12.3.2[a] Article XII(1) – Residence – Based Jurisdiction to Tax
Paragraph 1 of Article XII stands for the proposition that a resident of a country receiving royalty income should be taxed by the country of residence.
12.3.2[b] Article XII(2) – Source based jurisdiction to Tax at Reduced Rates
Paragraph 2 of Article XII provides that such royalties may also be taxed in the Contracting State in which they arise, but that if a resident of the other Contracting State is the beneficial owner of the royalties, the tax in the Contracting State of source is limited to 10 per cent of the gross amount of the royalties.
12.3.2[c] Article XII(3) – Exceptions to Source-based Jurisdiction
Paragraph 3 sets forth a list of royalties that are exempt from source taxation entirety. This list includes copyright royalties and like payments relating to the production or reproduction of any literary, dramatic or musical work. This exemption, however, does not include payments in respect of motion pictures, works on film, videotape or other means of reproduction in connection with television, although royalties from videotapes and other means of reproduction for private home use are exempt.
12.3.2[d] Article XII(4) – Definition of Royalties
Paragraph 4 defines the term “royalties” for purposes of Article XII. The term is broadly defined to mean payments of any kind received as consideration for the use of or the right to use any copyright of literary, artistic or scientific work. It includes motion pictures and works on film, videotape, or other means of reproduction for use in connection with television.
12.3.2[e] Article XII(5) – Royalty Income Associated with a Permanent Establishment
Paragraph 5 of Article XII provides that the 10 percent limitation on tax in the U.S. provided under paragraph 2, and the exemption in the U.S. for certain copyright royalties provided by paragraph 3, do not apply if the beneficial owner of the royalties carries on business in the U.S. through a permanent establishment, or performs independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base.
12.3.2[f] Article XII(6) – Source Rules for Royalties
The rules of this paragraph differ from the source rules under U.S. domestic law.
12.3.2[g] Article XII(7) – Excessive Royalties
Paragraph 7 permits either Contracting State not to apply the royalty provisions of the Article to royalty amounts that exceed what parties would agree to, if they were not in a special relationship.
12.3.2[h] Article XII(8) – Triangular Royalty Payments
Paragraph 8 imposes a limitation on the right of a Contracting State to impose taxes on royalties paid by a resident of the other Contracting State.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
