Words and Phrases - "royalty"
Royal Bank of Canada v Commissioners for His Majesty's Revenue and Customs, [2025] UKSC 2
Before noting (at para. 110) that the OECD commentary on the wording of Art. 12 of the Model Convention supported a narrow view of the scope of immovable property in Art. 6, Lady Rose stated (at para. 109):
Article 12(4) [of the Canada-UK Treaty] defines "royalties" as any payment received "as a consideration for the use of, or the right to use, any copyright, patent, trade mark...". Para 8 of the Commentaries on Article 12 states that the Article includes both payments made under a licence and also payments made to compensate the owner for an infringement of the right. But it does not cover a payment that "whilst based on the number of times a right belonging to someone is used, are made to someone else who does not himself own the right or the right to use it". The Commentaries give as an example of the distinction being drawn a situation where an artist receives both a fee for performing and also, if the performance is recorded, a royalty for each sale of the recording. The performance fee would fall under Article 17 which deals with income of performers and athletes but royalties for each sale of the recording will fall within Article 12 where the artist is the holder of the copyright. But where the copyright in the sound recording belongs to a third party, the payments made under the contract fall under Articles 7 or 17 rather than under Article 12 even if the payments are contingent on the sale of the recordings. Further, the 2017 Commentaries make clear that where payments are made in exchange for an outright transfer of the rights, those payments do not fall within Article 12 because "the payment is not in consideration 'for the use of, or the right to use' that property and cannot therefore represent a royalty" (para 8.2). The payment will instead be a business profit within Article 7 or a capital gain within Article 13.
29 October 2010 External T.I. 2009-0347791E5 F - Somme reçue par une société
A corporation ("Holdco") holding some of the voting shares of a corporation ("Opco") may receive amounts (contingent payments) from a non-resident corporation or its subsidiary, in the event that certain events (liquidity events) occur in relation to the non-resident corporation or its subsidiary, with the payments to Holdco representing a percentage of the cash derived from the shares of the non-resident corporation's subsidiary (in the form of dividends or the sale of such shares). Are the amounts royalties, income from property, business or capital gain? After referring to various judicial definitions of “royalty, CRA stated:
[T]he amounts described in the contract as "contingent payments" that may be paid to Holdco do not, in our view, appear to represent royalties to Holdco.
It went on to indicate that there was insufficient information to determine whether the amounts were income from property or a business or a capital gain.
16 August 2017 Internal T.I. 2017-0701291I7 - Exclusive Distributorship Rights
In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. The Directorate found that the lump sum was not a royalty on general principles and not subject to withholding under s. 212(1)(d) - but that the exclusivity of the distributorship right granted by NRco was a “restrictive covenant,” so that the lump sum would be subject to Part XIII tax under ss. 56.4(2) and 212(1)(i).
However, turning to the Treaty, the Directorate stated:
To the extent the Upfront Payment is subject to Part XIII tax under subparagraphs 212(1)(d)(i), 212(1)(d)(iv) or paragraph 212(1)(i), the Upfront Payment should be exempt from Canadian withholding tax under Article VII … .
A substantially similar definition of the term “royalties” [to that in the Treaty] is found in Article 12 of the Model Convention … .
Paragraph 10.1 of the OECD commentary (the “OECD Commentary”) on Article 12 of the Model Tax Convention states that payments made in consideration for obtaining the exclusive distribution rights of a product in a given territory do not constitute royalties within the meaning of the Model Tax Convention as they are not made in consideration for the use of, or the right to use, an element of property included in the definition. We are in agreement… .
16 August 2017 Internal T.I. 2017-0701291I7 - Exclusive Distributorship Rights
In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. The Directorate found that the lump sum was not a royalty on general principles, stating:
[T]he Upfront Payment is not a “royalty” within the meaning of paragraph 212(1)(d) on the basis that it is a lump sum payment that does not depend on Canco’s profit or the degree of exercise by it of its exclusive distributorship right. … [C]ontingency is an essential element of a royalty.
