Why File in Canada?

Canada is a dynamic and prosperous country with a strong economy and a well-educated workforce. Some of Canada’s vibrant industry sectors include: aerospace, automotive, biotechnology, chemicals and plastics, digital media, medical devices, mining industries, oil and gas, renewable energy, software, and telecommunications.

Canada’s intellectual property regime complements its competitive R&D environment and provides significant benefits for foreign applicants. Some of these benefits include:

Late National Phase Entry.^* Applicants are permitted to enter the national phase in Canada up to 42 months after the priority date, upon payment of a CA $200 late fee.  This option is not available in most other jurisdictions, where national phase entry must be completed within 30 or 31 months after the priority date.

One-Year Grace Period. Canada provides a 12-month grace period for validly filing a Canadian patent application after public disclosure of the invention by the applicant. Public disclosures made within the grace period by the patent applicant or a person deriving knowledge of the invention through the patent applicant are not considered to be novelty-destroying. The grace period does not protect against independent disclosures made by third parties prior to the effective filing date.  One important limitation to Canada’s grace period is that it is calculated based on the Canadian filing date, not based on the priority date.

Deferred Examination.^* The Canadian patent regime affords applicants flexibility in the timing of prosecution.  Examination must be explicitly requested, and a corresponding fee paid, within 5 years from the filing date of the Canadian application.  Thus, an applicant can reduce costs at the outset by postponing the request for examination.  The applicant can also delay examination in Canada until corresponding claims have been allowed in another jurisdiction.

PPH. Under the Global Patent Prosecution Highway (GPPH), applicants can make a PPH request based on favourable national or international (PCT) work products to the CIPO. A Canadian application proceeding under the PPH program is generally examined within a few months. In many cases, the claims allowed in other participating patent offices are also allowed in Canada.

According to CIPO’s PPH Portal, between July 2016 and December 2016, the grant rate for PPH applications was 89% (compared to 65% for all applications); the average pendency from a PPH request to the first Office Action was 0.8 months (compared to 11.5 months); the average pendency from a PPH request to a final decision was 5.4 months (compared to 31.2 months); the average number of Office Actions was 0.9 (compared to 1.6); and the allowance rate without a first Office Action was 33% (compared to 5%). This means significant cost and time savings for applicants.

Expedited Examination. The Canadian Intellectual Property Office (CIPO) offers a unique strategy for fast-tracking examination of an application. The CIPO’s ‘special order’ program provides a first office action within 60 days of making a request. Such a request requires the filing of a statement that the failure to advance the application is likely to prejudice the applicant’s rights and can only be made if the application has been published (or the request is accompanied by a request for early publication). No other evidence or documentation is required.

Expedited examination can also be requested where the application relates to technology capable of resolving or mitigating environmental impacts or conserving the natural environment and resources (referred to as ‘greentech’). No additional fees beyond the usual examination fee are required, and no supporting information needs to be provided.  Based on the expedited examination available in Canada, the CIPO can, accordingly, be used as the office of earlier examination to expedite prosecution in other patent offices participating in a PPH program.

Reduced Fees. Compared with other jurisdictions, it is relatively inexpensive to file and prosecute a patent or trademark application in Canada.  Also, patent maintenance fees, which are due annually upon the 2^nd anniversary of the Canadian application filing date, are relatively small compared to those of other patent offices.

No Excess Claims Fees. There is no limit or surcharge on the total number of claims or the number of independent claims that may be included in a patent application.  There are also no restrictions or surcharges on the use of multiply dependent claims.  This allows applicants to file numerous independent claims and an unlimited number of narrower dependent claims in an attempt to enhance the scope of protection available in Canada.

