A-115-73
Rapistan Canada Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Mackay and
Sweet D.JJ.—Toronto, January 24, 1974.
Income tax—Deed giving donee the `know-how" to manu
facture and market donor's products—Not a gift of "proper-
ty" within provisions for claiming capital cost allowance—
Income Tax Act, s. 139(lxag)—Income Tax Regulations,
Sch. B, Class 14—Interpretation Act, R.S.C. 1970, c. I-23, s.
15.
Under a deed of gift, the appellant company received
from a United States company the enjoyment of certain
benefits for a stated period, in manufacturing and marketing
the donor's products. Appellant's claim for capital cost
allowance, in respect of such benefits, was rejected in its
assessments for the taxation years 1966, 1967, 1968. The
Minister's decision was affirmed by the Trial Division.
Held, dismissing the appeal, the gift must be construed as
a promise by the donor that the appellant would be informed
by the donor as to how to commence and carry on a certain
operation, or what the deed called "know-how, techniques,
skills and experience". This acquisition might be described
as by "asset" and "right" falling within the definition of
"property" in section 139(lxag) of the Income Tax Act. But
it was not "property that is a patent, franchise, concession
or licence for a limited period in respect of property" within
Class 14 of Schedule B to the Income Tax Regulations. It
cannot qualify for the capital cost allowance.
Moreau v. St. Vincent [1950] Ex.C.R. 198 and Hollin-
rake v. Truswell [1894] 3 Ch. D. 420, applied.
INCOME tax appeal.
COUNSEL:
W. D. Goodman, Q.C., for appellant.
N. A. Chalmers, Q.C., and S. Pus-
togorodsky for respondent.
SOLICITORS:
Goodman and Carr, Toronto, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered orally in English by
JACKETT C.'J.: This is an appeal from a
judgment of the Trial Division dismissing an
appeal from the appellant's assessments under
Part I of the Income Tax Act for the 1966, 1967
and 1968 taxation years.
The facts are fully set out in the Reasons for
Judgment of the learned Trial Judge and I do
not propose to state them except in so far as is
necessary to indicate why I am of opinion that
the appeal must be dismissed.
On February 1, 1957, an instrument entitled
"Deed of Gift" was executed by the appellant
and The Rapids-Standard Company Inc. In this
document The Rapids-Standard Company Inc.
is referred to as "Rapistan" the "donor" and the
appellant is referred to as the "donee". The
substantive part of the document reads as
follows:
NOW THEREFORE THIS DEED OF GIFT WITNESSETH AS FOL-
LOWS:-
1. RAPISTAN gives, grants and assigns by way of gift to
RAPISTAN CANADA, subject to the provisions stated below, to
have, to hold and to enjoy for a term of 10 years or during
such period as RAPISTAN is a shareholder of RAPISTAN
CANADA, whichever shall be the shorter period, all of its
present manufacturing, engineering, production, manage
ment and sales know-how, techniques, skills and experience,
together with, but not limited to, all of its blueprints and
designs and the following franchises, rights and licences,
limited to and exclusive in the Dominion of Canada, name
ly:—
(a) To manufacture or assemble and to market the full
range of RAPISTAN products;
(b) To use all RAPISTAN product designs and applications,
productions, sales and marketing data, methods and tech
niques, bibliography, library, field reports, sales aids and
data;
(c) To use the existing RAPISTAN developed Canadian sales
organization;
(d) To use all RAPISTAN trade names, trade marks, regis
tered or unregistered, including the right to use future
acquired trade names and trade marks, and to become a
registered user of the Canadian registered trade mark;
(e) To use and practice the arts disclosed in all RAPISTAN
patents and applications for patents.
Provided however that until such time as RAPISTAN CANADA
is able to and does produce a specific RAPISTAN product,
RAPISTAN may continue to produce and supply to the
Canadian market its United States produced specific RAPIS-
TAN product in order that the Canadian market may be
adequately served and none of the foregoing gifts shall
prohibit RAPISTAN from so doing.
2. RAPISTAN CANADA accepts the foregoing gift and acknowl
edges, covenants and agrees as follows:—
(a) That by reason of accepting the foregoing gift it will
obtain confidential information and data disclosed to it by
RAPISTAN and it will not at any time except so far as may
be necessary in connection with its own rights of manu
facture and sale, disclose to third persons any of the
information, knowledge or data imparted or furnished to it
by RAPISTAN and it will use every effort to prevent disclo
sures at any time of the 'said information, data or knowl
edge by its employees or others possessing or having
access thereto;
(b) That it will not by reason of its exercise of the rights
hereby given to it obtain or claim to obtain any property
rights whatsoever or wheresoever in respect to any trade
name, trade mark, letters patent or applications for any
such, now owned or controlled by RAPISTAN beyond the
rights conferred upon it by this Deed of Gift;
(c) That should trade marks covered hereby be registered
by RAPISTAN under the laws of any country other than
Canada, such registration and trade marks shall be the
sole property of RAPISTAN, and RAPISTAN CANADA will not
contest at any time in any manner, the validity thereof;
(d) That should Rapistan apply for or have issued letters
patent by any country other than Canada relating to any
product covered by this Agreement, RAPISTAN CANADA will
not contest at any time, in the manner, the validity
thereof;
(e) That the rights, franchises and licences acquired by it
hereunder will not be transferred by it in any way without
the prior consent of RAPISTAN;
(f) That upon the termination of the period hereinbefore
fixed it will return to RAPISTAN all blueprints, written data
and information.
