Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a payment for software to an Australian vendor is subject to withholding under Part XIII of the Income Tax Act.
Position: No.
Reasons: The payment is not a royalty for purposes of the Canada-Australia Income Tax Convention and Australian vendor does not have a permanent establishment in Canada.
XXXXXXXXXX 2004-010061
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("NRco")
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer, with respect to the sale of certain computer software called XXXXXXXXXX (the "Software"), to XXXXXXXXXX (the "Purchaser").
To the best of your knowledge, and that of the taxpayer involved, none of the issues involved in this ruling request are:
? in an earlier return of the taxpayer or a related person;
? being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayer or a related person;
? under objection by the taxpayer or a related person;
? before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
? the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Facts
1. NRco is a corporation resident in Australia. NRco's address is: XXXXXXXXXX.
2. The Purchaser's address is: XXXXXXXXXX.
3. NRco sells the Software worldwide to both resellers and direct end users. The Software is designed to be used by XXXXXXXXXX companies.
4. NRco does not maintain any office in Canada.
5. Several third-party corporations are resellers of the Software and other NRco products in Canada. Each reseller also sells other products and/or services. Each reseller is legally independent of NRco (outside of the dealings with respect to NRco products) and sells NRco products in the course of its ordinary business.
6. The Software is an advanced software application XXXXXXXXXX. The Software is typically used for:
XXXXXXXXXX.
7. The Software is not designed for one particular XXXXXXXXXX company and is used within the industry worldwide. The Software is used in university as well as corporate environments.
8. The Software is packaged with a general licensing agreement (the "General Agreement"), which does not specify an end user or a licensing fee.
9. The General Agreement does not have to be signed by the end user prior to delivery of the Software to the end user; however, the end user must "click" their acceptance of the conditions of the General Agreement before the Software will install and provide access to a license manager. Once the Software is installed the customer must then send either a manual or automated request to NRco to obtain a license code. The license code is entered into the license manager, which then allows the Software to be used.
10. The end user is not permitted to customize the Software.
11. The end user is not permitted to reproduce the Software.
12. The Software can be provided to the end user in "shrink-wrap" (physical product) format or in electronic format. The electronic format requires the end user to download the Software from a secure internet location.
13. The General Agreement contains information on NRco's technical support for the Software, which is provided to end users who obtain a Standard Support and Updates Subscription. This subscription costs an additional amount beyond the payment for the Software, and must be renewed and paid for on an annual basis. An end user is not required to purchase this subscription either along with the Software or subsequently.
14. The technical support offered (upon payment of the subscription), is limited to product updates, installation assistance, and assistance with general software problems (by internet, email, fax or telephone).
15. The unit price for 1-2 copies of the Software is $XXXXXXXXXX USD + $XXXXXXXXXX USD shipping. There is a XXXXXXXXXX% discount for orders of 3-6 units, and a XXXXXXXXXX% discount for orders of 7-10 units. The same discounts apply for volume software maintenance renewals.
Proposed Transactions
16. NRco will sell XXXXXXXXXX units of the Software to the Purchaser. The Purchaser will be the end user of these units of the Software.
17. The Purchaser will pay NRco for the Software in accordance with NRco's terms of payment, which stipulate payment in full within XXXXXXXXXX days by way of bank transfer, draft or credit card (the "Payment").
Purpose of the Proposed Transactions
18. This transaction is being undertaken so that NRco may sell the Software to the Purchaser for use in the Purchaser's business.
Ruling Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
By virtue of Articles 5, 7 and 12 of the Canada-Australia Income Tax Convention, the Payment to NRco by the Purchaser will not fall under the definition of "royalties" in Article 12 and will be exempt from the tax levied under Part XIII of the Income Tax Act (the "Act"). Consequently there will be no requirement for the Purchaser to withhold Part XIII tax from the Payment.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, and is binding on the Canada Revenue Agency (the "CRA") provided that the proposed transactions are completed by XXXXXXXXXX. The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act that, if enacted into law, could have an effect on the ruling provided herein.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
a) any tax consequences to either the Purchaser or NRco with respect to payments by the Purchaser to NRco for updates and support services for the Software; or
b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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© Her Majesty the Queen in Right of Canada, 2005
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