2022-0926461C6 IFA 2022 Q2 - Royalty Apportionment 212(1)(d)(vi)

Principal Issues: Determination of the application of the exception in subsection 212(1)(d)(vi).

Position: General comments provided.

Author: Dion, Jean-Bernard
Section: 68, 212(1)(d)(vi)

2022 International Fiscal Association Conference

CRA Roundtable

Question 2 - Apportionment of a Royalty Payment for the Purposes of Subparagraph 212(1)(d)(vi)

Should the application of the exception in subparagraph 212(1)(d)(vi) be based on an apportionment of a royalty payment between copyrights and trademarks agreed to by arm’s length parties to a mixed contract?

CRA Response

Where arm’s length parties enter into a royalty agreement in respect of property that is protected by both a trademark and a copyright (referred to as a “mixed contract” in this response), the parties might decide to include in the agreement an apportionment of the royalty payment between the copyright and the trademark.

If the payment is made to a non-resident of Canada, a portion of this royalty payment might be subject to tax under part XIII (“withholding tax”). In this regard, paragraph 212(1)(d) generally provides that an amount paid as a royalty to a non-resident person should be subject to withholding tax, unless one of the exclusions described in that paragraph applies. In particular, subparagraph 212(1)(d)(vi) provides that a royalty or similar payment “on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work” is not subject to withholding tax.

An apportionment of a royalty payment agreed to by arm’s length parties under a mixed contract, to the extent that it is reasonable and realistic, in the sense that it is reflective of the actual consideration paid for a copyright described under subparagraph 212(1)(d)(vi), will generally be accepted by the CRA.

However should the apportionment of the royalty payment between copyrights and trademarks not be reflective of the actual consideration paid for a copyright described in the exemption provided under subparagraph 212(1)(d)(vi), the role of the CRA is to administer that provision and to assess the parties based on their statutory obligation. A taxpayer does not have the prerogative to define the scope of its tax obligations under paragraph 212(1)(d) by including in a mixed contract an apportionment that is based on its preferred tax outcome. This is consistent with the comments of the court in paragraphs 105 and 106 of the decision rendered in Paletta v. The Queen, 2019 TCC 205.

Whether a particular apportionment of the consideration paid is reflective of the actual payments described in the exemption under subparagraph 212(1)(d)(vi) depends on the legal nature of what is being provided under the mixed contract, the relationship between the parties and the facts of the particular situation including the commercial reality of the parties and the consideration paid in these circumstances. In determining if an apportionment provided under a mixed contract is reflective of the obligation of the parties under subsection 212(1), consideration would be given, amongst others, to the terms of the mixed contract and to whether the parties have divergent interests in respect of this apportionment. Where the payor is economically indifferent to the apportionment, the apportionment provided under the terms of the mixed contract might not be reasonable, realistic and reflective of the tax obligation of the recipient under subsection 212(1)(d) and the CRA might determine that a different portion of the payment is subject to withholding tax.





Jean-Bernard Dion
2022-092646
May 17, 2022

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