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: Are certain legal fees incurred and paid in the application for patents deductible pursuant to paragraph 20(1)(cc) of the Act?
Position: Yes.
Reasons: The term "in making any representation" in paragraph 20(1)(cc) is broad enough to include an application to a government or public body or a regulatory agency thereof. Our bulletins IT-99R5 and IT-477 both state that paragraph 20(1)(cc) applies to representation for the purpose of obtaining a patent.
December 4, 2001
Toronto West Tax Services Office HEADQUARTERS
Neale Dookie Jacques E. Grisé
Team Leader 957-2059
442-1-3
2001-010961
Representation Expense
This is in reply to your memorandum of November 7, 2001, requesting our opinion as to whether certain legal fees incurred in the application for patents qualify for a deduction under 20(1)(cc) of the Income Tax Act (the Act).
You are currently auditing a taxpayer who is in the business of designing and manufacturing XXXXXXXXXX. Legal fees were incurred by the taxpayer in the application for patents in order to protect its rights in the products that it has successfully designed and manufactured. The fees in issue consisted of charges by the taxpayer's lawyers for hours spent in filing the applications, title searches and in tracking or monitoring of the applications. They also consisted of reimbursements of registration fees paid by the lawyers to the applicable patent issuing authorities. Some of the applications were made to Canadian patent authorities, but the majority of them were made to foreign patent authorities.
As indicated in Interpretation Bulletins IT-99R5, Legal and Accounting Fees, and IT-477, Capital Cost Allowance - Patents, Franchises, Concessions and licenses, we have accepted that paragraph 20(1)(cc) of the Act applies to representation for the purpose of obtaining a patent.
In our view, the term "in making any representation" in paragraph 20(1)(cc) is broad enough to include making an application for a patent to a government or public body or a regulatory agency thereof. Accordingly, the amount paid by a taxpayer to another person in respect of an application for a patent relating to a business of the taxpayer would normally qualify as a deduction pursuant to paragraph 20(1)(cc) of the Act whether or not the patent is ultimately granted. The expenses deductible under paragraph 20(1)(cc) of the Act, include not only those of presenting and monitoring the application but also those of obtaining and preparing the information on which it is based.
It seems that a law firm hired by a taxpayer to obtain a patent by applying to a government or agency described in paragraph 20(1)(cc) of the Act or by purchasing an existing patent would invoice the services provided as "legal fees". Such fees paid for the former services could qualify as a deduction pursuant to paragraph 20(1)(cc) of the Act while the fees for the latter services would likely be included in the capital cost of the patent. The portion of the legal fees billed that do not relate to the application of a patent, such as, the reimbursements of registration fees paid by the law firm to the applicable patent issuing authorities would not qualify as a deduction pursuant to paragraph 20(1)(cc) of the Act but, as indicated in IT-477, would be included in the capital cost of the patent.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. A copy will be sent to you for delivery to the client.
We hope our comments are helpful.
John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
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