A Canadian Royalty Agreement is a legally binding contract between a licensor (intellectual property owner) and a licensee (IP user) that establishes the terms under which the licensee may use the licensor's intellectual property in exchange for periodic royalty payments. This agreement is essential for monetizing patents registered with the Canadian Intellectual Property Office (CIPO), copyrights protected under the Copyright Act (R.S.C. 1985, c. C-42), trademarks registered under the Trademarks Act (R.S.C. 1985, c. T-13), industrial designs, trade secrets, and software.

In Canada, royalty agreements must account for several unique legal considerations. The Copyright Act provides authors with moral rights under section 14.1 — the right to attribution and the right to the integrity of the work — which cannot be assigned but may be waived in writing. The Income Tax Act imposes Part XIII withholding tax at 25% on royalties paid to non-residents under section 212(1)(d), though tax treaties may reduce this rate and copyright royalties for literary, dramatic, musical, or artistic works may be exempt under subparagraph 212(1)(d)(vi). GST/HST may apply to royalty payments where the supply of intellectual property constitutes a taxable supply under the Excise Tax Act.

A well-drafted Canadian Royalty Agreement defines the licensed IP, scope of permitted use, royalty calculation methodology, payment terms, reporting obligations, audit rights, confidentiality protections, and termination conditions. Late payment interest must comply with Criminal Code section 347, which as of January 1, 2025, caps the criminal interest rate at 35% annual percentage rate (APR). The agreement should also address whether the licence is exclusive or non-exclusive, the geographic territory, sublicensing rights, and allocation of IP infringement risk through indemnification clauses.

A Canadian Royalty Agreement is needed whenever an intellectual property owner wishes to licence their IP to another party in exchange for ongoing royalty payments rather than a one-time sale. Common scenarios include licensing a patented invention to a manufacturer who pays a percentage of sales revenue, licensing copyrighted content (books, music, software, artwork) to a publisher or distributor, licensing a trademark or brand name to a franchisee, and licensing trade secrets or proprietary technology to a business partner.

This agreement is particularly important for Canadian technology companies, authors, musicians, inventors, and brand owners who want to retain ownership of their IP while generating recurring income. Startups and research institutions frequently use royalty agreements to commercialize innovations developed in-house without building manufacturing or distribution capabilities.

A Royalty Agreement is also critical when IP crosses provincial or international borders. If the licensee is a non-resident of Canada, the licensor must consider Part XIII withholding tax obligations under the Income Tax Act and potential treaty relief. If the IP involves copyrighted works, the agreement should address moral rights waiver under section 14.1 of the Copyright Act. For patented inventions, the agreement should reference the CIPO patent registration number and define the scope of the patent claims licensed.

Without a written agreement, disputes over royalty calculations, payment timing, permitted use, and territory can be difficult to resolve. Provincial limitation periods for breach of contract claims range from two years in Ontario, British Columbia, and Alberta to three years in Quebec and six years in Manitoba and the Atlantic provinces.

A comprehensive Canadian Royalty Agreement should include identification of both parties with full legal names and Canadian addresses, a detailed description of the licensed intellectual property including registration numbers from CIPO where applicable, specification of whether the licence is exclusive or non-exclusive, the geographic territory, and the permitted scope of use.

The royalty payment structure must be clearly defined — whether calculated as a percentage of gross revenue, net revenue, a fixed amount per unit sold, or a flat periodic fee. Include minimum annual royalty guarantees if applicable. Payment terms should specify frequency (monthly, quarterly, semi-annually, or annually), the number of days after period-end by which payment is due, the payment method, and the currency (typically CAD). Late payment interest rates must not exceed the Criminal Code s.347 criminal rate of 35% APR.

Reporting obligations require the licensee to provide detailed sales reports with each payment, and audit rights allow the licensor to inspect financial records upon reasonable notice. The agreement should specify record retention periods — the CRA recommends a minimum of six years. For copyright-protected works, address moral rights under Copyright Act s.14.1 and whether the author waives them. Include GST/HST provisions noting that the supply of IP may be a taxable supply under the Excise Tax Act. For non-resident licensors, address Part XIII withholding tax under ITA s.212(1)(d).

Termination provisions should cover both termination for cause (material breach, insolvency under the Bankruptcy and Insolvency Act) and termination without cause with a notice period. Post-termination obligations should require the licensee to cease using the IP, return or destroy materials, and pay accrued royalties. Include confidentiality obligations, dispute resolution mechanisms (litigation, arbitration, or mediation), indemnification clauses, and a governing law clause specifying the Canadian province.