20 February 1991 External T.I. 903470 F - Disposal of Licences - Business Income or Property Income

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.

Dear Sirs:

We are writing in response to your letter dated November 29, 1990  wherein you requested our comments regarding the possible application of sections 14 and 38 of the Income Tax Act (Canada) (the "Act") where paragraph 12(1)(g) of the Act applies in the following situation.

Facts

1.     

2.     24(1)

3.     

You are of the view that the royalty payments similar to those described above would be included in income under paragraph 12(1)(g) of the Act and as such, the provisions of sections 14 and 38 of the Act would not apply to the disposal of the licence and related costs since the taxing statutes give priority to paragraph 12(1)(g) of the Act.

You are also of the view that any income realized by Canco which will be included in its income under paragraph 12(1)(g) of the Act will constitute business income and not income from property.  You have requested the Department's views on what criteria should be used to make such a determination.

In your letter you have outlined what appears to be an actual fact situation related to a past transaction.  The review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known.  However, we can provide you with the following general comments which we hope will be of assistance to you.

The Department's views on payments based on production or use are stated in Interpretation Bulletin IT-462.  In particular, paragraph 5 of IT-462 provides the rules to be applied when calculating what portion of the proceeds of disposition of property is income and what portion of the proceeds of disposition of property is on account of capital.  The situations described in subparagraphs 5(b), 5(c) and 5(d) of  IT-462 provide examples of where sections 14 and 38 of the Act would apply to a portion of the proceeds of disposition of property and paragraph 12(1)(g) of the Act would apply to the balance of the proceeds of disposition of property.

It is a question of fact whether income received from a particular transaction would be considered income from a business or income from property.  The Department's views concerning the criteria to be used in determining the classification of income are set out in Interpretation Bulletin IT-73R4.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch