30 August 2001 External T.I. 2001-0081355 - DISPOSITION-INTELLECTUAL 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.

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.

Principal Issues: A taxpayer has asked about the disposition of intellectual property.

Position: General comments were provided.

Reasons: The available information was very limited.

XXXXXXXXXX 2001-008135
M. Eisner, CA
August 30, 2001

Dear XXXXXXXXXX:

Re: Intellectual Property

Your letter of March 30, 2001, addressed to the St John's Taxation Centre, has been referred to us for reply.

In your letter, you have indicated that you were issued a patent concerning a "XXXXXXXXXX". In addition, an application for a patent has been made regarding a "XXXXXXXXXX".

In relation to the above assets, you enquire as to the tax treatment of amounts you may receive in respect of the manufacturing rights, or, on the other hand, upon the disposition of the intellectual property in an outright sale, assuming there is a gain.

Our Comments

We cannot confirm the tax implications of particular transactions unless 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 70-6R4 (enclosed). We also note that since you have requested our views on several alternative courses of action, your concerns may involve tax planning in which case you might consider consulting with a tax professional. Nonetheless, it should also be noted that we are not in a position to provide definitive comments on the tax treatment of the above amounts as such a determination is a question of fact, and we have been provided with very limited information.

The tax treatment of amounts received in respect of the above assets depends, inter alia, on the nature of the transferor's business, the nature of the payments received, the term of the patent, and the nature of the property in the transferor's hands (e.g., inventory, capital property, depreciable property or eligible capital property). For instance, in the case where the transferor can be considered to be in the business of selling patents or patents pending, any payments received would be included in business 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 Income Tax Act (the "Act"). In other cases where capital property has been disposed, the amounts received would be proceeds of disposition, which may result in a taxable capital gain under section 38 of the Act and/or, depending on the nature of the property in the transferor's hands, recaptured capital cost allowance or an eligible capital amount.

For your information, we have enclosed copies of the following Interpretation Bulletins which may be of assistance: IT-123R6 "Transactions Involving Eligible Capital Property", IT-143R2 "Meaning of Eligible Capital Expenditure", IT-459, "Adventure or Concern in the Nature of Trade", and IT-462 "Payments Based On Production Or Use", IT-477 "Capital Cost Allowance - Patents, Franchises, Concessions and Licenses" and IT-478R2 "Capital Cost Allowance - Recapture and Terminal Loss".

If you require further information, you may contact your local tax services office.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 2 -