Words and Phrases - "contingent right"

Under Agreement 1, the Investor (a registrant) pays a lump-sum Royalty Acquisition Amount to Corporation 1 (a Canadian-resident registrant) in return for a monthly Royalty Payment that is calculated as a percentage of revenue streams of Corporation 1 generated each month from certain taxable supplies of intellectual property (IP) made by Corporation 1, and does not have any stipulated minimum. The Investor is only granted the above Gross Sales Royalty and is not granted an interest in any assets or Business IP of Corporation 1.

Agreement 2 (under which Investor pays an amount referred to as the “Initial Instalment” and, if applicable, the “Second Instalment” to Corporation 2, in return for a monthly Royalty Payment that is calculated as a percentage of certain IP related revenue) is similar to Agreement 1 except that it provides for Investor to receive a minimum monthly amount.

CRA ruled that the Royalty Acquisition Amount is consideration for a taxable supply made by Corporation 1 of intangible personal property (a right to be paid money, that is, the Royalty Payments). This right is not a "debt security" because Investor’s right to be paid money is contingent on Corporation 1 earning IP Revenue (that is, there is no minimum amount guaranteed to the Investor, i.e., the "right to be paid money is a possibility but not a certainty").

In contrast, under Agreement 2, Investor’s right thereunder is not contingent (that is, there is a minimum amount guaranteed to Investor in the form of Minimum Monthly Amounts). Therefore, the right to receive the Royalty Payments is a debt security and is a financial instrument.