Royalties in Canada are taxed as either business income or other income depending on how they were earned, according to the Canada Revenue Agency (CRA). If you actively created the work generating royalties — such as writing a book, developing software, or licensing a patent — CRA classifies the income as business income reported on form T2125. If you passively receive royalties from inherited or purchased intellectual property, it is reported as other income on Line 13000. The classification determines what expenses you can deduct and how the income is taxed.
Last updated: March 2025
What Are Royalties According to CRA?
According to CRA’s definition, royalties are payments received as compensation for using or allowing the use of:
- A copyright (books, music, software, artwork)
- A patent (inventions, processes)
- A trademark (brand names, logos)
- A secret formula or process (trade secrets)
Common examples for Canadian entrepreneurs include self-published book royalties from Amazon KDP (which paid authors over $500 million USD in 2023 according to Amazon), music streaming royalties from Spotify or Apple Music, licensing fees for software or digital products, and royalty payments from franchises or business processes.
How CRA Classifies Royalty Income
CRA treats royalties differently depending on how they were earned. The classification affects your tax rate and deductions.
Business Income (Most Common for Creators)
According to CRA, if you actively created the work that generates royalties, this is business income. This applies if you:
- Wrote a book and earn ongoing royalties from sales
- Developed software and license it to other companies
- Created a course and earn royalties from a platform
- Invented a product and receive patent licensing fees
The advantage: As business income, you can deduct all related expenses against your royalty earnings. This includes the cost of your illustrator, editor, advertising, software tools, home office expenses, and any other costs directly related to creating and promoting the work.
Business income is reported on your T2125 (Statement of Business or Professional Activities) if you are a sole proprietor, or on your corporate tax return if you are incorporated.
Other Income (Passive Royalties)
According to CRA, if you did not actively create the work — for example, you inherited a copyright or purchased a patent as a passive investment — the royalties are classified as other income on Line 13000 of your personal tax return.
With other income, you have limited ability to deduct expenses. Only costs directly related to earning that specific income (like legal fees to maintain the patent) would typically be deductible.
Rental Income (Rare Cases)
In rare cases, royalties from licensing the use of tangible property (like equipment with a patented process) may be classified as rental income. This is uncommon for most people but worth mentioning for completeness.
Tax Rates on Royalty Income in Canada
Royalties do not have a special tax rate in Canada. They are added to your total income for the year and taxed at your marginal tax rate:
| Taxable Income (Federal, 2024) | Marginal Rate |
|——————————-|—————|
| Up to $55,867 | 15% |
| $55,867 to $111,733 | 20.5% |
| $111,733 to $154,906 | 26% |
| $154,906 to $220,000 | 29% |
| Over $220,000 | 33% |
Provincial tax rates are added on top of federal rates, bringing the combined marginal rate to between 20% and 54% depending on your province and income level.
Important: If royalties push you into a higher bracket, only the portion above the threshold is taxed at the higher rate — not all of your income.
Royalties Earned from the US (Amazon KDP, Audible, Spotify)
Many Canadians earn royalties from US-based platforms. According to the Canada-US Tax Treaty, here is how cross-border royalties are handled:
US Withholding Tax
The US withholds tax on royalties paid to non-residents. Under the Canada-US Tax Treaty, the withholding rate is reduced to 10% (from the default 30%), but only if you have submitted a W-8BEN form to the paying platform.
According to IRS data, many Canadians fail to submit the W-8BEN and overpay by 20 percentage points on every royalty payment.
Foreign Tax Credit
According to CRA, any US tax withheld can be claimed as a foreign tax credit on your Canadian return using Form T2209. This prevents double taxation. The credit is limited to the Canadian tax that would otherwise be payable on that foreign income.
GST/HST on Royalties
According to CRA, if your total worldwide revenue (including royalties) exceeds $30,000 in four consecutive calendar quarters, you are required to register for GST/HST.
However, royalties earned from foreign platforms (like Amazon KDP) for sales outside Canada are generally zero-rated exports, meaning you charge 0% GST/HST but can still claim input tax credits on related Canadian expenses.
Deductible Expenses for Royalty Income
If your royalties are classified as business income, according to CRA common deductible expenses include:
- Creation costs — illustrators, editors, designers, developers
- Advertising and promotion — Amazon ads, social media promotion, book launch costs
- Platform fees — publishing platform fees, distribution costs
- Professional services — accounting fees, legal fees for contracts
- Home office expenses — if you work from home creating the royalty-generating work
- Software and tools — writing software, design tools, keyword research tools
Reporting Royalties on Your Tax Return
| Income Type | Where to Report | Forms |
|————|—————-|——-|
| Business royalties | T2125 (sole prop) or T2 corporate return | T2125 |
| Passive/other royalties | Line 13000 on T1 personal return | T1 |
| US royalties with withholding | T1 + foreign tax credit | T2209 |
| GST/HST (if registered) | Regular GST/HST return | GST34 |
Frequently Asked Questions
How are royalties taxed in Canada?
Royalties are taxed as either business income or other income depending on whether you actively created the work. According to CRA, business royalties are reported on form T2125 and allow full expense deductions. Passive royalties are reported as other income on Line 13000 with limited deductions. Both are taxed at your marginal tax rate.
Do I need to pay GST/HST on royalty income?
If your total worldwide revenue exceeds $30,000 over four consecutive calendar quarters, you must register for GST/HST. However, royalties from foreign platforms for international sales are typically zero-rated, meaning no GST/HST is charged but you can still claim input tax credits on Canadian business expenses.
How do I avoid double taxation on US royalties as a Canadian?
Submit a W-8BEN form to the US platform to reduce withholding from 30% to 10% under the Canada-US Tax Treaty. Then claim the US tax withheld as a foreign tax credit on your Canadian return using Form T2209. This ensures you are not taxed twice on the same income.
Can I deduct expenses against royalty income in Canada?
Yes, if CRA classifies your royalties as business income (meaning you actively created the work). Deductible expenses include creation costs, advertising, platform fees, professional services, home office expenses, and software tools. Passive royalty income reported as other income has very limited deduction options.
Related Articles
- Independent Contractor vs Employee in Canada: CRA Rules and What Happens When You Get It Wrong
- Should You Incorporate as A Canadian Amazon Seller?
- Working from Home Tax Deductions in Canada: Complete Guide
Need Help With Royalty Income?
Royalty income can get complicated, especially when earning from multiple countries or deciding whether to incorporate your creative business. If you are a Canadian earning royalties and want to make sure you are set up correctly, contact us. We help entrepreneurs and creators get their taxes right.