26 January 1999 GST/HST Interpretation HQR0001230 - Payment of GST/HST on Tariff No 17 Copyright Royalties

Dear XXXXX

Thank you for your letter of February 12, 1998, (with attachments) concerning the application of the Goods and Services Tax /Harmonized Sales Tax to the payment of royalties.

Background

XXXXX

In accordance with the Copyright Act, XXXXX has to pay royalties to the XXXXX) for the performance or the communication by telecommunication of musical or dramatico-musical works.

XXXXX the Copyright Board published the statement of royalties to be collected by XXXXX for the performance or the communication by telecommunication, in Canada, of musical or dramatico-musical works forming part of its repertoire in respect of  XXXXX XXXXX[.]

As a result, XXXXX has to pay royalties to XXXXX for the period of January 1, 1990 to December 31, 1995. XXXXX XXXXX for royalties due for the period of January 1990 to August 1993.

On April 1, 1997, the Harmonized Sales Tax (HST) replaced the Goods and Services Tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. If a person makes supplies in a participating province to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

Interpretation Requested

You have requested an interpretation regarding the application of the GST/HST. You want to know if the payment of royalties for the year 1990 is subject to the GST even if the GST was not in effect at that time. Also, you want to know if the payment of royalties for the period of January 1, 1991 to March 31, 1997 is subject to the GST or subject to the HST.

Interpretation Given

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 of a right. In this case, the XXXXX receives royalty payments from XXXXX for the supply of the right to perform or communicate by telecommunication musical or dramatico-musical works. For GST/HST purposes, the supply of such a right is a supply of intangible personal property and such a supply is generally subject to tax when made in Canada by a GST/HST registrant in the course of its commercial activities. For purposes of this interpretation, we have assumed that the royalty payment is consideration for a taxable supply and subject to the GST/HST.

The rules concerning the payment of royalties for the performance or the communication by telecommunication in Canada of musical or dramatico-musical works are stipulated in Tariff No. 17.

Section 10 of Tariff No. 17 provides that, in most cases, royalties shall be due on the last day of the month following the month for which the royalties are being paid. Because Tariff No. 17 was issued on April 20, 1996, and is retroactive to 1990, the Tariff includes transitional provisions for the period covered before its publication. Subsection 15(1) of Tariff No. 17 states that the amount payable for any given month shall be due on April 30, 1996, and shall be increased by using the specified interest factor for that month. As such, the due date for the payment of royalties by XXXXX to XXXXX, for the period of January 1, 1990 to December 31, 1995 is April 30, 1996. Generally, tax is payable on the day that consideration is due.

Subsection 340(4) of the Excise Tax Act (ETA) states that where a taxable supply of property is made to a person by way of lease, licence or similar arrangement, no tax is payable in respect of the consideration for the supply that became due before May 1991. In this case, the consideration for the supply became due after May 1991.

Consequently, the payment of royalties for period of January 1990 to December 31, 1995 is subject to the GST and the GST is payable on April 30, 1996.

There is not sufficient information to determine whether the supply of the right to perform or communicate by telecommunication musical or dramatico-musical works is a supply made in a participating province. However, for purposes of this interpretation, we have assumed that the supply is made in a participating province. With respect to the HST, transitional rules provide that where a taxable supply of property by way of lease, license or similar arrangement is made in a participating province to a person, or outside the participating provinces to a person to whom the property is delivered or made available, or physical possession of the property is transferred, in a participating province, the provincial component of the HST does not apply to any rent, royalty or a similar payment attributable to a period before April 1, 1997, provided the payment becomes due, or is paid without having become due, before August 1, 1997.

Therefore, the payment of royalties for the period of January 1, 1990 to December 31, 1995 will only be subject to the GST even if the payments are made after the HST came into effect.

Because Tariff No. 17 does not cover the period after December 31, 1995, we can't give an interpretation on the application of the HST to the payment of royalties to XXXXX for the period of January 1, 1996 to March 31, 1997 without further information to determine where the supply is made and when the royalty payments are due.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8812.

Yours truly,

Isabelle Breault
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate