2004 Ruling 2004-0081521R3 - Payment to settle patent infringement action

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.

Principal Issues: Whether a payment by a Canadian corporation to an XXXXXXXXXX corporation to settle a patent infringement action would amount to royalties for the purposes of paragraph 212(1)(d) of the Act and Article XXXXXXXXXX of the Canada-XXXXXXXXXX Income tax Convention.

Position: Yes.

Reasons: Jurisprudence and previous positions.

XXXXXXXXXX
								2004-008152
								Senior Rulings Officer
XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re : Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above named taxpayers in respect of the income tax consequences arising from the proposed transaction described below (the "Request"). We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations (XXXXXXXXXX) in connection with the Request.

XXXXXXXXXX files its tax returns with the XXXXXXXXXX Taxation Center and is serviced from the XXXXXXXXXX Tax Services Office. Its tax account number is XXXXXXXXXX. As for XXXXXXXXXX, it doesn't have a tax account number nor has it ever filed a Canadian income tax return.

We understand that, to the best of your knowledge and that of the taxpayers on whose behalf this ruling is requested, none of the issues involved in the Request:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms used therein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transaction and purpose of the proposed transaction is as follows:

Facts

1. XXXXXXXXXX ("Foreignco") is a corporation organized and existing under the laws of XXXXXXXXXX, having a principal place of business at XXXXXXXXXX. Foreignco is resident in XXXXXXXXXX.

2. Foreignco is not resident in Canada and does not have a permanent establishment in Canada.

3. Foreignco carries on the business of manufacturing XXXXXXXXXX. In connection with its business, Foreignco owns a number of patents for the manufacture of XXXXXXXXXX, including XXXXXXXXXX Canadian patents (the "Canadian Patents") relating to XXXXXXXXXX". The originator's patent for XXXXXXXXXX itself has expired, but the Canadian Patents claim XXXXXXXXXX.

4. XXXXXXXXXX ("Canco") is a corporation resident in Canada which carries on the business in Canada of manufacturing and selling XXXXXXXXXX. Since at least XXXXXXXXXX, Canco has produced for sale and sold in Canada XXXXXXXXXX.

5. Foreignco believed that XXXXXXXXXX infringed and/or was made by a process and/or in a manner which infringed the Canadian Patents. Foreignco had not licensed or otherwise permitted Canco to use the Canadian Patents. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. The amount of the Settlement Payment XXXXXXXXXX. A copy of the Settlement Agreement was enclosed with the Request.

Proposed Transaction

9. In accordance with the Settlement Agreement, Canco will make the Settlement Payment to Foreignco within XXXXXXXXXX days of the execution of the Settlement Agreement.

Purpose of the Proposed Transaction

10. The purpose of the proposed transaction is to carry out the terms of the Settlement Agreement.

Ruling given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transaction, and purpose of the proposed transaction, and provided further that the proposed transaction is carried out as described above, our Ruling is as follows:

A. The Settlement Payment will be subject to a 10% Part XIII tax pursuant to paragraph 212(1)(d) of the Act and paragraph XXXXXXXXXX of Article XXXXXXXXXX of the Canada-XXXXXXXXXX Income Tax Convention and, as a consequence, Canco will be required, pursuant to subsection 215(1) of the Act, to withhold and remit to the Receiver General on behalf of Foreignco the said amount of Part XIII tax from the Settlement Payment.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the Ruling given above.

The Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA provided that the proposed transaction is completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch