate Jurisdiction)

computer tracking-system charges of a Danish company to local agents were profits of its international shipping business rather than for technical services

The Danish-resident taxpayer had set up and maintained a global telecommunication facility connected to computers in Denmark to assist all of its appointed agents in various countries in booking and tracking of cargo and servicing customers in those countries. The expenses of this “Maersk Net” system were shared by all the agents through charges made to them by the taxpayer. Three of them were resident in India. The Indian Revenue authority assessed on the basis that the taxpayer’s receipts from the three agents was fees for technical services rather than income arising from the taxpayer’s international shipping business. At issue were Article 13 of the India-Denmark Double Taxation Agreement (the “DTA”), which permitted India to impose tax of 20% on the gross amount of fees for technical services (essentially defined as “consideration for the services of technical or other personnel”); and Article 9 of the DTA, which provided for a reduced rate of Indian tax on “profits derived from the operation of ships in international traffic.”

In finding for the Art. 9 characterization, Sikri J stated (at paras 11 and 12):

…It is clearly held that no technical services are provided by the assessee to the agents. … It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. … Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.

…'[P]rofit' from operation of ships under Article…9 … would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited, (2016) 383 ITR 1 (SC) has categorically held that use of [a] facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all.

Words and Phrases
technical service
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 8 computer tracking-system charges of a Danish company to agents in India were profits of its international shipping business 186

DCIT v. Bombardier Transportation India Pvt. Ltd, ITA No.555/Ahd/2016 (ITAT Ahmedabad)

not a technical services royalty if Indian services recipient did not acquire know-how

The taxpayer was a wholly-owned Indian subsidiary within the Bombardier group, that was engaged in the business of manufacturing and supply of rail transportation systems. A Canadian Bombardier company ("BT Canada") provided it with and charged (based on a calculation of the taxpayer's share of globally incurred costs) for information system support services, such as e-mail database, control tools and time management systems, bar coding solutions, an HR payroll system, a finance reporting system, and management software systems, none of which resulted in the taxpayer obtaining control or use of the hardware or server involved. The assessing officer treated the payments as fees for technical services that were subject to withholding.

In addition to finding in the taxpayer’s favour on a domestic withholding issue, Kumar J also addressed Article 12 of the Canada-India Treaty, which assimilated services to royalties as follows:

4. For the purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.

In finding that the "make available" test in subpara. 4(b) was not satisfied, so that the fees were not royalties under Art. 12, Kumar J stated (at paras. 15-17):

The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. ...

De Beers [CIT v. De Beers India Pvt. Ltd (2012) 346 ITR 467 (Kar), I.T.A. No. 35/2010]...posed the question, as to “what is [the] meaning of make available”… and proceeded...as follows:

… [T]o fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. …

The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. … [P]ayment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

… [I]t is not even the case of the Assessing Officer that the assessee, i.e. recipient of services was enabled to use these services in future without recourse to BT Canada. The...mere fact that there were certain technical inputs or that the assessee immensely benefited from these services...is wholly irrelevant.

Tech Mahindra Limited v Commissioner of Taxation, [2016] FCAFC 130

exception in the Australia-India Treaty for “effectively connected” royalties was not intended to exempt royalties not attributable to the source country PE from source country withholding

The Indian-resident taxpayer performed services for its Australian customers from its offices in India and through an Australian permanent establishment. Art. 12(4) of the Royalty Article of the Australia-India Treaty provided:

The provisions of paragraphs (1) and (2) [of Art 12] shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein…and the property, right or services in respect of which the royalties are paid or credited are effectively connected with such permanent establishment…. In such a case, the provisions of Article 7 … shall apply.

The Indian taxpayer argued that the royalties received by it in India (which were accepted by Australia as not being attributed under Art. 7 to the Australian PE) nonetheless were “effectively connected” to that PE in the sense that the work in India advanced the common goal with the Australian PE of servicing the Australian customers. The taxpayer then argued that the quoted statement - that Art. 12(2) “shall not apply” - meant that Australia was precluded from imposing withholding tax on these royalties.

