When software companies license or "sell" into Canada
from abroad, there is often some leeway in how they allocate their
fees between the license itself and related services. How that
allocation is made results in very different tax consequences and
so should be taken into account in the early planning stages.
In short, license fees, aka royalties, for the use of software
are exempt from Canadian tax under certain tax treaties. So, for
example, royalties are not subject to Canadian tax when paid to the
U.S., the U.K., France, Germany or the Netherlands. Royalties are,
however, subject to Canadian tax when paid to India or Barbados. In
each case, the relevant treaty provision speaks to a recipient that
is both resident in the particular jurisdiction and which
beneficially owns the royalties such that one cannot simply route
the royalties through shell companies to access an exemption.
