CRA requires the allocation by arm’s length parties of a royalty between copyright and trademark to be “reasonable and realistic” for Pt. XIII purposes

S. 68 only applies to the allocation of proceeds of disposition, fees or restrictive covenant payments for Part I purposes. Therefore, CRA is bound, for Part XIII tax purposes, by the apportionment of a royalty payment between copyright (exempted under s. 212(1)(d)(vi)) and trademarks agreed to by arm’s length parties in a royalty agreement respecting property that is protected by both trademark and copyright (a “mixed contract”)?

CRA stated:

An apportionment of a royalty payment agreed to by arm’s length parties under a mixed contract, to the extent that it is reasonable and realistic, in the sense that it is reflective of the actual consideration paid for a copyright described under subparagraph 212(1)(d)(vi), will generally be accepted by the CRA. …

In determining if an apportionment provided under a mixed contract is reflective of the obligation of the parties under subsection 212(1), consideration would be given, amongst others, to the terms of the mixed contract and to whether the parties have divergent interests in respect of this apportionment. Where the payor is economically indifferent to the apportionment, the apportionment provided under the terms of the mixed contract might not be reasonable, realistic and reflective of the tax obligation of the recipient under subsection 212(1)(d) and the CRA might determine that a different portion of the payment is subject to withholding tax.

Neal Armstrong. Summary of 17 May 2022 IFA Roundtable, Q.2 under s. 212(1)(d)(vi).