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 ‚mis, peut ne pas repr‚senter la
Position actuelle du ministŠre.
Principal Issues:
Treatment of a sale of rights for intellectual property in respect of which the transferor has
applied for a patent.
Position:
The acquisition cost should be included in the capital cost of the patent. However, no CCA
can be taken until the patent is granted.
Reasons:
According to paragraph 20 of IT-477, expenses incurred prior to the acquisition of a class 14
property are added to the cost of property in the year of acquisition.
J. Gibbons
XXXXXXXXXX 5-972078
Attention: XXXXXXXXXX
April 17, 1998
Dear Sirs:
We are replying to your letter of July 31, 1997, in which you raise several questions regarding the treatment of a sale of rights for intellectual property in respect of which the seller (the transferor ) has applied for a patent. We apologize for the delay in replying. It is our understanding from an earlier telephone conversation (Gibbons/XXXXXXXXXX) that the sale includes entitlement to any patents, when and if granted.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.
As indicated in your letter, Interpretation Bulletin IT-477 provides some guidance on the treatment of patent costs. Paragraph 13 thereof states that a payment made to a holder of a patent in order that he will relinquish it in favour of the payer should be included in the cost of the patent. However, in the situation described in your letter, a patent does not exist at the time of the payment. Instead, only an application for a patent has been filed, and the payment has been made for the future relinquishment of the patent if and when it is granted.
Accordingly, the comments in paragraph 20 of IT-477 may be more relevant. Paragraph 20 indicates that expenses incurred prior to the acquisition of a class 14 property are added to the cost of the property in the year of acquisition. It also states that no claim for capital cost allowance may be made in a year prior to the year of the actual acquisition of the relevant property, in other words, when the patent is granted. Therefore, in our view, the amount of the payments to the transferor should be included in the purchaser's capital cost of the patent and deducted according to the capital cost allowance ( CCA ) rules for class 14 property.
However, no amount can be claimed for CCA until the patent is granted.
In regard to your question concerning the treatment of the proceeds received by the transferor, the answer depends on the nature of the transferor's business and the payments received. In the case where the transferor is in the business of developing and selling patents or patents pending, any payments received would be included in income as a trading receipt.
If the payments are based on the production or use of property, they are included in income pursuant to paragraph 12(1)(g) of the Act. In any other case, the amounts received would be proceeds of disposition, which may result in a taxable capital gain under section 38 of the Act.
With respect to your question whether the relationship between the transferor and the transferee affects our response, the answer would depend on the particulars of the case.
Generally, section 69 of the Act applies where property is transferred between persons not dealing at arm's length and the transfers do not reflect fair market value. Paragraph 69(1)(a) of the Act deems property acquired in excess of fair market to be acquired at fair market value, and paragraph 69(1)(b) of the Act deems property disposed of for proceeds less than fair market to be disposed of at fair market value.
Questions 5 and 6 in your letter concern the date a patent is considered to be acquired in the circumstances where a patent pending is acquired, i.e., whether to use the date the expenditure is made or whether to use the date that the patent is actually granted. More specifically, question 5 concerns the reference in the coming-into-force provisions of class 44 of Schedule II of the Income Tax Regulations (the Regulations ) to property acquired after April 26, 1993, and question 6 concerns the reference to the taxation year when a property is acquired, in subsection 1103(2h) of the Regulations, which determines when an election under that subsection must be made. Since a patent, as such, does not exist until the date of its granting, and thus cannot be acquired until then, it is our view that the date of the
granting of a patent should be used as the reference in these provisions.
In question 7 of your letter, you ask about the treatment of costs in a case where the patent claim is abandoned. In our view, such costs would likely qualify as eligible capital expenditures as defined in subsection 14(5) of the Act.
Your question 8 regarding the completion of Form T2057 is an administrative question and should be addressed to your local tax services office.
We trust that these comments will be of assistance.
Yours truly,
P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.
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