CRA rules that the purchase of an IP royalty gives rise to non-creditable GST/HST to the investor unless there is a specified minimum royalty

A Canadian registrant (Investor) enters into an agreement with a Canadian corporation (Corporation 1) under which it pays lump sums in consideration for the right to receive monthly royalties calculated as a percentage of intellectual property (IP) related revenue streams of Corporation 1. CRA ruled that the lump sums so paid are consideration for the taxable supply to Investor of intangible personal property (the right to the royalty payments). However, CRA ruled that Investor is not making any taxable supply in exchange for the royalty payments when Corporation 1 makes the subsequent royalty payments – so that Investor would not be entitled to claim input tax credits for the GST/HST paid or payable on related inputs. Apparently, this means that the GST/HST charged to it on its lump sum investment is non-creditable. This analysis could be troubling to the companies which invest in Canadian resource or other royalties.

A second agreement with Corporation 2 was similar, except that a minimum monthly royalty was specified. CRA ruled that because the Investor now had a non-contingent right to receive money, the right to the royalties qualified as a “debt security” (defined in ETA s. 123(1) as “a right to be paid money”), so that the purchase of the royalty agreement was now the exempt purchase of a financial instrument. This seems to suggest that the revenue potentially payable under a “debt security” can be highly variable provided that there is a specified minimum.

Neal Armstrong. Summaries of 10 February 2017 Ruling 162056 under ETA s. 123(1) - debt security, s. 169(1) and s. 182(1).