19 February 1997 External T.I. 9616305 - ROYALTY PAYMENTS FOR SHOWING VIDEOS IN PUBLIC

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Are royalty payments for showing videos in public taxable in Canada under the Canada-U.S. Convention.

Position:

Yes.

Reasons:

Subsection 212(5) applies. The exemption in paragraph 3 of Article XII is not applicable as the royalty payments are not in respect of the production or reproduction on video of works for private (home) use. See letter for complete position.

	                    					961630
XXXXXXXXXX						                   J. Stalker

Attention: XXXXXXXXXX

February 19, 1997

Dear Sirs:

Re: Withholding Tax on Videos

We are writing in response to your letter dated May 3, 1996 in respect of the interpretation of the words "for use in connection with television" as found in paragraph 212(5)(b) of the Income Tax Act (Canada) (the "Act") and paragraph 3 of Article XII of the Canada-U.S. Income Tax Convention (the "Convention").

You have presented a hypothetical situation where a Canadian resident company (Canco) obtains master videotapes or 35mm prints from a US company (USco). Canco has the right to reproduce the masters on videotapes or videocassettes (collectively "videos") either directly or by subcontracting to a third party. Canco also has the right to exploit the videos in Canada in return for a royalty to USco. The videos may be tapes of sports events and recreational sports, live musical performances, motion picture films, made for TV movies, or other special interest tapes.

Canco provides the ability for a customer to view the videos in a commercial establishment using Canco's operating and control system that sends the video to a television. The customer pays the commercial establishment for each video watched.

The television sets are part of an on-site system that could include co-axial and/or fiber-optic cable transmission, and multi-point distribution system. In the future, satellites may be used to transmit the videos to the specific locations. The video would not be broadcast to or from television stations or networks.

You have presented an example where Canco obtains a license to make videos available to the patrons of a health club. Canco installs television sets in the health club for us by the patrons to watch videos while they exercise. The patrons would pay a fee for each video watched. The viewing of the video would be exclusively for their personal enjoyment. Canco's income would consist of the fees paid by the partons less a service fee to the health club for each video watched. Canco's operating and control system would be located in the health club, inaccessible to the patrons. Canco would from time to time alter the videos to conform to Canadian video regulations and customer tastes.

You have asked if it is our view that, where there is no broadcasting, the Convention will exempt royalties paid to a US party from a Canadian resident where the royalties relate to motion picture films, other films or movies or video tapes.

It would appear that your query involves a factual situation involving a possibly completed transaction. As indicated in paragraph 22 of Information Circular 70-6R3, we are not in a position to deal with factual proposed transactions other than in the form of an advance ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. Issues involving completed transactions should be addressed to the appropriate Taxation Services Office of Revenue Canada. However, we offer the following general comments.

We have considered your comments, and those in the technical interpretation dated January 5, 1993 (our file 922053) to which you refer. That letter does not accurately represent our position on the application of paragraph 212(5)(b) of the Act.

Our position is:

(a) The phrase "for use in connection with television" as used paragraph 212(5)(b) of the Act is not limited to television broadcasting. The only restriction on the application of paragraph 212(5)(b) is where a film, videotape or other means of reproduction for use in connection with television is solely in connection with and as a part of a news program produced in Canada.

In addition, subsection 212(5) of the Act applies to any use or reproduction in Canada of motion pictures whether on videotape or not.

(b) Royalties paid by a resident of Canada to a resident of the United States in respect of the production or reproduction of a motion picture (including a videotape of a motion picture) for private (home) use are exempt from taxation in Canada pursuant to paragraph 3 of Article XII of the Convention, provided that the use is not in connection with television broadcasting. Royalties paid by a resident of Canada to a resident of the United States in respect of the production or reproduction of other types of literary, dramatic, musical or artistic works on videotape are also exempt from taxation in Canada pursuant to paragraph 3 of Article XII of the Convention provided the videotapes are for private (home) use and are not used in connection with television broadcasting. This interpretation is based on the Technical Explanation to paragraph 3 of Article XII and our understanding of the intent of the negotiators of the Convention, that is, that the exemption provided in paragraph 3 of Article XII of the Convention should be extended to include payments in respect of the production and reproduction for private home use of both motion pictures and other works on videotape except where such production or reproduction is in connection with television broadcasting. Royalties in respect of the production or reproduction of motion pictures or videotapes which are not for private (home) use, including but not limited to those used in connection with television broadcasting, are not exempt.

Note that private (home) use does not include showing a copyright work in public, such as bars, health clubs, airplanes, or other facilities generally open to the public.

The expansion of the exemption to private home use, in particular as it relates to motion pictures, is unique to the Convention and can not be extended to other treaties. In general, in other treaties, Canada preserves its right to tax all payments in respect of the production or reproduction of motion pictures and may grant an exemption in respect of the production or reproduction of other works not in connection with television broadcasting.

In respect of your references to subparagraph 3(d) of Article XII of the Convention as amended by the 1995 Protocol to the Convention, we note that that subparagraph has no impact on the above position.

It is our view that the showing of videos in a health club or other commercial establishment as described above would constitute showing a copyright work in public and is not private (home) use. Therefore, the royalties in the scenario you have described would not meet the requirements of the exemption in paragraph 3 of Article XII of the Convention, as the royalties are not in respect of the production or reproduction on video of works for private (home) use.

You have also asked for our guidance as to what constitutes a copyright royalty or other like payment in respect of the reproduction of a dramatic or artistic work. As you note, such a determination is a question of fact which requires looking at the royalty agreements involved. We suggest you refer to the appropriate provisions of the Copyright Act, in particular section 3. It should be noted that the right to show a work in public and the right to produce and reproduce such work are separate and distinct rights under the Copyright Act. However, in the scenario described above there is no need, for income tax purposes, to break down the payment into the portions in respect of each right because no part of the payment is exempt from tax.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch