SALE OF A PATENT AT A LOSS: IS IT DEDUCTIBLE?

SALE OF A PATENT AT A LOSS: IS IT DEDUCTIBLE?
ALEXANDRE C. ARCHAMBAULT AND ALDINE CALVEYRAC*
ROBIC, LLP
LAWYERS, PATENT AND TRADE-MARK AGENTS
The hardest thing to understand in the world is the income tax.
−Albert Einstein
How are transactions involving patents treated from an income tax perspective? A
recent Tax Court of Canada decision examined whether certain patents were
depreciable property for which a terminal loss could be claimed.
No one will disagree with Einstein’s statement. Nevertheless, the mechanisms
provided for in the tax regulations allow taxpayers to deduct certain losses from their
income accounts. The 568864 B.C. Ltd. v. The Queen [2014 TCC 373] case deals
precisely with this matter. Those who acquire patents as part of their business will be
interested in the solution provided by the Tax Court of Canada.
The Parties
Woodtone Group (hereinafter “W.G.”) is namely a manufacturer of wood boards.
Interact Wood Products Ltd. (hereinafter “Interact”) developed and patented a new
technology that can make wide and long boards of almost any length or width.
W.G. was interested in Interact’s technology. Considering the benefits that W.G. was
anticipating from supplying Interact’s lumber to its group of corporations, it advanced
$3,500,000 to Interact. To secure the loan, the patent owner, Interact’s principal
shareholder, granted W.G. a security interest in the coveted patents.
As Interact started to financially struggle, W.G. acquired its patents in the midst of
Interact’s bankruptcy proceedings. Since the patents were originally secured for the
loan of $3,500,000, the trustee in bankruptcy assigned the beneficial ownership of the
patents to W.G. W.G. was deemed to have acquired them at a cost of approximately
$3.9 million, which included various expenses it had incurred related to exploiting and
© CIPS, 2015.
*
From ROBIC, LLP, a multidisciplinary firm of Lawyers, and Patent and Trade-mark Agents. Published in
the Winter 2015 (Vol. 18, no. 3) Newsletter of the firm. Publication 068.187E.
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protecting the patents, although the patents’ fair market value could have been much
less.
Two years later, W.G. sold the patents to one of its related corporations for $1.00. As
such, it claimed that it incurred a terminal loss of $3.9 million.
The Crown disagreed and from this disagreement arose the appeal presented to the
Tax Court of Canada. In this regard, the Court first had to determine whether or not
W.G. had beneficial ownership of the patents at the time it sold the patents and,
secondly, if the latter acquired the patents for the purpose of earning income from the
business or property.
Did W.G. have beneficial ownership?
In order to conclude that W.G. was indeed the beneficial owner of the patents, the
Court took into account that at the time of Interact’s bankruptcy in 2005, it possessed
the physical patent documents, had the right to exploit the processes protected by the
patents and assumed all risk associated with these assets.
Beyond the beneficial ownership of the patents, the Court also had to look into the
depreciable quality of the patents. In this regard, the Court noted that W.G. acquired
sufficient interest in the patents and indicia of title: it acquired equipment to
manufacture the wood to exploit the patents, moved the equipment for safe keeping
at its costs and paid to protect its ownership of the patents. The patents thus became
depreciable property in its hands.
Finally, for W.G. to benefit from the deduction it was seeking, the Court had to make
sure that the patents had been acquired for the purpose of gaining or procuring
income.
Did W.G. acquire the patents for the purpose of earning income?
By virtue of the Income Tax Regulations, a taxpayer needs to have acquired the asset
for which he claims the deduction for the purpose of generating income.
As such, the Court considered that W.G.'s “prime motivating reason to lend
$3,500,000 to Interact was to give Interact the means to exploit the Patents in such a
manner that [W.G.] would get the wood sizes it wanted when it wanted and earn
income as a result”.
The Court also noticed that, upon Interact’s bankruptcy, W.G. tried, albeit
unsuccessfully, to make use of the patents through a joint venture or partnership with
others.
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These facts were sufficient to corroborate the acquisition of the patents in 2005 for an
income-producing purpose.
Thereby, the Tax Court of Canada confirmed that certain patents were depreciable
property for which a taxpayer could claim a terminal loss.