In rejecting this submission, and finding that the royalties were subject to Australian withholding tax, the Court stated (at paras 31, 43):

Article 12(4) is to be construed in the context that Art 7(7) gives priority to Art 12 over Art 7. Without Article 12(4), royalties forming part of the business profits of an enterprise attributable to a permanent establishment in the source State would be taxable by the source State but subject to a limit on the amount of tax that may be charged. No evident object or purpose is indicated, and none was suggested by the Appellant, for construing Art 12(4) in a way that would disentitle the source State from the right at all to tax a payment otherwise within the scope of Art 12(2) but outside the scope of Art 7. To the contrary, the evident purpose of Art 12(4) is to relieve the source State from the limitation on taxing rights imposed under Art 12 by taxing such royalties under Art 7, not to disentitle the source State from any taxing rights where otherwise Art 7 would not give such taxing rights. Such a construction gives effect to the language of Art 12(4) and is consistent with the extrinsic materials. …

Used as an adverb in conjunction with “connected”, “effectively connected with” should be understood to mean having a real or actual connection with the activities carried on through the permanent establishment. Whether or not such a connection exists is not answered merely on the basis that the property, rights or services provided “serve to effect the purposes of the permanent establishment”.

Words and Phrases
effectively connected

Technip Singapore Pte Ltd. v. Director of Income Tax, W.P.(C)--7416/2012, 2 June 2016 (Delhi High Court)

charges for use of the installer’s own equipment were not royalties for equipment use

The taxpayer was a Singapore company which installed a marine crude oil receiving facility over a 41-day period for Indian Oil Corporation Ltd (“IOCL‟) at a contract price of U.S.$18.6 million. Although the facility belonged to IOCL, its installation required the taxpayer to use its own barges containing specialized equipment, with 68% of the contract price allocated to this use (referred to as the “the mobilisation/demobilisation charges.”)

The definition of “royalties” in Art. 12.3(b) of the Singapore-India Double Taxation Avoidance Agreement (DTAA) included payments for the use of or the right to use any “industrial, commercial or scientific equipment.” In rejecting a submission on behalf of the Director of Taxation that the mobilisation/demobilisation charges were royalties, Dr Muralidhar J stated (at paras. 24, 36):

...IOCL did not have dominion or control over the equipment.

There is a difference between the use of the equipment by the Petitioner ‘for’ IOCL and the use of the equipment ‘by’ IOCL. Since the equipment was used for rendering services to IOCL, it could not be converted to a contract of hiring of equipment by IOCL.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 5 major installation project lasting 41 days was not a PE 104

Velcro Canada Inc. v. The Queen, 2012 DTC 1100 [at 2966], 2012 TCC 57

The taxpayer had previously paid royalties under a licence agreement with an affiliated Netherlands corporation ("VIBV"). When VIBV became a resident of the Netherlands Antilles, VIBV assigned the licence agreement (but not the patents or trade-marks) to its newly-incorporated Netherlands-resident subsidiary ("VHBV"). Under the assignment agreement, VHBV was required to pay to VIBV 90% of the royalty fees earned by it. The taxpayer withheld Part XIII tax at the Treaty-reduced rate of 10% on the royalty fees paid to VHBV on the basis that VHBV was the "beneficial owner" of the royalties under Article 12 of the Canada-Netherlands Convention. The Minister assessed the taxpayer on the basis that VIBV was the beneficial owner, so that Part XIII tax had been required to be withheld by the taxpayer at the non-Treaty reduced rate of 25% (Canada having no tax treaty with the Netherlands Antilles).

