8 March 1990 External T.I. 74595 F - Patent Costs & Legal Fees Considered Capital or Income Expenditures

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.

Re: Patent Costs & Legal Fees Capital or Income Expenditures

We are writing in reply to your memorandum of December 18, 1989, wherein you  requested our views regarding the deductibility of certain patent costs and legal fees incurred by a taxpayer in the following situation.

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Our comments

We have reviewed your submission, along with the relevant documentation.  Our comments and observations with respect thereto are as follows.

Patent Costs

It is our opinion that the patent costs are capital in nature that would, normally, be included in class 14 of schedule II. However, until such time as the taxpayer is able to recover his ownership of these patents these costs cannot be included in class 14.  Once recovery of the patents is effected these accumulated costs can be added to the UCC of class 14 for CCA purposes.

With respect to the costs incurred in registered foreign patents, these costs cannot be included in class 14  24(1)  Once the recovery of the patents is effected by the taxpayer, these accumulated costs can be added to class 14 as discussed  above.

Should the taxpayer eventually have a source of income (either business or property income) from the exploitation of these patents CCA may be claimed against these sources of income. Until such time as the taxpayer recovers his patents, it is our opinion that he cannot have a source of income that is property income relative to these patents.

In view of the above, it is our opinion that paragraphs 18(1)(b) would deny the taxpayer a deduction for these patent costs.

Legal Fees

In this regard it would appear that the taxpayer

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Since the patents themselves, and the rights thereto assigned to the company are in themselves capital properties, paragraph 18(1)(b) would deny the deduction of the legal costs incurred to protect his proprietary interest in these assets.  These costs can be accumulated and included in class 14, once the taxpayer recovers title to his patents.

In this regard, we draw your attention to the comments in IT-99R3 "legal and Accounting Fees" regarding capital expenditures.

With respect to the four questions posed at the close of your submission, our responses are as follows:

a)     Because of the capital nature of the expenses, no amounts are deductible in computing the taxpayers income from any source.

b)     The patent costs plus the legal costs incurred are capital expenditures that would be included in class 14 in schedule II once the patents themselves have been reacquired by the taxpayer.

c)     In view of the above comments, it is our view that these costs cannot be considered "capital nothings".

d)     Because these patents do no relate to the taxpayer's consulting business, no costs may be deducted from, nor CCA claimed with respect to, that business.

We hope these comments are helpful.

for Director Business and General Division Specialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch