March 4, 1992
| North York District Office | Rulings Directorate |
| K.B. Harding | |
| 957-2111 |
Attention: T. Ng
912389
Withholding Tax on Royalties
24(1)
This is in reply to your memorandum of August 20, 1991 wherein you requested our opinion whether royalties paid in the following situation are exempt from withholding tax in Canada pursuant to Article XII of the Canada-U.S. Income Tax Convention (the "Convention").
24(1)
24(1)
(It is our view that the payments made by 24(1) would fall within the provisions of subparagraph 212(1)(d)(i) of the Canadian Income Tax Act (the "Act") and would be subject to withholding tax unless the payments were exempted by virtue of subparagraph 212(1)(d)(vi) of the Act or Article XII of the Canada-U.S. Income Tax Convention (the "Convention").
Under the License Agreement 24(1) has been granted the right and license to use (make and sell) the License Products and to use the Licensed Property. The Agreement provides that the payments are made in respect of the use of designs, packing material, trademarks and copyright. In order to determine whether all or a portion of the payment in question is subject to withholding tax under subparagraph 212(1)(d)(i) of the Act, it will be necessary to apportion the total payments made to 24(1) between those payments made in respect of copyrights and fall within the exemption of subparagraph 212(1)(d)(vi) and those which are not.
Based on the limited information provided, it would be arguable that a portion of any payment made in respect of design and packaging material may well fall within the category of artistic work and be subject to copyright. In Butterworths, "Hughes on Copyright and Industrial Design", the author indicates that the Copyright Act only excludes designs that are ornamental or functional. He also indicated that industrial designs may be registered under the Industrial Design Act and where a design is capable of being registered as an industrial design, the Copyright protection is not available. Therefore, it would appear that designs and packaging material in the case of game boards may be subject to copyright provided you are satisfied that such material falls within the Copyright Act and not the Industrial Design Act. However, if any of the payments are in respect of designs which have been registered under the Industrial Design Act, they would not be subject to copyright and therefore excluded from the exemption provided in subparagraph 212(1)(d)(vi) of the Act.
We would agree that rules of instruction and other written material used in connection with such games will probably be considered as "literary work" and therefore subject to copyright.
In the case of trademarks, Butterworths indicates that a trade mark of distinctive design may qualify as an artistic work capable of acquiring copyright. However, they also state that "(c)opyright does not extend to a single word, name or title that is the field of trade marks, not copyright". Accordingly, it would appear that the trade mark 24(1) would not be subject to copyright.
The taxpayer's representative indicated that amounts paid in respect of trade marks, which do not qualify as copyright royalties, would qualify for the exemption in paragraph 3 of Article 12 of the Canada-U.S. Income Tax Convention (the "Convention") by virtue of the words "...copyright royalties and other like payments in respect of production or reproduction ...". It is our view, in order to fall within the term "other like payments" such payments would have to be made in respect to copyright. Therefore, any payments made in respect of trade marks, designs etc. would have to be subject to copyright law in Canada before they would fall within the exemption set out in paragraph 3. As indicated above a one-word trade mark would not qualify as a literary or artistic work nor would it qualify as a dramatic or musical work for treaty purposes. Consequently, any payments made in respect of the trade mark 24(1) would not be subject to copyright in Canada.
We do not have adequate information to determine whether any of the designs fall within the Industrial Design Act or the Copyright Act, but it is quite likely that all or a portion of the payment for designs will be for designs within the latter Act, however, as indicated above this would be a question of fact.
24(1)
We trust the comments are adequate for your purposes.
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch