Principal Issues: [TaxInterpretations translation] In the situation submitted, are royalties paid for the use of a trade-mark by a Canadian corporation to a foreign licensor attributable to wares sold through a foreign subsidiary subject to paragraph 212(1)(d) interpreted in light of section 4 of the Trade-marks Act?
Position: Yes.
Reasons: Reading of the Act and interpretation.
XXXXXXXXXX Income Tax Rulings Directorate
Yannick Roulier
(613) 957-2134
2009-034948
Attention: XXXXXXXXXX July 26, 2010
Dear Madam:
Subject: 212(1)(d)(i) - Use of a trade-mark in Canada
This is in response to your letter of November 26, 2009 requesting our views on the application of subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act") in the following hypothetical situation. Unless otherwise stated, the following are legislative references to the provisions of the Act (R.S.C. 1985, c. 1 (5th Supp.)) as amended, in force as of the date hereof.
Hypothetical Situation Submitted
1. Canco is a taxable Canadian corporation that produces consumer goods and sells them to retailers.
2. USco is a wholly-owned U.S. subsidiary of Canco.
3. Canco acquires a licence to use a trademark from a U.S. licensor with whom it deals at arm's length (the "Licensor").
4. The user licence provides for the payment of royalties to the Licensor based on the number of production units sold.
5. Canco has the right to use the trademark in connection with the sale of its goods and may exercise this right both in Canada and in the United States.
6. The goods are manufactured in a third country other than Canada or the United States by manufacturers with whom Canco and the Licensor deal at arm's length.
7. In accordance with the terms of the trademark licence, foreign manufactured goods are sold in part by Canco to retailers in Canada and in part through USco to retailers in the United States.
8. For sales in the United States, USco purchases the goods from Canco on an "FOB destination" basis, i.e., in the United States. The goods are shipped directly to the United States from the foreign manufacturing plant without passing through Canada, before being sold to retailers in the United States.
9. Under the terms of the licence agreement, the Licensor's right to receive a royalty for the use of the trademark arises at the time the goods are sold to third party retailers. In this respect, sales between Canco and USco are specifically excluded from the determination of the amount of royalties payable to the Licensor.
In this context, you submitted that it follows from the Trademarks Act (R.S.C. 1985, c. T-13, "TMA") that the use of a trademark in association with wares manifests itself in the sale of the wares on which the trademark is displayed or affixed. In this regard, the relevant provisions of the TMA read as follows:
“2 In this Act,
[…]
"use," in relation to a trademark, means any use that by section 4 is deemed to be a use in association with wares or services;
[…]
4 (1) A trademark is deemed to be used in association with wares if, at the time of the transfer of the property in or possession of the wares, in the normal course of trade, it is marked on the wares themselves or on the packages in which they are distributed or it is in any other manner so associated with the wares that notice of the association is then given to the person to whom the property or possession is transferred.
[…]
(3) A trademark that is marked in Canada on wares or on the packages in which they are contained is, when the wares are exported from Canada, deemed to be used in Canada in association with those wares.”
Question
Your question is whether the royalties paid by Canco to the Licensor that are attributable to the goods sold through USco are subject to the withholding tax under Part XIII of the Act given the wording of subparagraph 212(1)(d)(i) interpreted in light of subsections 4(1) and 4(3) of the TMA.
Comments
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5 issued on May 17, 2002, it is the practice of the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. If your situation involves a specific taxpayer and a transaction, you should forward all relevant facts and documents to the appropriate CRA Tax Services Office for its views. However, we would be pleased to provide the following general comments, which we hope you will find helpful. These comments are technical interpretations that are not binding on the CRA and may, in some circumstances, not apply to your particular situation.
We do not agree with the argument that subparagraph 212(1)(d)(i) must be interpreted in light of subsections 4(1) and 4(3) of the TMA in the context of the hypothetical situation outlined above. It is our view that royalty payments made by Canco to the Licensor in the hypothetical situation presented would generally be subject to Part XIII withholding tax under paragraph 212(1)(d). The withholding tax would therefore apply to the full amount of the royalty payments paid, including the portion of the payments attributable to the goods sold through USco.
Paragraph 212(1)(d) states, in part, that "every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits … on account or in lieu of payment of, or in satisfaction of … rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, …"
Considering that the payments made under the hypothetical situation submitted constitute royalties, we are of the opinion that they are therefore subject to paragraph 212(1)(d) without the need to refer to paragraph 212(1)(d)(i). The words "but not so as to restrict the generality of the foregoing” support such an interpretation. In this regard, paragraph 5 of Interpretation Bulletin IT-303 - Know-How and Similar Payments to Non-Residents, issued by the CRA on April 8, 1976, states in paragraph 5:
… This means that if an amount is rent, royalty or a similar payment, it need not fall within the specific cases enumerated in subparagraphs (i) through (v) in order to attract withholding tax.
We hope that the above 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.