October 07, 2011

Her Majesty The Queen (Appellant) v. Canadian General Electric Company Limited (Respondent)

87 DTC 5070
Federal Court of Appeal
January 23, 1987

(Court File No. A-688-82.)

Income or capital receipt — Sale of “know-how” and licence relative to heavy water plant operation — Income Tax Act, S.C. 1970-71-72, c. 63, s. 9.

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 taxpayer decided that it could not afford to expand and thus to exercise its right of first refusal for increased production. The taxpayer provided its “know-how” and granted a non-exclusive licence of what was basically its patent in its plant operation to the government marketing body. The Minister assessed the amount received by the taxpayer for the “know-how” and the licence as income. The Federal Court-Trial Division (82 DTC 6232) found that the receipt was on account of capital and accordingly allowed the taxpayer’s appeal. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was allowed. The majority of the Court found that the amount in issue was properly assessed as income. Based on earlier authority, the essential question for decision was whether the taxpayer lost its business as a direct and necessary result of entering into the licence agreement. It was not open to the trial judge to emphasize the de facto consequence of the decision of the government marketing body to go it alone if necessary. The sale of know-how will not normally be regarded as the sale of a capital asset, particularly when the sale is by way of a non-exclusive licence. Any exception to this rule must be strictly established as a total loss of know-how which is a direct and necessary result of the licence agreement. This test must be strictly applied and the taxpayer therefore could not succeed.