October 07, 2011

Canadian General Electric Company Limited (Plaintiff) v. Her Majesty The Queen (Defendant)

82 DTC 6232
Federal Court-Trial Division
June 9, 1982

Capital gain or income — Sale of “know-how” and license to heavy water plant operation — Taxpayer’s commercial expansion limited — Proceeds were received on account of capital — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 38, 39 and 40.

The taxpayer manufacturing company was actively involved in the engineering and manufacturing of components for nuclear reactors and, after being disappointed in its commercial enterprise to build nuclear power plants, became involved in the processing and supply of “heavy water” for which purpose it agreed to build and operate a “heavy water” plant for supply to the government atomic energy marketing body. Upon the demand for further supplies of “heavy water”, the government marketing body undertook production of such for its own use after the inability of the taxpayer to exercise its right of first refusal in production expansion. The taxpayer provided its “know-how” in “heavy water” production and granted a license of what was basically its patent in its plant operation to the government marketing body. The Minister assessed the payment received for the “knowhow” and patent as an income receipt. The taxpayer appealed to the Federal Court-Trial Division.

Held: The taxpayer s appeal was allowed. The Court found that the government marketing body’s production of “heavy water” for its own use marked the end of the taxpayer’s business opportunity in that field, and that, by what was basically a salvage operation, the taxpayer disposed of its “know-how” and operation in “heavy water” production. While the taxpayer did not lose business from its operating plant, it did lose its opportunity for the future expansion of its business. The Court decided that the payment for “know-how” and the license was received on account of capital and the taxpayer’s appeal was allowed accordingly.