Every now and then a taxpayer proposes to transfer an intangible “something” to a corporation for valuable consideration. The taxpayer, or his or her advisers, would do well to read Tri Pacific Gas Corporation v. Canada, 2007 FCA 38, before proceeding.
In Tri Pacific, the taxpayer purported to transfer certain “pre-development costs” to a corporation. The corporation made a journal entry showing the costs as an asset; the off-setting credit was a payable to the taxpayer. In a subsequent taxation year, the corporation earned income. The corporation purported to reduce the income by the cost of its property (the costs). The corporation also paid an amount to the taxpayer, supposedly in satisfaction of the payable owing to him. The CRA reassessed to deny the expense to the corporation and to include the amount paid to the taxpayer in his income as a shareholder benefit under subsection 15(1). The taxpayer and the corporation appealed to the Tax Court.
Justice Bell dismissed the appeals of the corporation and the taxpayer on the basis that the taxpayer had not transferred anything to the corporation because whatever he had transferred was not property. If it was not property, then the taxpayer could not transfer it and the amount supposedly owing by the corporation was a nullity. The Federal Court of Appeal dismissed the appeals of the taxpayer and the corporation in the following terms:
[16] In my view, Bell J. was correct when he concluded that, for income tax purposes, Mr. Roth’s “know-how” was not property that was capable of being transferred by Mr. Roth or acquired by Tri Pacific and as a result, the liability portion of the 1992 journal entry could not be treated as having created or established a legally enforceable right on the part of Mr. Roth to be paid $371,726 as the cost of property acquired by Tri Pacific.
