11 September 1989 Administrative Letter 58456 F - Transfer of License

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.

September 11, 1989

Dear Sirs:

Re:  Transfer of License Subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act")

This is in reply to your letter of July 31, 1989 wherein you requested our confirmation that the above-captioned subparagraph of the Act would not apply to the cost of a license allocated to the Canadian subsidiary in the following hypothetical fact situation.

1)     A U.S. company ("U.S. purchaser") acquires operating assets from an arm's length U.S. vendor.  As part of the asset purchase, the U.S. purchaser pays $10 million for a license to use the trade name, trademarks, logos, etc. of the U.S. vendor for a period of two years.

2)     The U.S. purchaser consequently becomes a licensee under the license.

3)     All foreign and domestic subsidiaries of the U.S. purchaser will exploit the license.

4)     The U.S. purchaser allocates the $10 million cost to each of its subsidiaries, which in turn pays that allocated amount to the U.S. purchaser.

Assuming the allocated amount is reasonable in the circumstances, it is your view that the payment or credit by the Canadian subsidiary to the U.S. purchaser is not subject to withholding tax under subparagraph 212(1)(d)(i) of the Act.  It is also your view that it would appear unnecessary for the U.s. purchaser to either have purchased from the U.S. vendor separate licenses for all countries and/or subsidiaries involved, or to write such sub-licenses prior to allocating the cost of the license purchased by a subsidiary of the U.S. purchaser.

The situation outlined in your letter appears to involve actual contemplated transactions which should be the subject of an advance income tax ruling.  Assurance concerning the tax consequences of contemplated transactions can only be given in the context of an advance income tax ruling.  The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R, dated December 18, 1978, and the related Special Release thereto.  However, we offer the following general comments on the above situation.

Generally speaking, a lump sum license fee represents, in our view, a payment for the use of one or more of the properties referred to in subparagraph 212(1)(d)(i) of the Act, and is thus subject to withholding tax under Part XIII of the Act, unless the payment is one which is described in paragraph 12 of Interpretation Bulletin IT-303.  As indicated in paragraph 10 of IT-303, the provisions of subparagraph 212(1)(d)(i) extend to any payment, including a single or lump sum payment, made to a non-resident for the right to use, in Canada, any property, invention, trademark, design or model, plan, secret formula, process, trade name, patent or other thing whatever.  Such a payment will be subject to Part XIII tax whether or not it falls within the category of rent, royalty or a similar payment.

It is not clear in your situation whether the U.S. purchaser has an absolute right to the property which is the subject of the license and whether the U.S. vendor still has a right to use the trade name, trademark, etc. after the "transfer", as your letter indicates that "the U.S. purchaser pays $10 million for a license to use the trade name, trademarks, logos, etc. of the U.S. vendor for a period of two years" (emphasis added).  It is also not clear whether the other foreign and domestic subsidiaries of the U.S. purchaser can exploit the license "transferred or allocated" to the Canadian subsidiary.  If they can, the Canadian subsidiary would not have an absolute right to the "allocated" license but rather it would only have acquired a right to use the trade name, trademark, or any other thing related to the license, with the result that tax under Part XIII of the Act would be applicable to the payment made by the Canadian subsidiary to the U.S. purchaser.

As one of the determining factors with respect to whether subparagraph 212(1)(d)(i) of the Act would apply to your situation is whether the Canadian subsidiary has acquired an absolute assignment of the U.S. purchaser's rights under the license, we do not concur with your view that it would not be necessary for the U.S. purchaser to have purchased from the U.S. vendor separate licenses for all countries and/or subsidiaries involved, or to write such sub-licenses prior to allocating the cost.  In our view separate agreements would be necessary in order for the payment to the U.S. purchaser by the Canadian subsidiary to be considered to be for the outright assignment of the license such that subparagraph 212(1)(d)(i) of the Act would not apply.

In our view an outright assignment of an existing license would require that the U.S. purchaser transfer its entire interest in the subject matter of the assignment to its Canadian subsidiary.  In other words, the U.S. purchaser would have to dispose of all of its interest in the license agreement to its Canadian subsidiary.

The comments set out in this letter are, of a purely general nature and do not take into account considerations that might arise in the context of a specific transaction.  In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed herein do not constitute advance income tax rulings and consequently are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch