Words and Phrases - "know-how"
Hasbro Canada Inc. v. The Queen, 98 DTC 2129, [1999] 1 CTC 2512 (TCC)
The taxpayer, which was a Canadian manufacturer and distributer of toys in Canada, paid fixed commissions expressed as a percentage of the purchase price of products acquired by it from the Far East, to an affiliated company resident in Hong Kong. Before going on to consider ss.212(1)(d)(ii) and (iii), Dussault TCJ. noted (at p. 2136) that "a royalty or similar payment is ... one made for the use of property, rights or information whereby the payments for such use are contingent upon the extent or duration of use, profits or sales by the user", and went on to find that because the purchase commissions were essentially for services rendered, they did not so qualify.
Transfer Pricing Memorandum TPM-06, “Bundled Transactions” 16 May 2005
After noting the exemption in Art. 12 of the Canada-U.S. Tratyu for payments for the use of or right to use know-how, but not for the provision of services, and before referring to the OECD Commentaries on this distinction, CRA stated:
The distinction between know-how and other royalties/services is not always clear so it is important to give special consideration to these types of transactions between non-arm's length parties in Canada and the United States. Generally, know-how is the confidential technical information that is necessary to reproduce a product or process and may provide a competitive and/or comparative advantage. An example includes the narrative description and diagrams of a secret manufacturing process such as those used in pharmaceutical drug development.
Know-how differs from the provision of services in that the technical information, which already exists, is disclosed to another party for use of their own account. Other than providing the information, the payee's contractual obligation will not be substantial, and they retain an interest to the information provided (that is, the payer will be subject to a confidentiality agreement). On the other hand, a service provider undertakes and performs a task for the other party without necessarily transferring to them pre-existing knowledge, skills, or expertise.