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: How should amount received on the disposition of intellectual property be reported?
Position: General comments provided.
Reasons: The tax treatment of amounts received depends, on the nature of the transferor's business, the nature of the payments received, and the nature of the property in the transferor's hands (e.g., inventory, capital property, depreciable property or eligible capital property).
XXXXXXXXXX
2013-048550
Charles Rafuse
613-247-9237
May 10, 2013
Dear XXXXXXXXXX:
Re: Disposition of Intellectual Property
This is in response to your email of April 15, 2013, concerning the treatment of income received from the sale of intellectual property by a taxpayer that carries on a business of developing video games.
You have asked if the sale would be considered as a sale of eligible capital property which would result in a capital gain and how the adjusted cost base for this property could be determined.
Our Comments
Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
The tax treatment of amounts received in respect of game software depends, inter alia, on the nature of the transferor's business, the nature of the payments received, and the nature of the property in the transferor's hands (e.g., inventory, capital property, depreciable property or eligible capital property). For instance, in the case where the transferor can be considered to be in the business of developing game software, any payments received would be included in business income as a trading receipt. If the payments are based on the production or use of property, they are included in income pursuant to paragraph 12(1)(g) of the Income Tax Act (the "Act"). In other cases where capital property has been disposed of, the amounts received would be proceeds of disposition, which may result in a taxable capital gain under section 38 of the Act and/or, depending on the nature of the property in the transferor's hands, recaptured capital cost allowance or an eligible capital amount.
For your information, the following Interpretation Bulletins may be of assistance: IT-123R6, Transactions Involving Eligible Capital Property, IT-143R2, Meaning of Eligible Capital Expenditure, IT-459, Adventure or Concern in the Nature of Trade, and IT-462, Payments Based On Production Or Use, IT-477, Capital Cost Allowance Patents, Franchises, Concessions and Licenses and IT-478R2, Capital Cost Allowance Recapture and Terminal Loss. These documents can be found on the CRA website at http://www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Yours truly
Michael Cooke, C.P.A., C.A.
Manager
Business and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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