Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
A company develops technology and applies for a patent. Prior to the patent being granted, the company grants a license to a related company for a period of XXXXXXXXXX years with the taxpayer having the option to renew for an additional XXXXXXXXXX years. The taxpayer incurs further costs to develop the technology, capitalizes the costs as class 14 and claims CCA. Can the taxpayer claim CCA on the development costs?
Position:
Royalties are current expenses. If there were any capital costs, they would be included in Class 14
Reasons:
The taxpayer has acquired a license for XXXXXXXXXX years. Even though the licensor has not received a patent, the taxpayer has incurred costs in respect of an XXXXXXXXXX -year license.
January 29, 2002
XXXXXXXXXX Tax Services Office HEADQUARTERS
Terry Young, CA
Attention: XXXXXXXXXX (613) 952-1506
Verification and Enforcement Division
2001-010777
XXXXXXXXXX ("Canco1")
Right to Use Patented Technology
We are replying to your letter of October 24, 2001, concerning whether or not certain expenditures were Class 14 assets and if capital cost allowance (CCA) could be claimed by Canco1 prior to patents being granted. We also acknowledge our telephone conversations (Young/XXXXXXXXXX ) of January 8 and 16, 2002.
XXXXXXXXXX ("Canco2") developed a technology for which it has applied for various patents in the United States and Canada. Canco2 has entered into a licensing agreement (the Agreement) with Canco1, a related company, for a period of XXXXXXXXXX years with an option for Canco1 to extend it for a further XXXXXXXXXX years. Under the Agreement, Canco2 grants to Canco1 a worldwide license "to develop, manufacture, market, sell and distribute products utilizing the technology" (the "Commercialization Rights") in exchange for royalties based on revenue. Canco2 also retains the rights to all improvements to the technology. Canco1 will also be permitted to sublicense the technology to XXXXXXXXXX ("USco"), a related corporation resident in XXXXXXXXXX, U.S.A., to contract with XXXXXXXXXX, an unrelated company resident in XXXXXXXXXX, U.S.A., for assembling and distributing Canco1's products, which utilize the technology covered by the licensing agreement.
Canco1 has capitalized certain costs with respect to the license and has amortized them over XXXXXXXXXX years on a straight-line basis in the taxation year ended XXXXXXXXXX. As of that date, the patents had not been approved. In our discussions, you indicated that the costs included a number of expenditures allocated amongst the various companies.
You have asked us if Canco1 should include the Commercialization Rights as a "right to use patented information" in Class 44 of Schedule II of the Income Tax Regulations (the Regulations). You have also asked us to comment on whether Canco1 can claim CCA for "a patent" or "right to use patented information" prior to the patent applications being approved.
Since no patents had been issued as of XXXXXXXXXX, it is our view that any cost associated with the acquisition of the Commercialization Rights conferred by the Agreement should not be included in Class 44. Because the patents had not yet been granted, the Commercialization rights could not be considered "a right to use patented information" within Class 44. In our view, these rights constitute "property that is a ... licence for a limited period in respect of property" and would be a Class 14 asset. However, it is not apparent that Canco1 incurred any costs to acquire the limited period license. According to the Agreement, Canco1 is only required to pay royalties based on revenue in respect of the license. In our view, these are current expenses and thus would not form part of the capital cost of a license.
Although it is not anticipated that Canco1 will be required to incur any other costs in respect of the license, you have indicated that Canco1 has capitalized other costs in respect of the license. Since, we have not been provided with any information on such costs, we cannot provide any comments.
We trust that our comments will be of assistance.
John Oulton, CA
Manager, Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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