The basic question to be decided on this
appeal is the question whether the subject
matter of this so-called "gift" is "property" that
is a "patent, franchise, concession or licence
... in respect of property" within the meaning
of those words in Class 14 of Schedule B to the
Income Tax Regulations in respect of which the
appellant may claim capital cost allowance. It is
clear that, if what the appellant has acquired by
the "Deed of Gift" is not "property" of such a
class, the appeal must fail. ,
Class 14 reads as follows:
CLASS 14
Property that is a patent, franchise, concession or license
for a limited period in respect of property but not including
(a) a franchise, concession or licence in respect of miner
als, petroleum, natural gas, other related hydrocarbons or
timber and property relating thereto (except a franchise
for distributing gas to consumers or a licence to export
gas from Canada or from a province) or in respect of a
right to explore for, drill for, take or remove minerals,
petroleum, natural gas, other related hydrocarbons or
timber,
(b) a leasehold interest, or
(c) a property that is included in class 23.
As appears from the appellant's Memoran
dum of Fact and Law, the substance of the
"gift" was the donor's "existing technology and
know-how". The question is, therefore, whether
"technology and know-how" is "property" that
falls within the words "a patent, franchise,
concession or licence ... in respect of
property".
The word "property" is defined by section
139(1)(ag) of the Income Tax Act as follows:
"property" means property of any kind whatsoever whether
real or personal or corporeal or incorporeal and, without
restricting the generality of the foregoing, includes a right of
any kind whatsoever, a share or a chose in action; 2
While the "Deed of Gift" purports to be a
gift, grant and assignment of "know-how, tech
niques, skills and experience", as far as I know,
under no system of law in Canada, does knowl
edge, skill or experience constitute "property"
that can be the subject matter of a gift, grant or
assignment except to the extent, if any, that it
can be a right or a part of a right in respect of
which there is property of the kind classified as
industrial property. Therefore, as I understand
the "gift" in this case in the light of the evi-
1 No claim has been put forward in respect of specific
patents, trade names or marks or physical things that are
mentioned incidentally in the description of the "gift".
2 By virtue of section 15 of the Interpretation Act, the
word "property" in the regulation has the same meaning as
in the statute.
dence, it must be construed as a promise by the
donor that the appellant will be informed and
instructed by the "donor" as to how to com
mence and carry on a certain manufacturing
operation. Clearly, it is not based on any of the
industrial property rights such as patents for
inventions, copyright, trade marks and industrial
designs. 3 As I understand the law, knowledge or
ideas, as such, do not constitute property. Cer
tainly, they cannot be the subject of copyright.
Compare, for example, Moreau v. St. Vincent'
per Thorson P. at pages 204-05:
Just as an author has no copyright in the ideas he has
expressed even although they are original, but only in his
expression of them, so also no person has any copyright in
any arrangement or system or scheme or method for doing a
particular thing even if he devised it himself. It is only in his
description or expression of it that his copyright subsists.
This principle was tersely put by Lindley L.J. in the leading
case of Hollinrake v. Truswell, [1894] 3 Ch. D. 420 at 427,
as follows:
Copyright, however, does not extend to ideas, or schemes,
or systems, or methods; it is confined to their expression;
and if their expression is not copied the copyright is not
infringed.
and there has never been any departure from this principle. I
am, therefore, of the view that in seeking to protect his
system for conducting a competition from encroachment by
the defendant the plaintiff was attempting to use the law of
copyright for a purpose to which it is not applicable. He
claimed more than the law permits.
To a limited extent, knowledge or ideas can be
the subject of a monopoly conferred by a patent
for an invention or by registration of an indus
trial design, and therefore, to that extent, "prop-
erty" as, I suppose it may be said, techniques,
skills and experience may be, in a certain sense.
As such, however, and in the absence of any
such statutory monopoly, in my view, "know-
how, techniques, skills and experience" are not
3 Any such rights as may have been involved were inci
dental and not of the essence of the "gift".
4 [1950] Ex.C.R. 198.
"property" and cannot, therefore, be "proper-
ty" within Class 14 supra.
It is true, of course, that one business man
may acquire from another what is usually
referred to as "know-how" just as he can
acquire what is usually referred to as "good-
will" and when he does so for a consideration,
what he has acquired may properly be referred
to, and shown in his balance sheet, as an
"asset". The question still remains as to wheth
er he has, in any particular case, acquired
"property" within the definition of that word in
the Act. The difference is exemplified in this
case by the following statement in the appel
lant's Memorandum of Fact and Law:
The U.S. Company could have fulfilled its obligations under
the deed of gift by delivering all its blueprints, field reports,
engineering data, service manuals, etc. existing as of Febru-
ary, 1957, allowing a week or so for representatives of the
Canadian Company to go through the plant, and then
declined to do anything more,
The asset that the appellant acquired in this case
was the knowledge of how to commence and
carry on the particular manufacturing operation.
That was, from the business man's point of
view, an "asset". It was not, however,
"property".
It is true that the appellant did, by the "Deed
of Gift", acquire, by implication, a promise that
the donor would do certain things and that that
promise is a "right" that falls within the defini
tion of the word "property". That right is not,
however, the "know-how" that is the subject
matter of the claim for capital cost allowance.
As appears from the passage just quoted from
the appellant's memorandum, that promise
could have been soon satisfied. The "know-
how" would, however, continue as a capital
asset of indefinite durations. It is not however,
as such, "property".
s Once the "Deed of Gift" was executed, the appellant
had a "right" to be informed and instructed. If there had
been a breach of the obligation, the appellant would have
had a "chose in action" in respect of that breach. Once the
information was duly conveyed, the appellant had what it
had bargained for—the "know-how ...".
In my opinion, the appeal should be dismissed
with costs.
* * *
MACKAY D.J. concurred.
* * *
SWEET D.J. concurred.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.