In allowing the taxpayer's appeal, Rossiter ACJ. found that VHBV was the beneficial owner of the royalties. Despite a contractual obligation for VHBV to transfer 90% of the royalties to VIBV, the flow was not automatic in practice. Moreover, VHBV had been established to manage licensing royalty stream, and had independent discretion as to how its 10% share of revenue should be spent. The royalty fees were also co-mingled with other accounts before going to VIBV, and the amounts received and paid by VHBV were different, so that it was not clear that the amounts paid to VHBV were the same funds as those paid to VIBV. VHBV also assumed risk in respect of the royalties because the incoming and outgoing amounts were donominated in different currencies.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency alleged agent had discretion and no power to bind 133

Canada v. Dawn’s Place Ltd., [2006] GSTC 137, 2006 FCA 349

International subscribers to the registrant's internet website were granted a "non-exclusive, limited and revocable licence to download and view the content of the website" on their computer. In finding that the subscription fees were not zero-rated consideration, Sharlow J.A. quoted with approval a statement of the OECD Model Tax Convention on Income and Capital that:

"Thus, in a transaction that in essence is an acquisition of data or images transmitted electronically, any incidental copying is merely the means by which the data is captured and stored. The essential consideration for the payment in that case is the data, not the use of the copyright, even though copyright is incidentally used."

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule VI - Part V - Part V-10 use of copyright in downloading images was only incidental 111

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

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.

Administrative Policy

27 March 2018 External T.I. 2017-0715561E5 - Withholding tax on royalties for streamed content

television and broadcasting included digital streaming

Canco streams movies and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a TV video stream and a digital content library. Canco pays a royalty to an arm’s length U.K. content provider (“U.K. Content Provider”) that is based on the amount of viewing of the digital content by Canco’s subscribers. Canco either stores its digital content on a server that is located outside of Canada or it is streamed directly by the U.K. Content Provider to Canco’s subscribers.

CRA found that the royalty payments could be bifurcated between a component taxable under s. 212(5) and a non-taxable component, stating that “a portion of the payments to the U.K. Content Provider relates to the use or reproduction of the digital content outside of Canada since Canco’s server is situated outside of Canada and the foreign subscribers are viewing the streamed content outside of Canada.”

Art. 12 of the Canada-U.K Treaty exempted copyright royalties, but there was an exclusion from this exemption for payments in respect of motion pictures or of works on film, videotape or other means of reproduction for use in connection with television broadcasting. CRA rejected an argument that the definition of “broadcasting” in the Interpretation Act had the effect of making this exclusion inapplicable to TV shows. Instead “an ordinary meaning was intended to be given to the words ‘television’ and ‘broadcasting’ and … their meaning, under either domestic or international law, is broad enough to include the digital streaming of television content” – so that the applicable Treaty rate was 10%, not zero. CRA then stated:

[T]he reduced withholding tax rate of 10% could also apply for the payments related to Canco’s foreign subscribers if the right in or to the use of the digital content was partly used or reproduced in Canada prior to being streamed to these foreign subscribers for viewing outside of Canada or if it was being streamed in Canada.

Words and Phrases
television
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(5) NR fee for streamed films and TV shows taxable under s. 212(5) only re Canadian use or reproduction 307
Tax Topics - Statutory Interpretation - Interpretation Act - Section 35 - Subsection 35(1) - Broadcasting Interpretation Act definition of broadcasting not applicable to Treaty interpretation of those words 232

1 June 2018 External T.I. 2017-0723051E5 - Meaning of "Relieved from Tax"

rate reduction inapplicable where received by remittance-based UK resident free of UK tax

A former Canadian author, who now was resident but not domiciled in the UK, was not subject to UK tax on royalties he received from a Canadian publisher because the royalties were not remitted to the UK. Art. 27(2) of the Canada-UK Convention effectively provides that where under the Convention “any income is relieved from tax in” Canada and that income is subject to tax in the UK only on a remittance basis, then “relief to be allowed under this Convention in [Canada] shall apply only to so much of the income as is taxed in” the UK.

These words indicated that the royalties that he thus received free of UK income tax were subject to Canadian withholding tax at 25% rather than the Treaty-reduced rate of 10%.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 29 Canadian royalties received exempt of U.K. tax by non-dom U.K. resident not eligible for Treaty-reduced rate 265

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

lump sum paid for distributorship rights 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 and not subject to withholding under s. 212(1)(d) - but that the exclusivity of the distributorship right granted by NRco was a “restrictive covenant,” so that the lump sum would be subject to Part XIII tax under ss. 56.4(2) and 212(1)(i).

However, turning to the Treaty, the Directorate stated:

To the extent the Upfront Payment is subject to Part XIII tax under subparagraphs 212(1)(d)(i), 212(1)(d)(iv) or paragraph 212(1)(i), the Upfront Payment should be exempt from Canadian withholding tax under Article VII … .

A substantially similar definition of the term “royalties” [to that in the Treaty] is found in Article 12 of the Model Convention … .

Paragraph 10.1 of the OECD commentary (the “OECD Commentary”) on Article 12 of the Model Tax Convention states that payments made in consideration for obtaining the exclusive distribution rights of a product in a given territory do not constitute royalties within the meaning of the Model Tax Convention as they are not made in consideration for the use of, or the right to use, an element of property included in the definition. We are in agreement… .

Words and Phrases
royalty
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 - 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

15 June 2015 External T.I. 2014-0525501E5 - Royalty payments & the US or UK Treaties

fees paid to the U.S. or U.K. for access to customer lists were exempt royalties

Canadian-resident UserCos, who use existing confidential lists of the names and addresses of customers who have purchased certain types of products (“Lists”) for marketing purposes, pay CanCo fees based upon their use of the Lists. CanCo sources the information for the Lists from various corporations (“OwnerCos”) that are resident in the U.S. or U.K., which generate business profits by collecting fees for the right to use their Lists, and do not have a Canadian permanent establishment. OwnerCo provides the List directly to the UserCo pursuant to agreements between them. The List, although remaining on UserCo’s database, is required to be treated as confidential information proprietary to OwnerCo. Should the fees paid by CanCo to the OwnerCos considered as “royalties” as per Art. XII, para. 4 of the US Treaty and Art. 12, para. 4 of the UK Treaty and, if so, is the relief in para. 3(c) or 3(b) of the respective Treaties available? Turning first to the US Treaty, CRA stated:

[T]here has not been a transfer of ownership of the information, but simply permission has been granted to use the information on the Lists for an approved purpose…[so that] the payment can be said to be “for the use of or the right to use…” the information on the Lists. …

[T]he OwnerCos have information in their possession due to their special knowledge and experience and there is little that needs to be done to meet the request by CanCo to provide the Lists. The information on the Lists is considered confidential as it is not generally available to the public and CanCo can derive an economic benefit from the disclosure of the List by OwnerCo. Therefore… the Lists constitute “information concerning industrial, commercial or scientific experience”… .

… CanCo (the payer) is a resident of Canada and therefore, it is our view that the payment arose in Canada.

CRA concluded that the UK Treaty applied in the same way:

[I]f Fee #2 were paid to an OwnerCo resident in the UK, it would fall into the definition of “royalties” in paragraph 4 of Article 12 of the UK Treaty. However, it would meet the exemption under paragraph 3(b) of Article 12 and would be exempt from Part XIII withholding taxes in Canada.

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). However, they would be "royalties" under Art. XII, para. 4 of the Canada-US Tax Convention (the "Treaty"). CRA stated:

payments arising in Canada that are beneficially owned by a resident of the US and that are for the use of any information concerning industrial, commercial or scientific experience would be taxable only in the US, and not subject to Part XIII tax pursuant to paragraph 3 of article XII of the Treaty.

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 - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(v) client list utilization payments to U.S. resident 133

23 January 2015 External T.I. 2013-0509771E5 - Oil & gas payments made to U.S. resident

non-application of Art. 12 of US Treaty to resource royalties

Mr. A, a U.S. resident, grants the right to drill for or take the oil & gas from his Canadian freehold property to a Canadian company, in consideration inter alia for annual royalties payable out of any oil & gas production. After noting that in any event the royalties could be taxable to Mr. A under s. 115(1)(a)(ii) or (iii.3) rather than s. 212(1)(d)(v), CRA stated:

The annual royalty payments arising from the oil and gas rights paid by the company to Mr. A are not included in this definition [in Art. XII of the Canada-US Treaty]. As a result, they do not qualify for the 10% treaty rate under paragraph 2 of Article XII of the Treaty. Therefore, the company must withhold and remit 25% of the annual royalties paid to Mr. A.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(iii.1) negative CCDE pool for non-resident individual 170
Tax Topics - Income Tax Act - Section 66.4 - Subsection 66.4(5) - F FMV addition and subtraction where drilling rights are granted for royalty 137
Tax Topics - Income Tax Regulations - Regulation 805 application to resource royalties 235
Tax Topics - Treaties - Income Tax Conventions - Article 6 negative CCDE gain from grant of oil and gas royalty not exempt under US Treaty 166

