February 6, 1995
XXXXX
On September 10, 1993, you sent a copy of a letter you wrote to XXXXX for the purpose of obtaining a confirmation of the position you took in your letter.
Facts
1. XXXXX enters into a contract with an artist for the purpose of recording and distributing the production of the artist.
2. At the time of the recording, XXXXX pays for the costs associated with the production of the recording. Pursuant to the agreements between XXXXX and the artist, these payments are deemed to be non-returnable recoupable advances paid to the artist.
3. XXXXX agrees to pay to the artist royalties as full compensation for the services rendered and rights granted by the artist to XXXXX
4. The royalties to be paid to the artist are calculated based on a percentage of the suggested retail sale price of each record sold or of the proceeds received by XXXXX depending on the types of sales being made by XXXXX
5. The deemed advance payments may be recouped by XXXXX out of the royalties accruing to the artist.
Interpretation
In your letter to XXXXX you stated that two separate taxable supplies are being made, these supplies being:
1) a supply made by the artist to XXXXX of the exclusive copyright, and
2) a supply made by XXXXX of recording services to the artists.
You asked for a confirmation that this interpretation is correct.
ANSWER
Based on the sample agreement that you provided to us we believe that your interpretation is correct, for the following reasons.
In our opinion, XXXXX is making a supply of a service of recording the artist's performance and the artist is making a supply of a copyright and of an interest with respect to merchandising and sponsorship.
Please note that the artist appears to be making multiple supplies. However, we addressed the supplies made by the artist as if they constitute a single supply, given that all the supplies made by the artist have the same taxable status, making this aspect of the case not at issue.
Supply made by the artist
As mentioned above, the artist is making a supply of a copyright and an interest to XXXXX and the consideration payable by XXXXX in respect of this supply is the royalties
Where a registrant, the artist will be required to charge tax on the value of that consideration. For the purpose of the discussion, we will assume hereafter that the artist is a registrant.
These royalties are expressed in money. Pursuant to paragraph 153(1)(a), where the consideration or a part thereof is expressed in money, the value of the consideration or part is deemed to be that amount of money. Pursuant to subsection 168(2), where the consideration for a taxable supply is due on more than one day, tax is payable on each day on each part of the consideration that is paid or becomes due on that day.
If any royalties are paid or become due to the artist, the latter should charge tax on these royalties on each day royalties are paid or become due. Pursuant to section 11 of the sample agreement, royalties become due semi-annually within sixty (60) days following June 30th and December 31st. Consequently, royalties become due on August 29 and on March 1 of each year. The artist should charge tax on the value of these royalties on the earlier of the day they are paid or become due.
Supply made by XXXXX is making a supply of a service of recording the artist's performance. The consideration paid by the artist in respect of that supply is the amount of royalties due to the artist that are offset against the recording costs incurred by XXXXX These amounts constitute consideration expressed in money.
Pursuant to subsection 168(2), where the consideration is payable on more than one day, tax is payable on each part of the consideration on the day that part is paid or becomes due. Pursuant to the sample agreement you provided to us, royalties are payable to the artist within 60 days following June 30th and December 31st and the artist is required to pay to XXXXX amounts on account of the costs incurred by XXXXX to record the artist's performance on the same dates, up to the time XXXXX has recouped all these costs. XXXXX should charge tax on the amounts recouped from the royalties payable to the artist on the day they are paid or become due. In the sample agreement mentioned above, these amounts become due on August 29 and on March 1 of each year, if any royalties become due on these dates, until such time XXXXX has recouped all the recording costs from the artist.
I hope the above will be useful to you. Should you wish to discuss this issue further, please contact Mr. Serge Bernier at (613) 952-9580.
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST XXXXX
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