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:
In a parent and a subsidiary situation, whether the transfer of the parent's know-how to the subsidiary constitutes a franchise agreement for purposes of paragraph 3(c) of the Canada-United States Income Tax Convention (1980).
Position:
Question of fact. It depends on the kinds of commercial arrangements that the parent and the subsidiary have entered into.
Reasons:
Unable to give definitive reply due to the lack of information.
D. Wong
XXXXXXXXXX 970018
Attention: XXXXXXXXXX
October 15, 1997
Dear Sirs:
Re: Treaty Definition of “Franchise Agreement”
We are writing in response to your letter of January 3, 1997 wherein you requested our comments on whether a cross border know-how agreement would be considered a “franchise agreement” for the purposes of paragraph 3(c) of Article XII of the Canada-United States Income Tax Convention (1980) (“Treaty”). In your letter, you provided a hypothetical situation whereby a non-resident parent corporation agrees to provide know-how to a Canadian subsidiary in exchange for a payment based on sales of the Canadian subsidiary. You further indicated that the know-how (“Know-How”) in this situation is to include the use by the subsidiary of the parent’s copyrights, patents, secret formulas, designs and models and the related industrial, commercial and scientific knowledge. Your position is that this cross-border Know-How together with the technical support necessary to implement or utilize the Know-How, should not be considered a franchise agreement.
The Treaty does not define the term “franchise” and pursuant to paragraph 2 of Article III of the Treaty, the term is to have its meaning for Canadian tax purposes. The term "franchise" is not defined for purposes of the Income Tax Act; however, the expression has been judicially considered. In paragraph 11 of Interpretation Bulletin IT-477 (Capital Cost Allowance- Patents, Franchises, Concessions and Licences) it is stated that :
"The words "franchise, concession or licence", are not capable of easy definition. Generally, they must be given the meaning or sense in which they are normally employed by businessmen on this continent and they extend, not only to certain kinds of rights, privileges or monopolies conferred by or pursuant to legislation or by governmental authority, but also to analogous rights, privileges or authorities created by contract between private parties. Again, generally, these words are used to refer to some right, privilege or monopoly that enables the holder to carry on his business or earn income from property, or that facilitates the carrying on of his business or the earning of income from property. These words do not extend to a contract under which a person is entitled to remuneration for the performance of specified services, nor to a covenant not to compete for a limited period."
These comments are consistent with the jurisprudence in the following court cases: The Investors Group v. M.N.R. (Ex.Ct.) 65 DTC 5120; Capital Management Ltd. v. M.N.R. (S.C.C.) 68 DTC 5041; M.N.R. v. Canadian Glassine Co. Ltd., (FCA) 76 DTC 6083; Bomag (Canada) Ltd. v. The Queen (FCA), 84 DTC 6363.
It is our position that the term "franchise" as used in the Treaty covers a broad range of commercial arrangements. While we agree that the transfer of Know-How, in and of itself, does not constitute a franchise agreement, one cannot consider the transfer of the Know-How in isolation to determine this issue. It is necessary to assess the kinds of commercial arrangements that have been entered into between the parent and the subsidiary, be they expressed, implied, oral or written, in order to determine whether these commercial arrangements in their totality constitute a franchise agreement at law. Such a determination can only be made on the basis of all of the facts relating to the particular situation.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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