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a group of lawyers and of patent and trademark agents dedicated since 1892 to
the protection and the valorization of all fields of intellectual property: patents,
industrial designs and utility patents; trademarks, certification marks and
indications of origin; copyright and entertainment law, artists and performers,
neighbouring rights; computer, software and integrated circuits;
biotechnologies, pharmaceuticals and plant breeders; trade secrets, knowhow, competition and anti-trust; licensing, franchising and technology
transfers; e-commerce, distribution and business law; marketing, publicity and
labelling; prosecution litigation and arbitration; due diligence. ®/MD
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Marques de commerce de ROBIC, S.E.N.C.R.L. pour ses services de
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que ses services juridiques
*************************************************************************************************
*
For services pertaining to intellectual property, technology and
communication law and related matters (including patent and trade-mark
agency services) as well as legal services.
ROBIC, un groupe d'avocats et d'agents de brevets et de marques de
commerce voué depuis 1892 à la protection et à la valorisation de la propriété
intellectuelle dans tous les domaines: brevets, dessins industriels et modèles
utilitaires; marques de commerce, marques de certification et appellations
d'origine; droits d'auteur, propriété littéraire et artistique, droits voisins et de
l'artiste interprète; informatique, logiciels et circuits intégrés; biotechnologies,
pharmaceutiques et obtentions végétales; secrets de commerce, know-how et
concurrence; licences, franchises et transferts de technologies; commerce
électronique, distribution et droit des affaires; marquage, publicité et
étiquetage; poursuite, litige et arbitrage; vérification diligente et audit. ROBIC,
ROBIC, LLP
www.robic.ca
[email protected]
MONTREAL
1001 Square-Victoria - Bloc E - 8th Floor
Montreal, Quebec, Canada H2Z 2B7
Tel.: +1 514 987-6242 Fax: +1 514 845-7874
QUEBEC
2828 Laurier Boulevard, Tower 1, Suite 925
Quebec, Quebec, Canada G1V 0B9
Tel.: +1 418 653-1888 Fax.: +1 418 653-0006
6
a group of lawyers and of patent and trademark agents dedicated since 1892 to
the protection and the valorization of all fields of intellectual property: patents,
industrial designs and utility patents; trademarks, certification marks and
indications of origin; copyright and entertainment law, artists and performers,
neighbouring rights; computer, software and integrated circuits;
biotechnologies, pharmaceuticals and plant breeders; trade secrets, knowhow, competition and anti-trust; licensing, franchising and technology
transfers; e-commerce, distribution and business law; marketing, publicity and
labelling; prosecution litigation and arbitration; due diligence. ®/MD
COPYRIGHTER TM/MC
IDEAS LIVE HERE ®/MD
IL A TOUT DE MÊME FALLU L'INVENTER!
® MD
/
LA MAÎTRISE DES INTANGIBLES ®/MD
LEGER ROBIC RICHARD ®/MD
NOS FENÊTRES GRANDES OUVERTES SUR LE MONDE DES AFFAIRES ®/MD
PATENTER®/MD
or stylizedR®/MD
ROBIC®/MD
or stylized ROBIC ++++®/MD
or stylized ROBIC + DROIT +AFFAIRES +SCIENCES +ARTS®/MD
or stylized ROBIC +LAW +BUSINESS +SCIENCE +ART®/MD
THE TRADEMARKER GROUP TM/MC
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ROBIC, LLP
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[email protected]
MONTREAL
1001 Square-Victoria - Bloc E - 8th Floor
Montreal, Quebec, Canada H2Z 2B7
Tel.: +1 514 987-6242 Fax: +1 514 845-7874
QUEBEC
2828 Laurier Boulevard, Tower 1, Suite 925
Quebec, Quebec, Canada G1V 0B9
Tel.: +1 418 653-1888 Fax.: +1 418 653-0006
7
YOUR BUSINESS IS THE WORLD OF IDEAS; OUR BUSINESS BRINGS YOUR
IDEAS TO THE WORLD ®/MD
Trade-marks of ROBIC, LLP for its services pertaining to intellectual
property, technology and communication law and related matters
(including patent and trade-mark agency services) as well as legal
services
ROBIC, LLP
www.robic.ca
[email protected]
MONTREAL
1001 Square-Victoria - Bloc E - 8th Floor
Montreal, Quebec, Canada H2Z 2B7
Tel.: +1 514 987-6242 Fax: +1 514 845-7874
QUEBEC
2828 Laurier Boulevard, Tower 1, Suite 925
Quebec, Quebec, Canada G1V 0B9
Tel.: +1 418 653-1888 Fax.: +1 418 653-0006