29 March 2011 External T.I. 2011-0397121E5 - Payments in Relation to Inventions and Designs

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 payments made to a taxpayer in respect to inventions and designs created while the taxpayer was employed by an employer would be considered income from employment, or whether they would be considered income from a business, when the payments continue after the employment has ceased.

Position: In our view, where rights to an invention or a design vest with the employer, and where a taxpayer continues to receive payments for that invention or design after employment ceases, section 6(3) would apply.

Reasons: Previous interpretations given.

XXXXXXXXXX
									2011-039712
									Andrea Boyle, CGA

March 29, 2011

Dear XXXXXXXXXX :

Re: Payments in Relation to Inventions and Designs

I am writing in reply to your letter dated February 18, 2011, in which you asked whether payments made to a taxpayer in respect to inventions and designs created while the taxpayer was employed by an employer would be considered income from employment, or whether they would be considered income from a business when the payments continue after the employment has ceased.

You have indicated that the employer retains propriety rights to the inventions and designs and that monthly payments are made to the taxpayer based on the employer's sales of the invented products and designs. The taxpayer has recently ceased to be an employee of that employer but will continue to receive these monthly payments for many years.

The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("the Act").

When an employee receives an amount from an employer as payment for an invention or design, the tax treatment will depend upon the ownership of the invention or design and the nature of the amounts received. Generally, where the rights to the invention or design vest with the employer, the receipt is taxable as income from employment pursuant to subsection 5(1).

In our view, where such payments continue after an individual's termination of employment, subsection 6(3) would apply. Subsection 6(3) states that if a payment is in satisfaction of an obligation arising out of an agreement made by the payer with the payee during a period in which the payee was in the employment of the payer, the payments are generally characterized as employment income and taxable as such. As a result, such payments are subject to employer withholding requirements pursuant to paragraph 153(1).

We trust that these comments will be of assistance.

Yours truly,

Guy Goulet C.A., M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch