Separately paid royalties and licence fees may need to be added to the value for duty when they relate to the imported goods and are required as a condition of sale.
If your business pays royalties and licence fees for a trademark, design, patent, or other right tied to goods you import, that payment may need to be included in the value for duty, even if it doesn’t appear on your supplier’s invoice.
For customs valuation purposes, the key questions are whether the payment relates to the imported goods and whether you are required to make it as a condition of the sale for export to Canada.
In this article, we explain when royalties and licence fees must be included when calculating value for duty under the transaction value method, and when they are not.
The Canada Border Services Agency (CBSA) considers royalties and licence fees to be payments made, or to be made, to acquire or use a protected right.
They can include payments for:
These payments may be made to the vendor or to a third-party licensor.
Under the transaction value method, royalties and licence fees may be added to the price paid or payable for the imported goods.
If a royalty or licence fee is already included in the price you pay your vendor, it is already part of the price paid or payable and therefore part of the value for duty.
If the payment is made separately, it must be added to the price paid or payable when all of the following conditions are met:
The fact that your vendor and licensor are the same person, or are related persons, does not by itself make the payment a condition of sale.
For a royalty or licence fee to be considered a condition of sale, the vendor’s right to refuse to sell the goods or repudiate the contract if the payment is not made must be explicitly stated in the commercial documentation between the purchaser and vendor, or in the licence agreement if the vendor is also the licensor.
This may include the sales agreement, commercial invoice, or other correspondence between the parties.
The same principle applies where the royalty or licence fee is paid through the vendor to another party. The payment is not considered a condition of sale unless the vendor can refuse to sell the goods or repudiate the contract if the payment is not made.
Not all payments related to intellectual property or commercial rights are added to the price paid or payable when calculating value for duty.
Royalties or licence fees paid for the right to reproduce imported goods in Canada are specifically excluded from being added to the price paid or payable under the transaction value method.
The right to reproduce is not limited to making a physical copy of the imported goods. It can also include the right to reproduce an invention, creation, thought, or idea that is incorporated in, or reflected by, those goods.
Payments for the right to distribute or resell goods in Canada are often made before the goods are sold for export to Canada. They are also commonly paid as a lump sum, such as a franchise fee, rather than being based on the selling price or quantity of goods sold.
These payments are only added to the price paid or payable if the documentation between the purchaser and the vendor or licensor explicitly states that failure to pay the royalty or licence fee allows the vendor to refuse to sell the licensed goods or repudiate the contract of sale.
Some royalty and licence fee agreements calculate payments periodically, such as a percentage of the eventual resale price of the imported goods.
Once the actual royalty or licence fee is determined, you may need to amend the declared value for duty if the final amount changes the amount that should have been declared.
Cole International provides trade consulting and customs brokerage services to help Canadian importers navigate customs valuation requirements.
Reach out to one of our trade professionals to discuss how royalties and licence fees may affect the value for duty of your imported goods.