No File Wrapper Estoppel or IDS. Patent applicants in the US and some other jurisdictions are subject to “file wrapper estoppel”. If a court is called upon to construe the claims of a patent after it is granted (for example, in an infringement lawsuit), file wrapper estoppel allows the court to use statements made to the patent office during prosecution to narrow the scope of those claims.  In Canada, there is no file wrapper estoppel, meaning statements made to the CIPO cannot later be used to narrow the scope of patent claims.  In addition, there is no requirement in Canada to disclose relevant prior art to the CIPO in an information disclosure statement (IDS).

No Trademark Class Fees.^* Canada has not yet implemented the Nice Classification system for trademarks, and as such there is currently no additional fee related to the number of classes of goods and services listed in a trademark application.

^*Legislative changes are expected to come into force in 2019 which will limit or eliminate these benefits, but for now they continue to be available to applicants.

This article will focus on income tax issues related to intellectual property (“IP”), including some of the tax implications of acquiring and disposing of IP rights.

Acquiring IP
First, we will discuss the implications of acquiring IP rights.

IP can be acquired in one of two ways: by creating and, where appropriate, securing IP rights (e.g. using a trademark in connection with goods/services or inventing and securing patent protection for technology), or by purchasing IP rights from a third party (e.g. through an assignment). In addition, the right to use (but not own) IP can be acquired by way of a license agreement with the IP owner.

Where IP rights are created (and secured where appropriate), different types of IP rights (i.e. trademark, patent, copyright, design, etc.) have different tax implications. For example, the cost associated with registering a trademark (including legal fees) are generally considered business expenses,¹ which reduce a business’ profit for a taxation year and reduce the amount of tax payable in that year.  In contrast, the costs associated with securing patent protection are generally considered to be capital expenses, which factor into determining the gain or loss only when the patent is ultimately disposed of.  Tax deductions are generally not available in the year of purchase of capital assets.

Where IP rights are acquired from a third party, the cost of the acquisition is generally treated as a capital expense. Again, this means that no deductions are available in the year of the purchase.  However, there are some exceptions to this rule.  For example, a lump sum payment to acquire know-how or trade secrets will be considered a capital expense.  However, if the know-how or trade secrets are acquired in an agreement with periodic (e.g. annual) payments, those payments are considered business expenses and are deductible in the year in which they are incurred.

Where IP rights are licensed from an IP owner, the licensee may be required to pay royalties (i.e. payments based on the profit earned by the licensee from use of the licensed IP) to the IP owner. For the licensee, royalty payments are considered business expenses, and are deductible in the year in which they are incurred.  For the licensor (i.e. IP owner), royalties are considered business income, and are considered taxable income.

Disposing of IP
The tax consequences associated with disposing of (e.g. selling) IP generally depend on the “normal course of business” of the taxpayer. For example, where a taxpayer sells its IP portfolio to another party, the proceeds of the sale will generally be treated as a sale of capital property,² meaning any gain will be half-taxable (or any loss will be half-deductible).  However, if the taxpayer is in the business of buying and/or selling IP rights, then the proceeds will generally be treated as business income, which is fully taxable (or fully deductible in the case of a loss).

Similarly, where an author (e.g. a writer or an artist) of a work sells copyright interests in that work in connection with their profession as an author, then the proceeds of the sale will be taxable as business income. But, if the author sells a copyright portfolio outside the normal course of business, then the proceeds of that sale would generally be a capital receipt and gains would be half-taxable and losses half-deductible.

Conclusion
This article gives a brief introduction to the many complicated ways that IP rights can impact taxes. For more information, please contact a dedicated tax professional.

¹ A taxpayer’s taxable income from a business in a taxation year is the profit (i.e. revenue minus expenses) earned from the business in that year. Business expenses reduce the amount of profit for a taxation year, and therefore reduce the amount of tax payable in that year.

Capital expenses are not deductible in the year the expense is incurred. Taxpayers must wait until the property is disposed of (i.e. sold) to determine their gain or loss.

² Capital property is property which a business retains over time without the intention to sell (for example, a warehouse or storefront space). Gains from the sale of capital property are only half-taxable, while losses are only half-deductible.

