CRA indicates that the onus is on it to determine the “reasonable and realistic” allocation of an outbound royalty between the exempt and taxable portions

Royalties were payable by Canco to a non-resident for the right to use copyright and trademarks in connection with the design, manufacturing and sale of products in countries in a particular region.

The Directorate indicated that since the royalties paid were royalties under general principles, they were subject to withholding under s. 212(1)(d) unless exempted under s. 212(1)(d)(vi) or (x).

Regarding what portion of each royalty payment should be treated as exempted under s. 212(1)(d)(vi), CRA cited inter alia Farmparts for the proposition that the onus would on it to determine the portion of the royalty payments that were exempted from Part XIII tax. However (similarly to 2022-0926461C6), it would not be bound by the allocation between (exempt) copyright royalty and (taxable) trademark royalty specified in the licence agreement if that allocation was not “reasonable and realistic” having regard inter alia to the commercial realities of the situation.

Regarding what portion of each royalty payment should be treated as exempted under s. 212(1)(d)(x) as an amount deductible in computing the income of Canco from a business carried on in the foreign country, CRA noted that “[o]rdinarily, such an allocation can be made on the basis of the factual relationship between the deductible royalty payment and the gross income arising from each of the parts of the business that is carried on in a particular country.”

Neal Armstrong. Summaries of 18 February 2022 Internal T.I. 2020-0836351I7 under s. 212(1)(d), s. 212(1)(d)(vi), s. 212(1)(d)(x) and s. 4(1)(b).