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

contingent payments came within broad Treaty definition of royalty

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, such that they do not qualify as royalties, per se." However, they were royalties under the Ireland-Canada Convention - but were exempt under Art. 12, subpara. 3(b) as royalties for the use of, or the right to use, any patent or information concerning industrial, commercial or scientific experience.

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 - 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

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

CRA was asked 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). After noting that such fees paid by Aco likely would be characterized as payments "for information concerning industrial or commercial experience...[within] subparagraph 212(1)(d)(ii) of the Act," CRA went on to indicate that they likely would be exempt under Art. XII of the Canada-US Income Tax Convention:

Where a resident of the U.S. is in receipt of payments for services made in the course of its business carried on in the U.S., it would be exempt from taxation in Canada by virtue of paragraph 1 of Article VII of the Treaty. However, paragraph 6 of Article VII of the Treaty states that if an element of the business profits is dealt with separately in other provisions of the Treaty, then those provisions are to be considered. In our view, payments made to a non-resident for information concerning industrial or commercial experience fall under the provisions of Article XII of the Treaty.

...The exemption under paragraph 3(c) [of Art. XII] covers payments for information concerning commercial and industrial experience. Therefore, a nil rate of tax applies to the gross amount of payments for the use of, or the right to use, information concerning industrial or commercial experience.

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.

CRA found that, although the fees otherwise would have been subject to Part XIII withholding tax under s. 212(1)(d)(iii)(A), they 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 they did not come within the "royalties" definition in Art. XII of the Canada-US Convention. Assuing the US publisher had no permanent establishment in Canada, the fees also would be exempt under Art. VII, para. 1.

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."

2012 Ruling 2011-0416821R3 - Article XII of Canada-US Tax Convention

A qualifying US-resident ("Pubco") provides Canco with an exclusive licence to manufacture and distribute some product lines in Canada, with a "royalty-free" licence of trademarks used in promoting and selling the products. Pubco provides only minimal ancillary support, e.g., the provisions of instructional materials for use by the product purchasers "and will not impose any restrictions on the manner in which Canco may carry on its business."

The amounts paid by Canco to Pubco (calculated pursuant to an agreed formula) are (to the extent that they are for the use of, or the right to use, any patent or know-how) taxable only in the US by virtue of Article 12, para. 3(c) of the Canada-U.S. Convention.

2011 Ruling 2011-0416891R3 - Fees for Digital Content & Management Services

A US LLC ("Corporation C"), whose sole member was a US corporation qualifying for benefits under the Canada-US Convention, ran a platform for the provision of "Digital Content" (movies, television shows, music videos, documentaries and similar audio-visual content) which it (and affiliated corporations) were permitted to distribute under content licence agreements with the third-party holders of the copyright. Canadian distributors (described as "Customers") created online storefronts for Canadian individual home users, running on Corporation C's platform, with customized design and branding for the Canadian Customers. Although the home users were licensed the right to receive Digital Content by virtue of agreements they entered into only with the Canadian Customers, it was Corporation C which collected the fees from them and operated the "online store", and it was stated in the description of facts to be the beneficial owner of those payments.

CRA ruled that fees collected from Canadian home users were exempt from Part XIII tax under Art. XII(3)(a) of the Convention. The exclusion in that provision for "payments in respect of motion pictures," was not discussed (presumably because it was accepted not to be applicable - see 2011-0374421E5).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(4) - Paragraph 212(4)(a) management of on-line store 228

1 February 2012 External T.I. 2012-043157 -

Oil royalty payments are covered by Art. VI, para. 2 of the Canada-US Convention ("amounts computed by reference to the amount or value of production from...resources") rather than by Art.XII, para. 4 ("payments...for...the use of...tangible personal property") and, accordingly, are not subject to the Treaty-reduced withholding tax rate.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 6 51

22 February 2011 External T.I. 2011-0374421E5 -

The exemption in the Canada-US Convention for royalties paid for the reproduction of motion picture films (in this case, on videos) for private home use rests on the 1984 US Treasury Explanation to that Convention. In the case of other similarly-worded treaties, such as those with the UK, France and Thailand, this interpretation does not apply so that such royalties are subject to Treaty-reduced rates of Part XIII tax (of 10%, 10% and 15%, respectively, in the case of those three countries) rather than being exempt.

