23 March 1994 External T.I. 9333895 - INDIRECT PAYMENTS

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.

XXXXXXXXXX 5-933389

Attention: XXXXXXXXXX

March 23, 1994

Dear Sirs:

Re: Subsection 56(2) of the Act - Royalties and Licensing Fees

This is in reply to your letter dated November 2, 1993, in which you asked our opinion as to the tax implications of a given fact situation. We apologize for the delay in replying to your request.

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance. Unless as otherwise stated all references to statute are to the Income Tax Act, S.C. 1970-71-72, c. 63 as amended consolidated to June 10, 1993 (the "Act").

As mentioned by Cattanach J. in the case of Fraser Companies Limited v. The Queen, 81 D.T.C. 5051, at page 5058, in analyzing the essential ingredients of subsection 56(2) of the Act:

"These ingredients are fourfold:

(1)there must be a payment or transfer of property to a person other than the taxpayer;

(2)the payment or transfer is pursuant to or with the concurrence of the taxpayer;

(3)the payment or transfer must be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer desired to have the benefit conferred, and

(4)the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person."

(our emphasis)

On the sole basis of the limited facts stated in your letter, our initial impression is that no payment or transfer of property will occur when the researcher will ask the University to put aside, in a special account for future research, the amount equal to 50% of the rents, licensing fees or royalties received by the University which the researcher may otherwise receive in cash. A transfer necessarily implies that a person divest himself of something and vest it in someone else (see Fasken Estate v. M.N.R., 49 D.T.C. 491). In your letter you mentioned that the University owns and controls all funds placed into a research account. Consequently, it seems that the research account is not vested in the researcher. Thus, one of the essential conditions to the application of subsection 56(2) of the Act is not met, i.e. a payment or transfer of a property.

Furthermore, it is unclear to us if, in the circumstances outlined in your letter, the amount put aside in the research account is for the benefit of the researcher. In other words, it is impossible for us to determine if the researcher will obtain a benefit from the fact that 50% of the rents, licensing fees or royalties received by the University are put in a research account that can only serve for University research and academic purposes. However, it is a question of fact as to whether a benefit to the researcher will occur when the University will make a disbursement from the research account. Such benefit, if any, may be taxable in the researcher's hands under paragraph 6(1)(a) or 56(1)(o) of the Act depending on the facts involved.

Furthermore, to the extent that the research account is established mainly to postpone tax payable by the researcher in respect of an amount that is, or is on account or in lieu of, salary or wages of the researcher for services rendered by him, such research account may be viewed as a "salary deferral arrangement" and any amount credited to that account for the benefit of the researcher may become taxable in his hands under subsection 6(11) of the Act.

This opinion does not constitute an advance ruling and as such is not binding on the Department.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch