Rapistan Canada Ltd. v. MNR, 74 DTC 6426, [1974] CTC 495, briefly aff'd 76 DTC 6177, [1976] CTC 296 (SCC)

The Chief Justice (concurred in by Mackay and Sweet, DJJ—judgment delivered from the Bench):—This is an appeal from a judgment of the Trial Division dismissing an appeal from the appellant’s assessments under Part I of the Income Tax Act for the 1966, 1967 and 1968 taxation years.

The facts are fully set out in the reasons for judgment of the learned trial judge and I do not propose to state them except in so far as is necessary to indicate why I am of opinion that the appeal must be dismissed.

On February 1, 1957 an instrument entitled “Deed of Gift” was executed by the appellant and The Rapids-Standard Company Inc. In this document The Rapids-Standard Company Inc is referred to as “Rapistan”’ the “donor” and the appellant is referred to as the “donee”. The substantive part of the document reads as follows:

NOW THEREFORE THIS DEED OF GIFT WITNESSETH AS FOLLOWS:

1. RAPISTAN gives, grants and assigns by way of gift to RAPISTAN CANADA, subject to the provisions stated below, to have, to hold and to enjoy for a term of 10 years or during such period as RAPISTAN is a shareholder of RAPISTAN CANADA, whichever shall be the shorter period, all of its present manufacturing, engineering, production, management and sales know-how, techniques, skills and experience, together with, but not limited to, all of its blueprints and designs and the following franchises, rights and licences, limited to and exclusive in the Dominion of Canada, namely:

(a) To manufacture or assemble and to market the full range of RAPISTAN products;

(b) To use all RAPISTAN product designs and applications, productions, sales and marketing data, methods and techniques, bibliography, library, field reports, sales aids and data;

(c) To use the existing RAPISTAN developed Canadian sales organization;

(d) To use all RAPISTAN trade names, trade marks, registered or unregistered, including the right to use future acquired trade names and trade marks, and to become a registered user of the Canadian registered trade mark;

(e) To use and practice the arts disclosed in all RAPISTAN patents and applications for patents.

Provided however that until such time as RAPISTAN CANADA is able to and does produce a specific RAPISTAN product, RAPISTAN may continue to produce and supply to the Canadian market its United States produced specific RAPISTAN product in order that the Canadian market may be adequately served and none of the foregoing gifts shall prohibit RAPISTAN from so doing.

2. RAPISTAN CANADA accepts the foregoing gift and acknowledges, covenants and agrees as follows:

(a) That by reason of accepting the foregoing gift it will obtain confidential information and data disclosed to it by RAPISTAN and it will not at any time except so far as may be necessary in connection with its own rights of manufacture and sale, disclose to third persons any of the information, knowledge or data imparted or furnished to it by RAPISTAN and it will use every effort to prevent disclosures at any time of the said information, data or knowledge by its employees or others possessing or having access thereto;

(b) That it will not by reason of its exercise of the rights hereby given to it obtain or claim to obtain any property rights whatsoever or wheresoever in respect to any trade name, trade mark, letters patent or applications for any such, now owned or controlled by RAPISTAN beyond the rights conferred upon it by this Deed of Gift;

(c) That should trade marks covered hereby be registered by RAPISTAN under the laws of any country other than Canada, such registration and trade marks shall be the sole property of RAPISTAN, and RAPISTAN CANADA will not contest at any time in any manner, the validity thereof;

(d) That should Rapistan apply for or have issued letters patent by any country other than Canada relating to any product covered by this Agreement, RAPISTAN CANADA will not contest at any time, in the manner, the validity thereof;

(e) That the rights, franchises and licences acquired by it hereunder will not be transferred by it in any way without the prior consent of RAPISTAN;

(f) That upon the termination of the period hereinbefore fixed it will return to RAPISTAN all blueprints, written data and information.

The basic question to be decided on this appeal is the question whether the subject matter of this so-called “gift” is “property” that is a “patent, franchise, concession or licence . . . in respect of property” within the meaning of those words in Class 14 of Schedule B to the Income Tax Regulations in respect of which the appellant may claim capital cost allowance. It is clear that, if what the appellant has acquired by the “Deed of Gift’ is not “property” of such a class, the appeal must fail.* [1]

Class 14 reads as follows:

Class 14

Property that is a patent, franchise, concession or licence for a limited period in respect of property but not including

(a) a franchise, concession or licence in respect of minerals, petroleum, natural gas, other related hydrocarbons or timber and property relating thereto (except a franchise for distributing gas to consumers or a licence to export gas from Canada or from a province) or in respect of a right to explore for, drill for, take or remove minerals, petroleum, natural gas, other related hydrocarbons or timber,

(b) a leasehold interest, or

(c) a property that is included in class 23.

As appears from the appellant’s memorandum of fact and law, the substance of the “gift” was the donor’s “existing technology and knowhow”. The question is, therefore, whether “technology and know-how” is “property” that falls within the words “a patent, franchise, concession or licence . . . in respect of property”.

The word “property” is defined by paragraph 139(1)(ag) of the Income Tax Act as follows:

’’property” means property of any kind whatsoever whether real or personal

or corporeal or incorporeal and, without restricting the generality of the foregoing, includes a right of any kind whatsoever, a share or a chose in action; [2]

While the “Deed of Gift” purports to be a gift, grant and assignment of “know-how, techniques, skills and experience”, as far as I know, under no system of law in Canada, does knowledge, skill or experience constitute “property” that can be the subject matter of a gift, grant or assignment except to the extent, if any, that it can be a right or a part of a right in respect of which there is property of the kind classified as industrial property. Therefore, as I understand the “gift” in this case in the light of the evidence, it must be construed as a promise by the donor that the appellant will be informed and instructed by the “donor” as to how to commence and carry on a certain manufacturing operation. Clearly, it is not based on any of the industrial property rights such as patents for inventions, copyright, trade marks and industrial designs.* [3]

As I understand the law, knowledge or ideas, as such, do not constitute property. Certainly, they cannot be the subject of copyright. Compare, for example, Moreau v St Vincent, [1950] Ex CR 198, per Thorson, P at pages 204-5:

Just as an author has no copyright in the ideas he has expressed even although they are original, but only in his expression of them, so also no person has any copyright in any arrangement or system or scheme or method for doing a particular thing even if he devised it himself. It is only in his description or expression of it that his copyright subsists. This principle was tersely put by Lindley LJ in the leading case of Hollinrake v Truswell, [1894] 3 Ch 420 at 427, as follows:

“Copyright, however, does not extend to ideas, or schemes, or systems, or methods; it is confined to their expression; and if their expression is not copied the copyright i is not infringed.”

and there has never been any departure from this principle. I am, therefore, of the view that in seeking to protect his system for conducting a competition from encroachment by the defendant the plaintiff was attempting to use the law of copyright for a purpose to which it is not applicable. He claimed more than the law permits.

To a limited extent, knowledge or ideas can be the subject of a monopoly conferred by a patent for an invention or by registration of an indusirial design, and therefore, to that extent, “property” as, I suppose it may be said, techniques, skills and experience may be, in a certain sense. As such, however, and in the absence of any such sta- utory monopoly, in my view, “know-how, techniques, skills and experience” are not “property” and cannot, therefore, be “property” within Class 14 (supra).

It is true, of course, that one businessman may acquire from another what is usually referred to as “know-how” just as he can acquire what is usually referred to as “goodwill” and, when he does so for a consideration, what he has acquired may properly be referred to, and shown in his balance sheet, as an “asset”. The question still remains as to whether he has, in any particular case, acquired “property” within the definition of that word in the Act. The difference is exemplified in this case by the following statement in the appellant’s memorandum of fact and law:

The US Company could have fulfilled its obligations under the deed of gift by delivering all its blueprints, field reports, engineering data, service manuals, etc. existing as of February, 1957, allowing a week or so for representatives of the Canadian Company to go through the plant, and then declined to do anything more,

The asset that the appellant acquired in this case was the knowledge of how to commence and carry on the particular manufacturing operation. That was, from the businessman’s point of view, an “asset”. It was not, however, “property”.

It is true that the appellant did, by the “Deed of Gift”, acquire, by implication, a promise that the donor would do certain things and that that promise is a “right” that falls within the definition of the word “property”. That right is not, however, the “know-how” that is the subject matter of the claim for capital cost allowance. As appears from the passage just quoted from the appellant’s memorandum, that promise could have been soon satisfied. The “know-how” would, however, continue as a capital asset of indefinite duration.* [4] It is not however, as such, “property”.

In my opinion, the appeal should be dismissed with costs.