2014-0549281E5 Paragraph 212(1)(d) and Patent License

Principal Issues: Whether paragraph 212(1)(d) applies to a payment made by a corporation resident in Canada (the "Taxpayer") to a non-resident of Canada and a resident of country A on behalf of its controlled foreign affiliate, a resident of country B. The Taxpayer initially entered into a licensing agreement for the worldwide rights to use a particular patent, but subsequently assigned the Patent Right Agreement to the controlled foreign affiliate.

Position: Question of fact.

Reasons: To the extent that the payment made by the corporation resident in Canada to the non-resident is a rent, royalty, or similar payment, the full amount of the payment would be subject to Part XIII withholding tax pursuant to paragraph 212(1)(d). Additionally, whether or not the payment was a rent, royalty or similar payment, subparagraph 212(1)(d)(i) would apply to the extent that the payment was for the use of or for the right to use in Canada the particular patent. The determination of whether or not paragraph 212(1)(d) applies to a particular payment by a Canadian resident to a non-resident person is a question of fact based on the legal nature of the transactions and the legal relationships between the parties involved in the series of transactions. A review of all the facts surrounding a particular situation would be required to conclude if the particular payment would be subject to Canadian withholding tax

Author: Chang, Jack Yu-Fan
Section: 212(1)(d)(i)

XXXXXXXXXX                                      2014-054928
                                                              J. Chang
                                                              (416) 973-0022

February 8, 2016

Dear XXXXXXXXXX:

Re:  Withholding Tax and Royalty Payments

We are writing in response to your letter dated October 1, 2014, in which you requested our views on the application of paragraph 212(1)(d) of the Income Tax Act (the “Act”).  We also acknowledge your emails, the last of which was received by us on January 18, 2016.  We apologize for the delay in responding.

Specifically, you have asked us whether a payment from a corporation resident in Canada (“Canco”) to a corporation not resident in Canada is subject to Part XIII tax on the basis that the payment was for the use of a patent outside of Canada.  In particular, you have advised us that:

*     On behalf of its subsidiary in XXXXXXXXXX (“Subsidiary”), Canco has entered into an agreement with a corporation resident in another country (“Licensor”) for the worldwide rights to use a particular patent (the “Patent Rights Agreement”);

*     Under the terms of the Patent Rights Agreement, Canco has the right to transfer or assign its rights and obligations pursuant to the Patent Rights Agreement to a related party;

*     Canco granted an authorization of license usage to Subsidiary for use only in XXXXXXXXXX;

*     Canco made the payment to the Licensor and Part XIII tax was withheld and remitted by Canco;

*     Subsidiary reimbursed Canco for the payment made by Canco to Licensor and the Part XIII tax withheld.

Our Comments

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.  Nevertheless, we offer the following general comments on the Canadian tax implications, which we hope are of assistance to you.

In general, paragraph 212(1)(d) of the Act imposes withholding tax on payments to non-residents for rents, royalties and similar payments.  Subparagraphs 212(1)(d)(i) through (v) include additional specific payments, while subparagraphs 212(1)(d)(vi) through (xii) exclude specific payments.  As such, to the extent that the payment made by Canco to Licensor is a rent, royalty, or similar payment, the full amount of the payment would be subject to Part XIII withholding tax.

Additionally, subparagraph 212(1)(d)(i) specifically applies to payments made for the use of or for the right to use in Canada property as outlined therein.  As such, if the payment made by Canco to Licensor was not a rent, royalty or similar payment, subparagraph 212(1)(d)(i) would apply only to the extent that the payment was for the use of or for the right to use in Canada the particular patent.  Canco would have to determine what portion of the payment, if any, was for the use or right to use the patent in Canada and, therefore, subject to Part XIII withholding tax.

The determination of whether or not paragraph 212(1)(d) applies to a particular payment by a Canadian resident to a non-resident person is a question of fact based on the legal nature of the transactions and the legal relationships between the parties involved in the series of transactions.  A review of all the facts surrounding a particular situation would be required to conclude if the particular payment would be subject to Canadian withholding tax. 

If the Licensor is of the view that an amount withheld pursuant to Part XIII should be refunded, reference should be made to Information Circular 77-16R4, dated May 11, 1992, which describes the procedure for obtaining a refund of withholding tax where applicable. In this regard, generally, the Licensor may apply for a refund of withholding taxes by completing form NR7-R, which is available on the CRA website, and mail it to the Non-Resident Withholding Division of the International Tax Services Office at 2204 Walkley Road, Ottawa, Ontario Canada K1A 1A8. 

Finally, given the specific nature of your question, please note that we have not considered the application of any other provision of the Act in the context of your query; however, we would note that transfer pricing implications should be considered.

We trust these comments will be of some assistance.

Yours truly,

Terry Young, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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