7 May 2007 External T.I. 2006-0201521E5 - Payments in Relation to Inventions

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: Tax Status of Payments to Employees in Relation to Inventions.

Position: 1. Question of Fact. 2. Generally, when the ownership of the invention vests with the employer, the payments made to the employee are treated as employment income under subsection 5(1) of the Income Tax Act.

Reasons: Consistent with prior positions

  								2006-020152
XXXXXXXXXX 							Joy Bertram
	   							CGA, CPA(vt)
May 7, 2007

Dear XXXXXXXXXX:

Re: Payments in Relation to Employee Inventions

We are writing in response to your letter of August 18, 2006, concerning the payment of amounts by the XXXXXXXXXX (the "Employer") to employees in respect of inventions created while an employee or while using the Employer's resources. We apologize for the delay in responding.

Your letter indicated that employees sign agreements to assign to the Employer their legal interest in the inventions. These agreements provide that the employee(s) who created the invention and assigned their interest will be paid 50% of net revenues from the inventions, either by one lump sum or in instalments over many years. Situations may arise where payments are to be made to a former employee after employment has ceased and/or to an heir or estate after the death of the employee.

You inquired about the tax status of such payments to the recipient(s) and about the Employer's related reporting requirements.

Our comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

When an employee receives an amount from an employer as an award for an invention, it is either a capital or an income receipt for income tax purposes. This determination usually depends on the ownership of the invention and the nature of the amounts received. Generally, where the rights to the invention vest with the employer, the receipt is taxable as employment income pursuant to subsection 5(1) of the Income Tax Act (the "Act").

In the circumstances you have described, where a payment occurs after an individual's termination of employment or retirement, subsection 6(3) of the Act appears to have application. Subsection 6(3) of the Act states that if a payment is in satisfaction of an obligation arising out of an agreement made by the payer with the payee during a period in which the payee was in the employment of the payer, the payments are generally characterized as employment income and taxable as such. Where the payee is a (former) employee's estate or beneficiary, the payment would not be deemed to be employment income insofar as the requirements of subsection 6(3) of the Act would not be met.

We have forwarded your letter to Lorraine Maisonneuve, Manager, Trust Accounts Division, Taxpayer Services and Debt Management Branch (613-957-9463), who will contact you to discuss the reporting and withholding obligations related to the payments in question.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch