Jarlan v. The Queen, 84 DTC 6452, [1984] CTC 375 (FCTD)

The Associate Chief Justice:—This action pursuant to section 174 of the Income Tax Act (RSC 1952, c 148 and amendments thereto) appeals assessments for the 1976 and 1977 taxation years and came on for hearing at Ottawa, on December 14, 1983. The facts are not in dispute and are set out in an agreed statement of facts, filed March 8, 1983, substantially as follows:

1. The plaintiff is a scientist who was resident in Canada throughout the period of March 1954 to July of 1966. Since July of 1966, the plaintiff has been a resident of France.

2. When the plaintiff was resident in Canada, he was employed as a senior research officer by the National Research Council of Canada, and while acting within the scope of his said employment, he invented what has become known as the “Jarlan Perforated Wall Concrete Caisson”.

3. The invention was made with facilities, equipment and financial aid provided by or on behalf of Her Majesty and resulted from and was connected with the plaintiffs duties and employment.

4. Pursuant to the Public Servants Inventions Act, RSC 1970, c P-31, the plaintiffs invention and all rights to it in Canada or elsewhere vested in Her Majesty in right of Canada, and administration and control of the invention were transferred by the Minister responsible for the National Research Council of Canada to Canadian Patents and Development Limited, an agency of Her Majesty resident in Canada.

5. Canadian Patents and Development Limited applied for and secured patent protection in respect of the invention.

6. The plaintiff left his employment at the National Research Council in 1966, returned to France, his country of origin, and established himself as a consultant in the field of hydrodynamics.

7. Through licensing agreements the patent rights, especially since 1972, have earned royalty income for Canadian Patents and Development Limited, and pursuant to section 10 of the Public Servants Inventions Act and section 13 of the Public Servants Inventions Regulations, SOR/73-104, February 28, 1973, the Minister responsible for the National Research Council of Canada autho- rized the payment of awards to the plaintiff in the amounts of $31,617.95 in 1976 and $31,943.10 in 1977, calculated as a percentage of the gross royalties received by Canadian Patents and Development Limited on account of the use of the patents.

8. Canadian Patents and Development Limited paid the plaintiff the awards of $31,617.95 in 1976 and $31,943.10 in 1977, and issued the plaintiff T4A slips for each of the said years.

9. The Minister of National Revenue assessed the plaintiff in respect of the said awards for the 1976 taxation year by notice of assessment dated November 26, 1979, and for the 1977 taxation year by notice of reassessment dated March 7, 1980.

10. The plaintiff objected to the said assessments by notices of objection filed February 20, 1980 and May 23, 1980, respectively, and the Minister of National Revenue issued notification of confirmation in respect of the said assessments on January 29, 1981.

It is the Crown’s contention that the nature of the payment to the plaintiff, in these circumstances, is income and has been unequivocally so found by the decision of Mr Justice Walsh in Thomas Dauphinee v The Queen, [1980] CTC 332; 80 DTC 6267. Consequent upon that finding, the relevant provisions of the statute are subsection 5(1), and thereafter paragraph 115(2)(c) and subparagraph 115(2)(e)(i);

5. (1) Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration including gratuities, received by him in the year.

115. (2) Where, in a taxation year, a non-resident person was

(c) an individual who had, in any previous year, ceased to be resident in Canada and who was, in the taxation year, in receipt of remuneration in respect of an office or employment that was paid to him directly or indirectly by a person resident in Canada,

(e) for the purposes of subpararaph (l)(a)(v), the aggregate determined under this paragraph in respect of the non-resident person is the aggregate of

(i) any remuneration in respect of an office or employment that was paid to him directly or indirectly by a person resident in Canada and was received by the non-resident person in the year, except to the extent that such remuneration is attributable to the duties of an office or employment performed by him in a country other than Canada and

(A) is subject to an income or profits tax imposed by the government of a country other than Canada, or

(B) is paid in connection with the selling of property, the negotiating of contracts or the rendering of services for his employer, or a foreign affiliate of his employer, or any other person with whom his employer does not deal at arm’s length, in the ordinary course of a business carried on by his employer, and that foreign affiliate or that person,

In a very persuasive presentation, counsel for the plaintiff argued that since Dr Jarlan had ceased to become a resident of Canada before these payments were made to him, it was open to me to conclude that they escaped the classification as income and could be treated as royalties, as contemplated by subpara- graph 212(l)(d)(i):

212 (1) Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of,

(d) rent, royalty or a similar payment, including, but not so as to restrict the generality of the foregoing, any payment

(i) for the use of or for the right to use in Canada any property, invention, trade name, patent, trade mark, design or model, plan, secret formula, process or other thing whatever,

I find, however, that the Dauphinee case is directly on point with the sole exception that Dr Dauphinee always remained a resident of Canada. I consider it a decision by which I am bound, and in any case, with which I have no reason to disagree. Furthermore, extensive examination of the reasoning in the Federal Court of Appeal and in turn in the Supreme Court of Canada in The Queen v Elizabeth Joan Savage, [1983] CTC 393; 84 DTC 6409 reinforces that conclusion. Sums paid to the inventor under the statutory provisions which apply to the facts of this case are income from employment, not royalties. The action of the recipient in becoming a non-resident of Canada cannot change that and is in fact precisely contemplated by subparagraph 115(2)(e)(i) in clear and unambiguous terms.

In the final analysis, I am not satisfied that the Minister was in error in assessing these sums as income in the plaintiffs 1976 and 1977 taxation years and accordingly the action must be dismissed.