19 April 2011 External T.I. 2011-0392761E5 - Motion picture films, ITA 212(5)

A Canadian-resident company (Canco) uses motion pictures distributed to it by a US and French company by reproducing them in Canada in digitized form and encrypting, in order that it can provide them to Canadian customers using its specialized software. The fees paid to the US distributor (a qualifying US resident) are subject to Part XIII tax at a Treaty-reduced rate of 10%, and the fees paid to the French distributor are exempt from Part XIII tax if the conditions in Art. XII, para. 4(a) of the Canada-France Convention are satisfied.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(5) film reproduction in encrypted form 91

TPM-06 "Bundled Transactions" 16 May 16 2005

The distinction between know-how and other royalties/services is not always clear so it is important to give special consideration to these types of transactions between non-arm's length parties in Canada and the United States. Generally, know-how is the confidential technical information that is necessary to reproduce a product or process and may provide a competitive and/or comparative advantage. An example includes the narrative description and diagrams of a secret manufacturing process such as those used in pharmaceutical drug development.

Know-how differs from the provision of services in that the technical information, which already exists, is disclosed to another party for use of their own account. Other than providing the information, the payee's contractual obligation will not be substantial, and they retain an interest to the information provided (that is, the payer will be subject to a confidentiality agreement). On the other hand, a service provider undertakes and performs a task for the other party without necessarily transferring to them pre-existing knowledge, skills, or expertise.

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Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) 141

Income Tax Technical News, No. 25, 30 October 2002, "E-Commerce"

2002 Tax Executives Institute Roundtable Q. 19, 2002-0173855 -

Respecting the position of Canada that after May 27, 2002 a payment for the use of custom computer software will only be subject to the royalty article of a particular convention if there is a reference to other intangible property in the royalty definition and there is no specific exclusion in the royalty article for computer software, CCRA noted that there is no change in assessing practices for payments made before March 28, 2002.

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

As Canada has removed its observation on Article 12 of the OECD Model Convention, CCRA generally will no longer view payments by a user of computer software pursuant to a contract that requires the source code or program to be kept confidential, as payments for the use of a secret formula and process and, thus, as constituting royalties. However, CCRA will view such payments as royalties within the definition of royalty if the particular Convention refers to "payments ... for the use of, or the right to use ... other intangible property."

15 October 1997 T.I. 970018

After indicating that "franchise" had its broad meaning under the Canadian domestic income tax jurisprudence as described in IT-477, RC indicated that although the term "franchise" as used in Article 12 of the Canada-U.S. Convention covers a broad range of commercial arrangements, it agreed "that the transfer of know-how, in and of itself, does not constitute a franchise agreement".

19 February 1997 T.I. 961630

In noting that royalties paid for a licence to make videos available to the patrons of a health club, who view videos on installed televisions sets while they exercise, will not be exempt from withholding tax, RC stated:

"Royalties in respect of the production or reproduction of motion pictures or video tapes which are not for private (home) use, including but not limited to those used in connection with television broadcasting, are not exempt. Note that private (home) use does not include showing a copyright work in public, such as bars, health clubs, airplanes, or other facilities generally open to the public."

27 June 1996 T.I. 960522

Payments made by a Canadian resident user to a U.S. resident supplier for accessing an information data base located in the U.S. via a modem located in Canada would be exempt as being for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Where the information was accessed by subscription to an information CD-ROM, part of the payment would appear to be for the use of, or the right to use, software and would be exempt, instead, on that ground.

