Principal Issues: [TaxInterpretations translation] In the submitted situation, are royalties paid by a Canadian corporation to a US corporation in respect of performances of a dramatic work exempt from withholding tax pursuant to subparagraph 212(1)(d)(vi)?
Position: Yes.
Reasons: Position stated in IT-303.
XXXXXXXXXX Income Tax Rulings Directorate Yannick Roulier (613) 957-2134 2010-035492 Attention: XXXXXXXXXX
May 26, 2011
Dear Sir:
Subject: 212(1)(d)(vi) – Tax exemption for copyright royalties
This is in response to your letter of January 20, 2010 in which you asked us for our opinion on the application of subparagraph 212(1)(d)(vi) of the Income Tax Act (the "Act") in the following hypothetical situation. Unless otherwise noted, the following legislative references are to the provisions of the Act (R.S.C., 1985, c.1 (5th Supp.)) as amended, effective on the date hereof.
Hypothetical Situation Submitted
1. Canco is a taxable Canadian corporation with a place of business in the province of Quebec. It works in the field of theater and the performing arts.
2. Canco plans to stage foreign plays in Quebec.
3. USco is an American company that deals at arm's length with Canco.
4. USco represents the American author of a play that Canco wishes to adapt for performances in Quebec.
5. Canco and USco enter into an agreement under which Canco is granted the right to translate from English to French and to adapt the play by the American author, the right of reproduction of copies of the theatrical text for the purposes of the staging and preparation of the play, as well as the exclusive right to perform the play in Québec.
6. The agreement has an initial term of twenty-four (24) months and includes optional renewal periods in Canco's discretion. However, these renewal options are subject to a minimum performance threshold.
7. The agreement provides that all rights relating to the translated and adapted version of the original text of the work will be acquired by the American author.
8. The agreement provides for the monthly payment of royalties to USco equal to 10% of the gross receipts from the sale of admission tickets to the performances of the adaptation of the play.
9. Upon signature of the agreement, a lump sum is paid by Canco to USco as a royalty advance. That amount will be retained by USco even if the royalties payable are lower than the lump sum.
10. Canco assumes all risks and responsibilities related to the translation, reproduction and performances of the play in Québec.
11. USco and the US author will in no way be involved in exploiting the rights granted under the agreement in Canada, and on that basis are not considered to be carrying on business in Canada for purposes of the Income Tax Act.
Question
You asked whether the royalties paid by Canco to USco were subject to Part XIII withholding tax having regard to the exemption under subparagraph 212(1)(d)(vi).
Comments
The situation described in your letter is an actual situation involving taxpayers. As explained in Information Circular 70-6R5 issued May 17, 2002, it is the practice of the Canada Revenue Agency ("CRA") Income Tax Rulings Directorate ("ITRD") not to issue a written opinion regarding proposed transactions otherwise than through advance rulings. If your situation involves a specific taxpayer and a transaction, you must forward all relevant facts and documents to the CRA's appropriate tax services office for their views. We are, however, prepared to provide the following general comments, which we hope will be useful to you. These comments are technical interpretations that are not binding on the CRA and may, under certain circumstances, not apply to your particular situation.
The withholding tax exemption in subparagraph 212(1)(d)(vi) applies in respect of amounts that qualify as royalties or similar payments, paid in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work. The scope of that exemption is discussed in two of the technical interpretations previously made by the ITRD to which you referred in your request, namely 9730076 and 2003-0018975. However, those interpretations no longer represent the position of the CRA. The practice of the CRA is to the effect that a royalty or similar payment respecting a copyright is not subject to any withholding tax under Part XIII of the Income Tax Act, as stated in paragraph 28 of Interpretation Bulletin IT-303SR "Know-how and Similar Payments to Non-residents”, issued September 19, 1985.
We hope that the comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch