23 January 1998 External T.I. 9800055 - custom versus shrink-wrap software

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:

Part XIII tax - Whether license fees were in respect of shrink-wrap or custom software.

Position:

Information provided was insufficient to make this determination.

Reasons:

XXXXXXXXXX                                                    							980005
                                                                       		Olli Laurikainen
Attention:  XXXXXXXXXX 

January 23, 1998

Dear Sirs:

Re: Withholding Tax in Respect of Software License Fees

This is in reply to your letter dated December 29, 1997 wherein you request our view whether license fees paid by residents of Canada to XXXXXXXXXX in respect of the right to use certain XXXXXXXXXX computer software are exempt from Canadian withholding tax pursuant to the Canada - U.S. Income Tax Convention (the "Convention").

As your inquiry concerns completed business transactions carried out by XXXXXXXXXX it falls outside the authority of this office. Accordingly, we have referred your letter and the attached request for refund of Canadian withholding tax already withheld, to our International Tax Services Office.

We note that your request for refund is in respect of taxes withheld in 1995. As you know, the recent Protocol amending the Convention to provide for an exemption for payments in respect of the right to use computer software is only effective for such amounts paid or credited on or after January 1, 1996. The 1995 withholding tax may in certain circumstances nevertheless qualify for refund. Under Revenue Canada administrative practice, fees paid for the right to use "shrink-wrap" computer software are treated as sale proceeds rather than license fees and are therefore not subject to withholding tax. The term "shrink-wrap software" is basically a reference to over-the-counter software that is licensed pursuant to a standard unsigned license agreement of the terms of which the licensee arguably may not have been aware at the time of purchase. This places the enforceability of the license agreement into question. The information you have provided is not sufficient for us to determine whether XXXXXXXXXX software is shrink-wrap software.

On the other hand, if your software is subject to a license agreement where it is clear that the customer was aware of its terms (usually verified by signing the license agreement) when acquiring the software, the software would be considered custom software and payments for its use would be subject to withholding tax in 1995 at a reduced rate of 10% of the gross amount of the payments as set out in the Convention.

If you believe that XXXXXXXXXX may be shrink-wrap software, please forward a brief description of XXXXXXXXXX software licensing practices and copies of any license agreements that were concluded with the XXXXXXXXXX which paid software license fees to XXXXXXXXXX in 1995 to Mr. Claude Vincent of the our Non-resident Withholding Account Division. The address is as follows:

Revenue Canada
International Tax Services Office
Non-resident Withholding Account Division
2204 Walkley Road

Ottawa, Ont.

Attn: Claude Vincent

Mr. Vincent may be reached at (613)526-6397.

Yours truly,

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

c.c. International Tax Services Office
Non-resident Withholding Account Division
Attn: Claude Vincent