D.S. Delorey (613) 957-2129
May 9, 1986
Dear Sirs:
This is in reply to your letter of March 3 asking if payments made to you by a Canadian licensee of your computer software are subject to Canadian withholding tax.
Unless exempted by virtue of the 1980 Canada-U.S. Income Tax Convention (the "U.S. Treaty"), payments made to a U.S. resident for the use in Canada of computer software are subject to a 25% Part XIII tax ("Canadian withholding tax") under the Canadian Income Tax Act. This rate is reduced to 10% under the U.S. Treaty.
With respect to educational institutions, Article XXI of the U.-S. Treaty will exempt from Canadian withholding tax payments made to a U.S. educational institution which is exempt from tax in the U.S., except with respect to income from carrying on a business or trade. Because of this exception, it is our view that Article XXI does not exempt from the above mentioned 10% tax the payments made to you for the use of your computer software. Consequently, it is our view that all payments made to you by a Canadian licensee for the use of your computer software are subject to a 10% Canadian withholding tax.
We trust that the above comments will be of assistance.
Yours truly,
ORIGINAL SIGNED BY
Wrm. R. McColm for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch