HST and patent royalties
The new harmonized sales tax (HST) comes into effect in Ontario and British Columbia on July 1, 2010. A guidance document published on the Canada Revenue Agency website (since removed) 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 royalty payments on intellectual property? According to CRA guidance, yes. CRA seems to ignore the distinction between a sale and a license of IP. From a tax perspective, the question is whether there is a “supply” of IP to Canadian residents (supplies of intellectual property to foreign residents are generally “zero-rated” and not subject to HST). A 2007 CRA bulletin states:
“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% in Ontario] 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.
No discussion about taxes on royalties would be complete without a caution. 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.”
EDIT: many people have accessed this post so I decided to add some clarification and improve readability. Thanks for reading.
