2017-0697811E5 Paragraph 212(1)(d)(vi)

Principal Issues: For the purposes of subparagraph 212(1)(d)(vi), does “a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work” include a payment for the right to use a copyrighted artistic work in connection with the manufacture, sale and distribution of products in Canada where the taxpayer ultimately only sells and distributes in Canada products that use that copyrighted work?

Position: Question of fact.

Reasons: Where a payor has entered into a legal agreement by which it has been granted the right to manufacture, sell and distribute products using the copyrighted property of the third party, a payment, to the extent it is a royalty or similar payment, made by the payor to the third party would be considered to be “on or in respect of a copyright in respect of the production or reproduction of any...artistic work” in subparagraph 212(1)(d)(vi) even if the payor does not manufacture any products using the copyrighted property itself.

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

XXXXXXXXXX                                                                                                             2017-069781
                                                                                                                                     J. Chang
                                                                                                                                     (416) 954-5164
January 5, 2018

Dear XXXXXXXXXX:

Re:  Withholding Tax and Royalty Payments

We are writing in response to your letter dated April 7, 2017, in which you requested our views on the application of subparagraph 212(1)(d)(vi) of the Income Tax Act (the “Act”). We also acknowledge our various discussions and correspondence.

Specifically, for purposes of subparagraph 212(1)(d)(vi), you have asked us whether “a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work” includes a payment for the right to use a copyright on artistic work in connection with the manufacture, sale and distribution in Canada of products in circumstances where the taxpayer ultimately only sells and distributes products in Canada that use that copyrighted artistic work.

Facts

In particular, you have advised us of the following hypothetical facts:

*     A corporation, formed and resident in the United States (“USCo”), wholly owns a corporation, formed and resident in Canada (“Canco”).

*     A group of corporations, formed and resident in the United States (collectively, “USIP”), own the copyright to certain artistic work (the “Copyright Property”).

*     USCo is at arm’s length with each of the corporations in USIP.

*     USCo and USIP have entered into a licensing agreement in respect of the Copyright Property (the “Licensing Agreement”) and the Licensing Agreement includes Canco.

*     The Licensing Agreement grants both USCo and Canco with the right to use the Copyright Property in connection with the manufacture, sale and distribution of products using the Copyright Property. USCo develops and manufactures its products using the Copyright Property as well as its own property/materials.

*     Canco does not have any manufacturing facilities in Canada and purchases all products for distribution and sale in Canada from USCo. A fee is payable by each of USCo and Canco under the Licensing Agreement for the rights to manufacture, sell and distribute the products that use the Copyright Property. In particular, Canco incurs a fee payable to USIP when the products using the Copyright Property are sold by it in Canada to retail stores.

*     Canco either makes the payment directly to USIP or to USCo who would remit the payment to USIP on its behalf.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 a particular transaction 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

It appears that your question relates to a completed transaction involving a specific taxpayer. This Directorate cannot confirm the tax treatment of specific transactions outside the scope of a request for an advance income tax ruling in respect of proposed transactions. Whether payments for the right to manufacture, sell and distribute products featuring copyrighted property should be characterized as royalties is a question of fact that can only be determined by reviewing the licensing agreement associated with the right to use the particular copyright. Although we cannot provide any comments with respect to the specific licensing agreement, we offer the following general comments on the Canadian tax implications, which we hope are of assistance to you.

Generally, paragraph 212(1)(d) of the Act imposes withholding tax on any payment to a non-resident of Canada for rents, royalties and similar payments. However, subparagraph 212(1)(d)(vi) excludes from withholding tax a “a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical, or artistic work.”

In our view, where a payor has entered into a legal agreement with a non-resident for the right to use copyrighted property in connection with the manufacture, sale and distribution of any artistic work in Canada, a royalty or similar payment for that right would be considered to be “on or in respect of a copyright in respect of the production or reproduction of any...artistic work” in subparagraph 212(1)(d)(vi) even if the payor does not manufacture the artistic works, which it distributes under that legal agreement. As such, in our view, such a payment would be exempt from Part XIII tax under subparagraph 212(1)(d)(vi).

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.

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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