Michael N. Kandev, "Canada Expands Back-to-Back Regime: Examining the Character Substitution Rules", Tax Notes International, June 19, 2017, p.1087
Potential non-existence of the situation posited (p. 1092)
[I]t is utterly mysterious how a rent or royalty can be determined, in whole or in part, by reference to an amount of interest or how a relevant funding arrangement can be entered into because a specified royalty arrangement was entered into. While interest is compensation for the use or retention by one person of a sum of money owed to another rent is compensation for the use or occupation of property, or for the right to use or occupy property, and a royalty is compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. [fn: 23: The term "royalty" is also undefined for Part XIII ITA. … Mobil Oil Canada Ltd. v. R., 2001 FCA 333 adopted the following meaning…: …“Compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced….] It is not clear how a logical or legal connection between interest, on the one hand, and rents or royalties, on the other, can exist as suggested by paragraph 212(3.6)(b).
Similarly, it is difficult to conceive of common situations in which rents or royalties are converted into interest or in which a particular relevant royalty arrangement was entered into because a debt or other obligation was entered into. Here, at least, some possibilities can be envisaged. Probably the only likely situation, which may fall under clause 212(3.92)(b)(i)(A), involves participating debt interest that tracks underlying rents or royalties or the value, production, or use of the underlying leased or licensed property. A more remote possibility involves money that has been lent to allow either the acquisition or development of tangible or intangible property that then has been leased or licensed. Arguably, however, the link between the two is too tenuous to meet the nexus requirements of clause 212(3.92)(b)(i)(B) in these situations.
6 February 2015 Internal T.I. 2015-0566681I7 F - Redevances perçues d'avance
In order that the non-capital losses of Lossco would not expire, an affiliated licensee of a licence to manufacture and sell a product made a purported prepayment of the royalties (which were calculated as a function of sales), but with the prepaid royalty being non-refundable. CRA found that this payment likely was not a royalty (given its non-contingent nature) and that the full amount was business income to Lossco either under s. 12(1)(a) (on the basis, applying Ellis Vision, that it “could be considered as an amount paid in advance for the use of chattels”) or under s. 9.
It was not necessary for CRA to “resolve the issue of which of these two provisions prevails because [Lossco] does not wish to benefit from a deduction under paragraph 20(1)(m).”
Grand Toys Ltd. v. MNR, 90 DTC 1059, [1990] 1 CTC 2165 (TCC)
The taxpayer agreed to act as the exclusive distributor in Canada of articulated figurines produced by a Hong Kong joint venture ("Panosh") and agreed to pay, for each order it placed, 103% of the ex Hong Kong factory price, plus "a buying commission and royalty ... of U.S. $0.52". Because the "royalty" was in no way related to the taxpayer's profits or gross sales of the units, and because there was no element of contingency in the quantum of the payments to be made, it did not constitute a payment in the nature of rents, royalties or similar payments.
Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al., 80 DLR (3d) 449, [1978] 2 S.C.R. 545
In order to divert to itself the increase in the price of oil that occurred after 1973, the Legislature of Saskatchewan enacted a "mineral income tax" approximately equal to 100% of the difference between the price received at the well-head and the price formerly received by the producers. Virtually all the oil produced in Saskatchewan was exported to other parts of Canada or the United States.
After rejecting a submission that this "royaty surcharge" was a "royatlty" (whose customary meaning was "a share of the production obtained by the lessee" (p. 561), Martland J. found (p. 564) that "the tax under consideration is essentially an export tax imposed upon oil production" and therefore was in substance an indirect tax which was beyond the competence of the Saskatchewan Legislature.
IT-303 "Know-How and Similar Payments to Non-Residents"
Meaning of royalty
7. The Department considers that the words "rent" and "royalty" are used in a broad sense and are not necessarily restricted to periodic payments, but may in certain circumstances include single or lump-sum payments. In general, a rent or royalty represents a payment made to the owner of property for the right to use such property for a given period of time. In most circumstances where a rent or royalty is paid, the owner of the property used by the person paying the rent or royalty retains ownership. However, where property in Canada is sold and payment is dependent upon the use of or production from the property, this payment will be subject to tax under subparagraph 212(1)(d)(v), unless the property is agricultural land.