10th
HST and patent royalties
The new harmonized sales tax (HST) is coming into effect in Ontario and British Columbia on July 1, 2010. A guidance document published on the Canada Revenue Agency website clarifies the transition rules through the use of the following example:
“You sold a patent to manufacture widgets and receive fixed annual royalty payments in respect of the sale. A royalty payment becomes due on June 20, 2010, but it is not paid until July 10, 2010. Since the payment becomes due before July 2010, the GST applies to the royalty payment, even though the payment is made on or after July 1, 2010.”
Does GST/HST really apply to these types of payments? A 2007 CRA bulletin seems to ignore the distinction between a sale and a license and suggests that, from a tax perspective, the question is whether there is a “supply” of IP to Canadian residents (for example):
“Taxable (other than zero-rated) supplies made in Canada are subject to GST at a rate of 6% [author: now 5%], or HST at a rate of 14% [author: now 13%] if they are made in the participating provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador. A “zero-rated supply” is a taxable supply that is subject to GST/HST at a rate of 0%.”
and
“[S]upplies of intellectual property (such as a patent or trademark) and rights to use such property are zero-rated if they are made to non-registered non-residents.”
Licensors of intellectual property in Ontario and BC should be aware of the HST and the HST transition rules, especially when selling to Canadian residents or certain non-residents where GST/HST may be payable.
As stated by the authors of the CF&P text on Commercial Transactions: Licensing:
“In any event, determining the tax consequences of a licensing agreement’s payment structure is typically a challenging process due to the inherent complexity of domestic taxation legislation and international tax treaties, and will, in many cases, necessitate the retention of expert advice.”
