Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 167225
[Addressee]
Dear [Client]:
Subject: GST/HST RULING
Royalty payments
Thank you for your fax concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to royalty payments provided by companies to […]([…][the Business]). We apologize for the delay in responding to your enquiry.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
You have provided us with the following redacted documents:
a) an agreement entitled Loan Agreement (Agreement #1) entered into on [mm/dd/yyyy]. Paragraph […] of Agreement #1 notes that there is a related royalty agreement that was also entered into on that same date;
b) a royalty agreement entered into on [mm/dd/yyyy] (Royalty Agreement #1) that relates to another agreement. For purposes of our response, it is assumed that Royalty Agreement #1 is the royalty agreement referred to in paragraph […] of Agreement #1; and,
c) a royalty agreement entered into on [mm/dd/yyyy] (Royalty Agreement #2).
Based on the information from the above agreements, and various telephone conversations, we understand the following:
1. [The Business] was established under the laws of […][the province] […].
2. [The Business] invests in a number of companies by either entering into two agreements, one of which is a royalty agreement or by only entering into a royalty agreement with the companies.
3. [The Business] does not sell any products.
Please note that in this response, capitalized words generally relate to various provisions of Agreement #1, Royalty Agreement #1 and Royalty Agreement #2 and are defined in the applicable agreement.
4. Agreement #1 was entered into between a company (Company #1), […] [the] Guarantors and […] [the] Lenders (referred hereafter as the Investors), one of which is [the Business].
5. Royalty Agreement #1 was entered into between a company, […] the Grantors and the Grantees who, based on the information in Agreement #1, appear to be the Investors. For purposes of our response, we assume the Grantees are the Investors, the Grantors are the Guarantors, and that the company is Company #1.
6. Section […] of Agreement #1 provides that the Investors make a payment to Company #1. The payment is referred to as a loan in the Principal Amount of $[…]. One of the conditions precedent for making the $[…] payment under Agreement #1 is that Company #1 must also enter into a corresponding royalty agreement (that is, Royalty Agreement #1).
7. As set out in section […] of Agreement #1, the Principal Amount under Agreement #1 will not bear interest while Company #1 is in full compliance with its obligations under the Agreement; however, if Company #1 is in breach of any of its obligations, the outstanding Principal Amount will bear interest at a rate specified in paragraph […] of the Agreement, that is, prime plus […]%.
8. Company #1 is required to make quarterly instalments to the Investors; each instalment shall be equal to […]% of the Gross Revenue of Company #1 and/or its Affiliates for each period. The total amount of these instalments shall not exceed the Principal Amount. In addition, if the total instalments paid by [mm/dd/yyyy] is less than the Principal Amount, the difference became due and payable on that date. “Gross Revenue” is defined in section […] of Agreement #1 to mean the aggregate revenue of Company #1, and all Affiliates, derived from all sales of the Products.
9. The Grantees (that is, the Investors) have agreed to pay $[…] described as an interest free loan in exchange for the payment of a royalty fee (Royalty Fee #1). In addition to the instalments described in fact #8, the Grantors and Company #1 agree to also pay Royalty Fee #1 at a rate of […]% of the Gross Revenue from retail sales of the Products and […]% of the Gross Revenue from Wholesale Orders of the Products to the Investors beginning on the date that Company #1 has paid a total of $[…] to the Investors.
10. Royalty Agreement #2 was entered into between a company (Company #2), […] (the Grantor), and [the Business] as Grantee.
11. Pursuant to the Preamble, [the Business] has agreed to pay the sum of $[…] to Company #2 in exchange for the payment of a royalty fee (Royalty Fee #2).
12. The Grantor and Company #2 agree to pay Royalty Fee #2 to [the Business] at a rate equal to […]% of the gross revenue, including but not limited to revenue attributed to sales of the Products of Company #2 and/or its Affiliates (but excluding all shipping fees and charges), up to a maximum of $[…]. Once this amount has been paid, Royalty Fee #2 is reduced to an amount equal to the aggregate of […]% of gross revenue from Canadian sales and […]% of gross revenue from sales outside Canada.
RULING REQUESTED
You would like to know the following:
1. Is Royalty Fee #1 provided by Company #1 under Agreement #1 and Royalty Agreement #1 to the Investors subject to the GST/HST?
2. Is Royalty Fee #2 provided by Company #2 under Royalty Agreement #2 to [the Business] subject to the GST/HST?
RULING GIVEN
Based on the facts set out above, we rule that Royalty Fee #1, as well as the instalments described in fact #8, provided by Company #1 to the Investors and Royalty Fee #2 provided by Company #2 to [the Business] are not subject to the GST/HST.
EXPLANATION
Where a transaction consists of several elements, there may be a single supply or multiple supplies. This distinction is important, for example, in cases where a combination of elements is supplied, some of which would be subject to the GST/HST, and some of which could be exempt of GST/HST, if supplied separately. It is a question of fact whether a person is making a single supply or multiple supplies. The principles outlined in Policy Statement P-077R, Single and Multiple Supplies can be used to determine whether a particular transaction consists of a single supply or multiple supplies. In applying the principles outlined in this policy statement and the terms of Agreement #1 and Royalty Agreement #1, we determined that Company #1 is making a single supply.
As set out in paragraph 8 of GST/HST Memorandum 17.1, Definition of “Financial Instrument”, a “debt security” does not include a contingent right. A right to be paid money is a possibility but not a certainty where a contingent right is involved; the payment is conditional upon the occurrence or non-occurrence of some future event that may never happen.
Under Agreement #1 and Royalty Agreement #1, Company #1 has made a single supply to the Investors, including [the Business], of the right to receive money, that is, the instalments described in fact #8 and Royalty Fee #1. This right is a supply of intangible personal property that is taxable. As the total amount of the royalty payments, that is, the instalments described in fact #8 and Royalty Fee #1, is paid to the Investors by Company #1 at a rate calculated on the Gross Revenue of Company #1 and/or its Affiliates, the total payment is conditional upon the occurrence of Company #1 earning revenue. Therefore, the Investors have acquired a contingent right to be paid money under Agreement #1 and Royalty Agreement #1. The consideration for this taxable supply is the Principal Amount of $[…] paid by the Investors to Company #1. As such, where Company #1 is a GST/HST registrant, the Investors are required to pay GST/HST to Company #1.
When Company #1 pays the instalments and Royalty Fee #1 to the Investors pursuant to the right that the Investors have acquired, we do not consider the Investors to be making a taxable supply in exchange for these payments of money. Accordingly, the instalments and Royalty Fee #1 are not subject to GST/HST.
Similarly, under Royalty Agreement #2, Company #2 is making a single supply to [the Business] of a right to be paid money contingent upon Company #2 earning revenue as Royalty Fee #2 is paid to [the Business] at a rate calculated on the gross revenue of Company #2 and/or its Affiliates. This right to be paid money is a taxable supply of intangible personal property made by Company #2 to [the Business]. The consideration for Company #2’s supply of the right is the Principal Amount of $[…] paid by [the Business] to Company #2. As such, where Company #2 is a GST/HST registrant, [the Business] is required to pay GST/HST to Company #2.
When Company #2 pays Royalty Fee #2 to [the Business] pursuant to the right that [the Business] has acquired, we do not consider [the Business] to be making a taxable supply in exchange for these payments of money. Accordingly, Royalty Fee #2 is not subject to GST/HST.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the rulings given in this letter provided that: none of the issues discussed in the rulings are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (778) 374-8360. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Marjorie Stevens
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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