Tel. #: (613) 954-8585
Fax #: (613) 990-1233
Files #: 11640-2(dc)
Sch. VI/V/10
Re: XXXXX
I refer to Ms XXXXX submission of January 4, 1996, sent to Mr. Ken Mathews of my staff, about Royalties and Rights, and to Mr. XXXXX[.] Memorandum of January 5, 1996, and attachments, addressed to Mr. Randy Nanner, requesting our comments in regard to an interpretation Mr. XXXXX proposes to issue to XXXXX[.] The matter concerns the application of the GST to the supply of intangible personal property (XXXXX to XXXXX an unregistered non-resident and the royalties XXXXX receives from XXXXX[.] I understand the facts as follows:
1. XXXXX is a Canadian manufacturer of pressure vessels, boilers, fan coils and domestic water heating systems, for which it holds the relevant license or right to manufacture such products.
2. On XXXXX entered into a Sublicense (sic) Agreement (Agreement) with the XXXXX, whereby XXXXX grants to XXXXX (and to any corporation which XXXXX controls) a sublicense of all of XXXXX rights and licenses to manufacture, use and sell pressure vessels XXXXX (not pressure valves) XXXXX[.]
3. XXXXX shall pay to XXXXX, on a quarterly basis, a royalty based on the sale of the pressure vessels made by any company controlled by XXXXX[.]
5. All royalty payments made by XXXXX will be made in Canadian currency (based upon the exchange rate in effect at the end of each quarter as set forth in the XXXXX XXXXX.
6. XXXXX shall maintain at its offices in XXXXX complete, clear and accurate records in sufficient detail and form to enable the royalties due to be determined. Such records will show all products manufactured and sold, put into use or otherwise disposed of.
7. Under the terms of the Agreement, the sublicense products (i.e., pressure vessels) are exclusively manufactured in XXXXX XXXXX however, reserves the non-transferable and unassignable right to itself to manufacture, use and sell the pressure vessels.
Analysis
With respect to Ms XXXXX memorandum to Ken Mathews, under paragraph 1), she states, on behalf of the TIS Unit, that a royalty is a right and is classified as intangible personal property. However, a royalty is a payment (usually in the form of a financial instrument e.g., money) made by one person who makes use of a right that belongs to another. In other words, a royalty is not a right, but is consideration for a supply.
XXXXX is making a supply in Canada to XXXXX an unregistered non-resident, of a right (sublicense) to use the patent (i.e., intellectual property) of the pressure vessels. In consideration of this supply, XXXXX pays to XXXXX a royalty, based on quarterly sales of pressure vessels.
As the supply of intangible personal property is made to an unregistered non-resident, the supply would be zero-rated as an exported supply by virtue of section 10 of Part V of Schedule VI to the Act.
Also at issue is the assessment established by XXXXX covering the period from XXXXX in the amount of XXXXX which was based on an interpretation issued by XXXXX in her memorandum of April 20, 1993 to XXXXX[.] At that time, Mrs. XXXXX stated that the royalty payment received by XXXXX, in consideration of the supply of a right to XXXXX to use the patent of the pressure vessels and the consulting services supplied by XXXXX were subject to the GST.
With respect to the supply of the consulting services supplied by XXXXX from the information at hand, it is not clear in XXXXX letter of October 27, 1995, whether the supply was made to XXXXX or to its Canadian subsidiary XXXXX[.] Neither the Agreement nor your proposed interpretation letter speaks of such a supply. Therefore, I will not comment on the issue. However, if in fact the supply of the consultation service by XXXXX was made to XXXXX the supply would, in all likelihood, be taxable as a supply made in Canada between two registrants.
XXXXX XXXXX
Should you require further information, please contact Mr. Daniel Chamaillard at (613) 957-8220 or Mr. Randy Nanner at (613) 952-8810.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch
Enclosures
GAD #s: 1559 & 1570 (REG)
| c.c.: |
R. Nanner
D. Chamaillard
M. Bloom, Manager, Taxing Provisions Unit 1 |
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