1996 Ontario Tax Conference Round Table, Q. 3 (No. 9630040)

RC has not formulated a position on the essential characteristics of a franchise agreement for purposes of subparagraph 3(c) of Article XII of the U.S. Convention, and it is a question of fact whether an arrangement is "in connection with a rental ... agreement".

1996 Ontario Tax Conference Round Table, Q. 1 (No. 9630030, see also 9621950a)

In general, payments to a U.S. or Netherlands resident for rights in respect of the use of custom computer software in Canada will be exempt on the basis of being: payments for the use of, or the right to use, computer software exempt under Article XII; payments in respect of the production or reproduction of software exempt under s. 212(1)(d)(vi); or payments for marketing or distribution rights that are exempt under the business profits article. In order for royalty payments to qualify for exemption as being for distribution rights, the payor must have exclusive rights to distribute.

6 September 1995 T.I. 951889

RC accepts that royalties paid for the use of, or the right to use, know-how as defined in paragraph 11 of the Commentary on Article 12 of the OECD Model Income Tax Convention constitute payments for the use of, or the right to use, information concerning industrial, commercial or scientific experience. The exemption in subparagraph 3(c) of Article 12 of the Canada-U.S. Treaty applies only to payments for the use of, or the right to use, the benefits that have arisen as a result of R&D and not the R&D expenditures that sells.

22 March 1995 External T.I. 5-941918 -

Where the Italian branch of a Canadian corporation pays royalties to a German affiliate of the Canadian corporation as the result of the licensing of a trademark by the German affiliate to the Italian branch, withholding tax is exigible by virtue of s. 212(1)(d) of the Act and Article 12 of the Canada-Germany Convention.

6 March 1995 Memorandum 942876 (C.T.O. "Video Reproduction Rights")

The exemption in Article XII of the Canada-U.S. Convention for copyright royalties does not apply to royalties for video tape works intended for private (home) use.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(5) 16

20 December 1994 T.I. 942143

With respect to a situation where a Canadian company pays royalties to a resident of the U.K. for the right to reproduce certain movies, television series and children's programs in video format with the resulting videos being sold to distributors who would, in turn, rent or sell the videos to the public for private use, RC stated "that if the payments are computed on the basis of the number of times a video movie is shown and/or viewed rather than on the number of copies of the video produced, the payments would not fall within the exemption in paragraph 3 of Article 12 as they would not be considered to be in respect of the production or reproduction of the work".

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

The payment to a non-resident for the right to distribute computer software is generally taxable under s. 212(1)(d). Such payments made to a resident of the U.S. would not come within the definition of royalties in Article XII of the Canada-U.S. Convention and, therefore, would be exempted under Article VII unless the related income is attributable to a permanent establishment.

29 July 1994 T.I. 941869

Payments made by a Canadian resident to a U.S. resident for the right to distribute computer software would generally be taxable under s. 212(1)(d), but would not fall under the definition of royalties in Article 12 of the U.S. Treaty and, therefore, usually would be exempted from tax under Article 7.

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 not bilateral agreements currently in force wherein such payments are exempted from tax."

93 C.M.TC - Q. 11

If a resident of a non-treaty country owning computer software rights licences them to residents of Canada "via" a Dutch corporation to take advantage of the exemption in the new protocol, the exemption in the new protocol will not apply if the interposed Dutch corporation is not the beneficial owner of the royalty payments. The beneficial owner is not necessarily the legal owner.

5 January 1993 T.I. 922053 (November 1993 Access Letter, p. 509, ¶C180-153; Tax Window, No. 28, p. 8, ¶2404)

Where a Canadian firm agrees with an American firm to duplicate video cassettes for sale or distribution through rental establishments for non-commercial use by the end users, the payments made for such duplication rights will not be subject to Part XIII tax, even though the source of the work might be a motion picture film.

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."

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

Payments made for the use of a trademark are not exempt under Article XIII(3) of the Canada-U.S. Convention because they are not in respect of copyright.

10 January 1990 T.I. (June 1990 Access Letter, ¶1281)

The definition of royalties in the Canada-U.S. Income Tax Convention includes payments made to a resident of the U.S. for the use of computer software.

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