5 January 2012 External T.I. 2011-0412581E5 - Right to use a patent - eligible 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.

Principal Issues: Whether a right to use a patent qualifies as eligible property under 85(1.1).

Position: The right to use the patent is property as defined in 248(1). Whether the right to use the patent is capital property to the transferor is a question of fact.

XXXXXXXXXX 				2011-041258
						Katie Campbell
						(613) 957-2126
January 5, 2012

Dear XXXXXXXXXX :

We are writing in response to your letter of June 29, 2011 wherein you requested a technical interpretation regarding whether certain property would qualify as eligible property as defined in subsection 85(1.1) of the Act (footnote 1) . In addition, you requested our comments on the calculation of cost amount for the purposes of a transfer under subsection 85(1). The relevant facts as provided in your letter are as follows:

A taxable Canadian corporation (OwnerCo) holds a patent that has a number of potential uses. It wishes to license the use of the patent for certain specified purposes to another taxable Canadian corporation (LicenseeCo) for a limited period in exchange for 40% of LicenseeCo's issued and outstanding common shares. OwnerCo will retain ownership of the patent and the right to exploit it for uses that will not compete with those for which LicenseeCo is licensed.

Specifically, you had asked whether the right to use the patent would qualify as eligible property under subsection 85(1.1). In addition, you requested our comments on the calculation of the cost amount of the property being transferred.

Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. Where the particular transactions are completed, they are the responsibility of the relevant tax services office. We can, however, provide the following general comments.

The definition of property in subsection 248(1) includes a right of any kind whatever. In order to be eligible property under subsection 85(1.1), a property must be capital property. While in some circumstances a disposition of a right to use a patent could be on account of income, and, therefore, not eligible property, the determination of whether a disposition is on account of income or capital is a question of fact that can only be determined after a thorough review of all the pertinent facts.

As we discussed, we are unable to comment on the cost amount of the property disposed of by OwnerCo.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5, dated May 17, 2002.

Yours truly,

David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.