Canco streams motion picture films and TV shows (the “digital content”) to its Canadian and foreign subscribers (who pay monthly fees) through a live TV video stream, a delayed TV stream and a digital content library. In order to obtain the rights to the films and TV shows that it streams, 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, and does not change the content received by it.
Are the royalty payments made to the U.K. Content Provider subject to tax under s. 212(5) and, if so, are they exempt under Art. 12(3)(a) of the Canada-U.K. Tax Treaty?
After stating that “a motion picture film that is streamed remains a ‘motion picture film’ and that a streamed TV show is a “means of reproduction” of the TV work, CRA indicated that withholding under s. 212(5) would only be applicable “to the portion of the payments to the U.K. Content Provider which relates to the streaming of the digital content to Canco’s subscribers to the extent that the right in or to the use of the digital content is being used or reproduced in Canada” – except that:
Canadian withholding tax can still apply, should the right in or to the use of the digital content be partly used or reproduced in Canada prior to being streamed to these foreign subscribers for viewing outside of Canada (but only to the extent of the payment that is related to the use or reproduction in Canada) or if it was being streamed in Canada.