Principal Issues: [TaxInterpretations translation] Was Canada's withdrawal of its observation to the Commentary on Article 12 of the OECD Model Tax Convention retroactive?
Position: No.
Reasons: Concession of Canada's right to contribute.
| Mr. Daniel Lasalle Audit Montérégie-Rive-Sud Tax Services 3250 Lapinière Blvd. Brossard (Québec) J4Z 3T8 December 19, 2002 |
Pascal Tétrault |
Dear Mr. Lasalle,
This is further to your email of November 7, 2002, in which you requested clarification regarding the effect of Canada's withdrawal of its observation to the Commentary on Article 12 of the OECD Model Tax Convention (the "Observation").
Your situation involves payments made by a Canadian resident during the months of XXXXXXXXXX for a total of $XXXXXXXXXX to a UK resident company. Those amounts were paid in consideration for the granting of permanent non-exclusive licences allowing the Canadian resident to use, download, execute, employ and store software owned by the non-resident.
Your intention is to tax the payments pursuant to paragraph 212(1)(d)(i) of the Income Tax Act and to apply Article 12 of the Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (the "Convention") to reduce withholding tax to the rate of 10%. Your application of Article 12 of the Convention would be on the basis that the payments met the definition of "royalties" found in the fourth paragraph of that Article, since they were regarding the use of a secret formula or process.
Your question mainly concerns the scope of Canada's withdrawal of the Observation. It was on March 28, 2002 that Canada withdrew the Observation, and you wonder whether payments made prior to the Observation's withdrawal should still be considered as royalties within the meaning of Article 12 of the Convention, given the reason set out in the previous paragraph. In our view, this question should be answered in the affirmative.
The position of the Canada Customs and Revenue Agency ("CCRA") is that the Observation's withdrawal applies prospectively. In this regard, the CCRA considers that Canada was administratively ceding its right to tax payments made after March 27, 2002, even though Canada was still entitled to do so. Consequently, your intention to issue an assessment on the above basis is well-founded.
We wish to emphasize, however, that the terms of a particular agreement must always be analyzed to determine whether payments for the use of software are subject to the section dealing with royalties. For example, a payment for the use of software remains subject to the Royalty Article, even after Observation's withdrawal, when the term "royalties" is defined as a payment for "the use of, or the right to use ... any other intangible property".
Best regards,
Alain Godin
Section Manager
for the Division Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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