Tax Implications Of Cross-Border Intellectual Property Licensing For Canadian Companies

As a business owner, making money matters. One way you might make money is by selling or licensing your intellectual property (IP). Another is by buying or licensing someone else’s intellectual property. What happens when the person you are selling your creation to, or buying a creation from, is outside Canada? What are the tax implications of cross-border intellectual property licensing? If you have questions about licensing IP or taxes, contact one of our knowledgeable tax lawyers with Jeremy Scott Law at (902) 403-7201 to schedule a consultation and learn more about how this method of producing income impacts your taxes. 

Intellectual Property in Canada

The Government of Canada defines intellectual property as creations of the mind, whether tangible or intangible. The government also identifies four main types of intellectual property. They are: 

• Copyrights: This is the sole right to produce or reproduce a work, in whole or in part. 
• Patents: Original invention protection that applies to products, machines, processes, chemical compositions and improvements to any of those inventions. 
• Trademarks: A clever, catchy name that identifies the essence of a brand and identifies that brand’s goods and services to the public mind. 
• Industrial Designs: Protection for how something looks, or protecting the visual features of shape, ornament, pattern, configuration, or any combination of these features. 

There are other types of intellectual property, such as trade secrets, but the four types listed are the ones most commonly sold and licensed. 

What Is Intellectual Property Licensing?

Intellectual property licensing, or IP licensing, is an effective and reliable way to generate long-term revenue from IP. Licensing is also scalable, making it a method that can grow with your company. IP licensing is an agreement between the IP owner and another party which allows the other party to use the IP owner’s intangible assets for a set price. This price is typically paid as a recurring cost or fee that is usually called a royalty. 

The IP owner keeps the rights to monetize and enjoy their IP while preventing others from doing so when they license their IP. Licensing IP may mean giving another company the right to use the IP to help run their business, such as when a patent owner develops a process for more efficiently building a product and licenses the process to other businesses. Licensing IP may also mean giving individuals the right to use the IP, such as when a computer software is sold to individuals to use on their laptops or phones. 

What Is the Difference Between Selling and Licensing Intellectual Property?

At first glance, selling and licensing intellectual property may seem to be the same thing. In both cases, someone else gains the right to use the IP and the IP owner makes money. The main difference between intellectual property licensing and selling is control over the IP. If the seller or IP owner relinquishes all control over the IP to the other party, it is considered a sale. If the seller or IP owner retains control over the IP, but grants the other party specific rights to the IP, then it is licensed to the other party. 

Tax Implications of Cross-Border Licensing Vs. Sale of Intellectual Property

There are many financial considerations that must be carefully weighed before deciding to license intellectual property across national borders. One such consideration is that the IP owner may want or need to register their IP in the foreign country in which they wish to license the IP to protect their rights. Canadian registration only protects the IP in Canada. IP owners may desire to register their IP in each country they plan to license their IP in. This is an additional expense that may add up quickly if the business owner is planning to license their IP in several countries at once. 

There are many tax implications to think about as well. Whether a business owner is licensing their own intellectual property to others or they are purchasing a license to someone else’s IP, it is important to understand the potential tax consequences. A skilled tax lawyer with Jeremy Scott Law may be able to assist you with understanding how taxes apply to your purchase or sale of intellectual property licenses. 

Licensing Your Intellectual Property to Others 

The Canada Revenue Agency (CRA) considers intellectual property as intangible personal property (IPP). As IPP, a license to that intellectual property is zero-rated if the license is sold to a non-resident recipient who is not registered under the regular Harmonized Sales Tax or Goods and Services Tax (HST/GST) registration provisions and is not physically present in Canada at the time of the sale. To confirm the recipient is a non-resident, the CRA accepts a self-declaration that they are not a resident when it includes their complete home address and that home address matches the billing address for the card used to purchase the license or matches the country the financial institution that issued the card is located in. The CRA also allows use of geo-location software for verification that the the recipient is outside Canada at the time of the sale. 

Licensing Intellectual Property From Others

The tax implications are a bit different when an individual or company is licensing intellectual property from others outside of Canada. In this case, per the Government of Canada, the Canadian buyer will need to self-assess the GST or the federal portion of the HST if they purchased it for use less than 90% in their commercial activities (or 100% if they are a financial institution). If they do not use the IPP at least 90% in commercial activities, they must report the GST or federal part of the HST on line 405 of the GST/HST return and remit the tax to the CRA. Tax is calculated based on the amount charged for the IPP in Canadian dollars and is due in the same reporting period that the IPP became payable or was paid for. 

If the Canadian buyer is a resident of a participating province, they will also need to self-assess the provincial part of the HST if bought for use at least 10% in the participating provinces. This tax is computed at the rate for the provincial part of the HST for each province the IPP will be used in on the amount paid to the extent it will be used in that province. If the buyer is not registered for the GST/HST, they still have to pay tax on the imported IPP. To remit this tax, they would use Form GST59. This tax is payable by the close of the month after the calendar month that the intellectual property license was paid or became payable. 

How a Lawyer May Be Able To Assist You with Cross-Border Intellectual Property Licensing and Taxes

Whether you are buying or selling intellectual property licensing, there are tax implications that must be considered and resolved. An experienced tax lawyer may be able to assist you with ensuring that you are paying the appropriate amount of tax, confirming that you have proof of your cross-border sales, and other tax questions or concerns around licensing or selling intellectual property. Call Jeremy Scott Law at (902) 403-7201 to schedule a consultation and review your Canadian tax options.