CRA accepts a loss shift through a lump sum irrevocable prepayment of contingent future royalties

In order that the non-capital losses of Lossco would not expire, an affiliated licensee of a licence to manufacture and sell a product made a purported prepayment of the royalties (which were calculated as a function of sales), but with the prepaid royalty being non-refundable. CRA found that this payment likely was not a royalty (given its non-contingent nature) and that the full amount was business income to Lossco either under s. 12(1)(a) (on the basis, applying Ellis Vision, that it “could be considered as an amount paid in advance for the use of chattels,” or under s. 9.

It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because [Lossco] does not wish to benefit from a deduction under paragraph 20(1)(m).” If the s. 20(1)(m) reserve weres relevant, it would have been necessary for CRA to engage with the finding in Doteasy that the s. 20(1)(m) reserve is available for an amount even if it is included under s. 9 rather than s. 12(1)(a), so long as it is described in s. 12(1)(a).

Neal Armstrong. Summary of 12 December 2014 Internal T.I. 2014-0524751I7 Tr under s. 9 - timing.