26 February 1981 Income Tax Severed Letter RCT-0515

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.

Paragraph 212(1)(d)

In your memorandum of February 19, 1981, you requested our view on whether a payment for an existing design must be extinguished from payments to create a design.

We believe the Act is quite clear in this regard. When a contract is made to create a design plan, etc. the design, plan etc. contemplated does not exist. Consequently, the payments cannot be said to be for "--- the use of or the right to use ---" the design. At the time the payments are contracted for, it is design work that is of value and not the design itself which may in fact have little intrinsic value. In our view, subparagraph 212(1)(d)(i) cannot apply to such payments. These payments are for commercial and industrial services and, as such, would be subject to withholding tax pursuant to sub-paragraph 212(1)(d)(iii) if the payments are dependent in whole or in part upon use, production or profits. We do not agree that the payments re for information to be used in Canada (see taxpayer's comments below). The payments are for services with the indirect result that information to be used in Canada may result from the services.

Perhaps our views could be illustrated by considering the case of a company which hires the services of a research scientist to do research that ultimately results in the company obtaining a patent. Surely in this case it is obvious that the payments to the scientist were not for a patent or the right to use a patent even if the contract specified that the aim of the research was to produce a patent.

In the specific case we examined for the Hamilton District Office, it appeared to us that services rendered constituted the bulk of the contract and that the resulting design may have had little if any intrinsic value as it was unlikely to be useful to other clients. This would, of course, be a matter to be established on its facts and as we pointed out to the District Office, portions of the payments undoubtedly did relate to existing marketable "know-how".

It may be of interest to note a taxpayer's comments on a similar engineering contract presently under consideration by one of our District Offices. In this case, the engineering contract called for the foreign contractor to deliver to his customer the plans anddrawings of the plant he was to design and build; his comments were:

• "This does not imply, however, that the contractor's particular know-how is transferred to the customer for the use in the latter's business. The designs, drawings etc. handed over to the customer are merely the end result of the contractor's know-how applied in his own business to the production of the equipment delivered under the contract. In other words, the customer, even though being in the possession of the information in question, would not even be able to reproduce a similar or like plant (in which he would not be interested, anyway.)"

We concur with this view.