3 October 1989 Ministerial Correspondence 80304 F - Sale of "Know-how"

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.

Subject:  Sale of "Know-How" to 24(1) 

We are writing in response to your memorandum of June 28, 1989 in which you requested our further comments on a situation which was the subject matter of our memorandum of June 30, 1988 to the Saskatoon District Office.  We also acknowledge receipt of the additional information submitted with your second memorandum of July 11, 1989.

We understand that the background facts involved in this situation remain the same as those stated in our earlier memorandum, and therefore are not repeated here.

You have indicated that the District Office accepted the opinion provided in our earlier memorandum and viewed the matter as an adventure in the nature of trade with 19(1)  being assessed on income account and the "concept" not being viewed as property under the Act.  Therefore the District Office assessed on the on the basis that the election provided for in subsection 85(1) of the Income Tax Act (the "Act") was not available and subsection 69(1) of the Act applied to yield deemed proceeds of disposition equal to the fair market value of 24(1)

In your opinion what the 24(1) transferred to 24(1) was property for the purposes of the Act and should be treated as wither a capital property or an eligible capital property for the purposes of the above mentioned election under subsection 85(1) thereof.  You have requested our further comments on the issues of whither this "concept" is property for the purposes of the Act and whether the disposition thereof is on income or capital account.

In our view, the specific references in subsection 85(1) of the Act to "his" property and in the definitions in the Act of capital property and eligible property to "of a taxpayer" imply that those provisions contemplate an item in which the taxpayer has a proprietary interest. 24(1) Based on the available information, it is our view that what was transferred consisted of "know-how" and technical information upon which patent or similar protection could not be obtained.  Therefore our opinion remains that this would not constitute property capable of a transfer pursuant to subsection 85(1) of the Act.  This conclusion is supported by the inability to obtain patent protection and the inclusion by their lawyers of a provision in the transfer agreement concerning the potential unavailability of section 85 of the Act.  We are also including a copy of a legal opinion dated April 3, 1981. 23

21(1)(b)

In our view section 14 of the Act will bring into income amounts which a taxpayer is entitled to receive on account of capital in respect of a business (with business being defined in subsection 248(1) of the Act as including an undertaking of any kind whatever and an adventure or concern in the nature of trade). This position is reflected in a response presented at the "Revenue Canada Round Table" at the 1981 Canadian Tax Foundation annual conference (see part five of question number six on pages 731 and 732 of the report thereon) concerning "know-how" of a capital nature.

24(1)

21(1)(b)

In conclusion, we remain of the view that "know-how" is not property for the purposes of subsection 85(1) of the Act and that the 24(1) were engaged in an "undertaking of any kind whatever" or "an adventure or concern in the nature of trade".

It should also be noted that our previous memorandum to the District Office did not rely on subsection 69(1) of the Act, the proceeds are equal to the fair market value of the consideration taken back which was the common shares of 24(1)

We are returning herewith the orange appeal file and the 1984 T1 returns for each of the 24(1) included with your earlier memorandum.

M.A. Hiltz for Director GeneralSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch