12 April 1994 External T.I. 9402315 - INTELLECTUAL PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

			940231

XXXXXXXXXX A. Seidel

Attention: XXXXXXXXXX

April 12, 1994

Dear Sirs:

This is in reply to your letter dated January 6, 1994 with respect to the application of paragraph 69(1)(b) of the Income Tax Act (the "Act") in the situation where a parent corporation ("Holdco") owns certain patents, trademarks, and copyrights ("intellectual property") used exclusively by one of its subsidiaries ("Subco") in its worldwide business without a fair market fee being charged for their use by Holdco.

Substantial costs are incurred in registering and maintaining the intellectual property around the world. These intellectual properties are held by Holdco to reduce re-registration costs which would be incurred if there was a corporate restructuring in the future. Holdco does not wish to charge Subco a fee to use the intellectual property. Instead, Subco will reimburse Holdco for any cost it might incur in the future relating to the intellectual property. This will result in Holdco receiving less than a fair market value fee for the use of its intellectual property.

Subparagraph 69(1)(b) of the Act applies in any situation where "a taxpayer has disposed of anything to a person with whom he was not dealing at arm's length" for proceeds less than the fair market value thereof. It is our view that the word "anything" as used in subparagraph 69(1)(b) of the Act is a broad term which includes products and other tangibles as well as intangible property, such as the right to use property. Accordingly, it is our view that subparagraph 69(1)(b) of the Act could apply to Holdco.

Whether or not the provisions of subsection 245(2) of the Act would apply in a given situation is a question of fact which can only be determined after reviewing all of the relevant facts.

There may also be other provisions in the Act which could apply. For instance, paragraph 18(1)(a) of the Act provides a general limitation on the deductibility of outlays and expenses in computing a taxpayer's income from a business or property. No deduction may be made by a taxpayer in respect of an outlay or expense except to the extent that it was made or incurred for the purpose of gaining or producing income. Any expenses incurred by Holdco with respect to the intellectual properties could be denied if they are not incurred to earn income from a business or property. Section 67 of the Act may also apply to deny the deduction of an amount in respect of an outlay or expense except to the extent that the outlay or expense was reasonable in the circumstances.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch