The TSO proposed to impose withholding tax (at a Treaty-reduced rate of 10%) on consideration paid prior to March 28, 2002 by a Canadian resident, for the granting by a UK resident of permanent non-exclusive licences allowing the Canadian resident to use, download, execute, employ and store software owned by the non-resident, on the basis that the payments met the definition of "royalties" in Art. 12(4) of the Canada-UK convention, since they were regarding the use of a secret formula or process. On the above date, Canada withdrew its observation that it did not adhere to paras. 14 through 14.3 of the Commentary, that payments by a user of computer software pursuant to a contract that requires that the source code or program be kept confidential, are payments for the use of a secret formula or process and thus are royalties within the meaning of paragraph 2 of the Art. 12.
The Directorate indicated that Canada's withdrawal of its Observation on Art. 12 on March 28, 2002 was prospective so that such proposed assessment was well founded.