Amendments To Withholding Tax Regime

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Information Technology, May 2008

When Canadian companies license computer software from U.S. licensors and arrange for maintenance and support services for the software, there are a number of Canadian tax issues to consider.

In connection with the license fee itself, Canadian withholding tax applies at the rate of 25 per cent to rents, royalties and similar payments paid by a Canadian resident to any non-resident of Canada, unless there is an exemption in the Income Tax Act (Canada) or an exemption or rate reduction in an applicable tax treaty. The U.S. licensor and the Canadian licensee should determine which party would bear the burden of the withholding tax, if any, and any gross-up clause should be drafted accordingly.