A non-resident corporation (“US Corp”) sold trademarks at a sales price in excess of their adjusted cost base to a non-arm’s length Canadian resident corporation (“Canadian Corp”). The Canadian Corp included the trademarks as Class 14.1 property with a capital cost of equal to their purchase price, and claimed capital cost allowance (“CCA”) accordingly. The Canadian Corp took the position that, as US Corp was a non-resident corporation which was not liable for tax in Canada, it was not a “taxpayer” under the Act in light of Oceanspan, so that it could not be considered to have a “capital property” (whose definition references a taxpayer), as required for the application of s. 13(7)(e)(ii).
The Directorate rejected this position and found that s. 13(7)(e)(ii) was also applicable where the non-arm’s length transferor was a non-resident, so that s. 13(7)(e)(ii) applied to determine the capital cost of the trademarks acquired from US Corp. In distinguishing Oceanspan (which entailed the purported generation of non-capital losses by a non-resident corporation while it was not subject to Canadian tax), it stated:
In the current situation, the object and purpose of subparagraph 13(7)(e)(ii) is to establish the resident purchaser’s capital cost of depreciable property acquired from a non-arm’s length transferor for CCA purposes. The purpose is not to determine the tax liability of the non-resident transferor corporation.