CRA confirms that custom software fees not subject to Canadian withholding tax

In 2012-0441091E5, the CRA said that fees paid to a non-resident for the use of custom software in Canada were exempt from Canadian withholding tax. The situation involved a non-resident company (NR Co) that designs and develops computer software programs, and retains full ownership of the programs at all times. NR Co licensed custom software to a Canadian company (Canco) for use in equipment that Canco manufactured and distributed in Canada. The software licence agreement also contemplated the provision of technical services by NR Co, which were to be rendered outside Canada. The CRA confirmed its view that although fees for the use of the software constituted royalty payments subject to 25% withholding tax under s. 212(1)(d)(i), the exemption in s. 212(1)(d)(vi) applied. The latter provision exempts “a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary work”. The Copyright Act defines literary work to include a computer program. The CRA further confirmed that the 15% withholding tax under Regulation 105 would not apply to the technical services because those services would be rendered outside Canada.