CRA recharacterizes cross-border franchise payments

Among other payments, a Canadian franchisee paid "procurement licence fees" to a US-resident franchisor based on the volume of its purchases of products from third parties rather than the US franchisor. (In theory, the US franchisor was giving up the right to require the franchisee to purchase these goods from it at a mark-up.)  CRA found that the field auditor could choose to recharacterize portions of this procurement fee as being applicable (based on "a valuation of the various rights") to withholding under ss. 212(1)(d)(i) and (ii) (non-copyrighted know-how and access to the franchisor's system) and (iv) (the exclusive aspects of the franchisor's system), while acknowledging that other elements such as payments for services generally would not be subject to withholding.

The results of this purported "valuation" exercise would essentially be indeterminate and highly sensitive to how CRA exercised its discretion.  Analogous difficulties tend to be avoided in characterizing supplies of goods or services for HST/GST purposes through application of the single supply doctrine.

Neal Armstrong.  Summary of 4 December 2012 Memorandum 2011-0431871I7 under s. 212(1)(d) and ss. 212(1)(d)(i), (ii), (iii), (iv), and (v).