Taxation Of Royalties And Licensing In Canadian Law

According to the Canada Revenue Agency (CRA), royalties are payments received in compensation for allowing someone to utilize a patent, trademark, copyright, secret process, or formula. They can also include investment or business income, as well as payments linked to television or film. The source and type of a royalty can directly impact the level of tax incurred on this income. Read about the taxation of royalties and licensing in Canadian Law, and discover how a Halifax tax lawyer from Jeremy Scott Law can aid businesses with their taxation concerns by calling (902) 403-7201.

Understanding the Taxation of Royalties and Licensing

Property owners receive royalties as compensation for allowing another party to use their assets, which can be intellectual property, such as musical or literary works, or physical assets, like minerals. Often, royalty payments are a proportion of the income or sales made by the individual or entity utilizing the property, either before or after deductions, but they could also be of a fixed value. If somebody wishes to sell the rights to use one or more assets to another party, they could consider formulating a royalty agreement. A royalty agreement is a contract between the asset owner, known as the licensor, and the person or organization wanting to use the asset, called the licensee; the agreement grants permission to the licensee to utilize the licensor’s asset and outlines the terms of use, such as the fee to be paid and the duration of the agreement.

Effective royalty agreements benefit both parties: The licensor earns an income from the royalty payments, and the licensee gains the use of the licensed asset, often for the purpose of generating additional income in their own enterprise. Since royalties are a type of income, the licensor may owe taxes on the payments they have received, with the level and kind of taxation depending on several factors, such as whether the parties bound by a licensing agreement are local vs. international entities.

Are Royalties Taxable in Canada?

Withholding tax occurs when another party deducts tax from the receiver’s income and pays the amount to the relevant tax-collecting authority. In addition to being a common arrangement between employers and employees, a withholding tax may also be applied to royalties paid by a licensee to a licensor. When the royalty fee is paid by a Canadian resident to a non-Canadian licensor, the royalty payments will frequently incur withholding tax, which varies in size depending on any existing tax treaties between Canada and the home country of the licensor.

The Income Tax Act (ITA) outlines that the usual rate of withholding tax applied to royalties paid by Canadians to non-residents is 25%. However, lower rates may apply under specific tax treaties with other countries. These international agreements help to prevent double taxation and facilitate commerce between residents of different countries by limiting the withholdings on various sources of income, such as royalties.

How Do I Report Royalty Income in Canada?

The CRA’s Folio 14 provides detailed guidance for artists, writers, and others whose work regularly involves the creation of intellectual property regarding how to classify the income from their endeavors. In general, however, CRA explains that an individual will typically report their royalty income from domestic licensing arrangements via box 17 on their T5 slip, which Canadian residents use to report benefit and income tax returns. Individuals should not use the T5 slip to report income from investments paid by individuals based outside of Canada. Here is an explanation of where to enter the income from royalties on a tax return:

• Line 10400: This is where individuals should note royalty income from an invention or artistic work.
• Lines 12100 and 13500: These sections are for recording other royalty income.

A business tax lawyer with Jeremy Scott Law may be able to help Canadian business owners and entrepreneurs explore the taxation of royalties and licensing in Canadian law in greater detail in a personalized consultation.

Are Royalties Subject to GST/HST in Canada?

The goods and services tax (GST) / is a type of value added tax that local businesses and consumers pay. The harmonized sales tax (HST) combines Canada’s GST with a provincial sales tax in certain provinces. The GST rate is 5% while the rate of HST varies between 13% and 15%, depending on the province. For example, Ontario. is an HST province and employs HST at 13%. Alberta, which has no provincial sales tax, has GST at 5% only.

Local tax regulations, transaction specifics, and the types of parties involved in the licensing agreement may all influence the taxation on royalties and licensing fees. Below is an overview of when royalties are subject to GST/HST in Canada:

• GST/HST and royalties: In general royalty income is subject to GST/HST. It will be important to understand Canada’s place of supply rules to determine which rate of GST/HST must be collected on royalty payments.
• Exceptions: In some circumstances, GST/HST, is not due on royalties; for instance, if the royalty income is from an exported asset or the licensee is a non-resident there may be a zero-rating provision which effectively removes the tax from the royalty payment.

Per the CRA, HST and GST registrants, except for charities and some financial institutions, must submit their tax filings electronically; otherwise, the registrant could face a penalty.

How Are Royalties Taxed?

In Canada, several factors may influence how royalties are taxed. Some of the most common include:

• Residency status: Canadian residents get taxed on their global income, which may include any royalty payments earned, regardless of whether the source of revenue was domestic vs. international. By contrast, non-Canadian residents incur tax on royalty income earned from property based in Canada and Canadian commercial activities.
• Tax deductions: Residents of Canada may include reasonable royalty-related tax deductions on their tax returns. Examples of such deductions include the fees associationed with intellectual property registration and related maintenance expenses.
• Royalty sales: Depending on the sales terms and royalty type, if someone chooses to sell their right to earn future royalties, the seller could incur capital gains tax.

Contact a Nova Scotia Tax Lawyer Today

Canadian tax laws are notoriously complex, including those referencing licensing and royalties. To gain assistance with interpreting these laws and correctly recording income from royalties on a tax return, consider speaking to an attorney. Understand more about the taxation of royalties and licensing in Canada, and find out how a Nova Scotia tax lawyer can help firms with their tax-related legal matters by contacting Jeremy Scott Law at (902) 403-7201.