In consideration for a lump sum, a non-resident in a Treaty country (NRco) granted an arm’s length Canadian company (Canco) the exclusive right to distribute its product in Canada, with Canco agreeing not to acquire or sell competitive products. The Directorate found that the lump sum was not a royalty on general principles, stating:
[T]he Upfront Payment is not a “royalty” within the meaning of paragraph 212(1)(d) on the basis that it is a lump sum payment that does not depend on Canco’s profit or the degree of exercise by it of its exclusive distributorship right. … [C]ontingency is an essential element of a royalty.