For example, say a business purchases a warehouse in 2010 for $100,000, with the intention to use the warehouse indefinitely to hold its excess inventory. In 2015, the business sells the warehouse for $75,000.  The business’ capital loss (the difference between the purchase price and the sale price) on the sale is $25,000.  Therefore, the business’ “allowable capital loss” is $12,500 ($25,000/2).  Thus, the business would be entitled to deduct $12,500 from its income for the 2015 taxation year.  Note that allowable capital losses can only be deducted against capital gains; the Income Tax Act allows taxpayers to “carry” allowable capital losses forward or back to other taxation years if they don’t have any capital gains in the year the loss is incurred.

By Tyler Berg

Registering the name of an individual as a trademark in Canada poses unique challenges. These challenges frequently impact celebrities wanting to protect their famous name in Canada. Currently, famous names are only registrable as trademarks if the applicant can establish by way of evidence that the applied-for name has “acquired distinctiveness”[1] or “is not without distinctive character”[2] in Canada and so long as the other statutory requirements are met. In general, the evidentiary burden imposed on such applicants decreases as the level of fame of the individual increases.  Unfortunately, recent amendments to Canada’s Trade-marks Act will make it even more difficult to secure registration for a famous name used as a trademark in Canada.

The difficulty in registering names as trademarks stems directly from Canadian trademark law. Under paragraph 12(1)(a) of the Trade-marks Act, a trademark is not registrable if it is “primarily merely the name or surname of an individual who is living or has died within the preceding thirty years”. Obtaining a consent to use and register the name from the named individual is not enough to overcome a paragraph 12(1)(a) objection.  However, the Trade-marks Act does provide mechanisms to overcome such an objection, as described in more detail below, and many individual and celebrity names are registered in Canada.  One example is the well-known American actor and singer, Robert John Downey Jr. who played the role of Marvel Comics’ superhero Iron Man. ROBERT DOWNEY JR. is the subject of trademark registration No. TMA878724 which covers motion picture films, pre-recorded video discs and downloadable video recordings as well as entertainment services.

The Trade-marks Act includes two mechanisms for overcoming a paragraph 12(1)(a) objection, as set forth in subsection 12(2) and section 14. To benefit from subsection 12(2), the applicant must furnish evidence to show that the applied-for name had been used in Canada as a trademark by the applicant or its predecessor in title so as to have become distinctive as of the date of filing an application for its registration.[3] To benefit from section 14, the applicant or its predecessor in title must have registered the name as a trademark in or for its country of origin, and must furnish evidence which shows that the trademark is “not without distinctive character” in Canada.[4] In the case of the application to register the trademark ROBERT DOWNEY JR., the applicant successfully overcame a paragraph 12(1)(a) objection by claiming the benefit of section 14.

To benefit from either subsection 12(2) or section 14, the applicant must submit sufficient evidence to establish the applicable criterion of “acquired distinctiveness” or “not without distinctive character” is met. This evidence is submitted in the form of an affidavit or statutory declaration which typically includes information such as:

• The goods and services with which the trademark is used, both in Canada and abroad.
• The length of time the trademark has been in use, both in Canada and abroad.
• The countries in which the trademark has been used.
• The countries in which the trademark has been registered.
• The approximate quantity and value of sales of products and services in association with the trademark for a reasonable period of time, e.g. the preceding five years, both in Canada and abroad.
• The channels through which the products or services are distributed in Canada, particularly if the product is sold by major retailers.
• Details of the extent and value of advertising under the trademark, both in Canada and abroad, including representative examples. For example, this could include the channels through which advertising is carried out, e.g. names of publications in which advertisements are placed, and the relevant circulation or readership figures for those channels.
• Any significant publicity given to the trademark, particularly in respect of Canada.

In general, the burden of adducing evidence is lighter for applicants relying on section 14 since the expression “is not without distinctive character” is a lower threshold and does not require the applied-for mark to have been “used” in Canada as of the filing date.[5] The trademark can simply be used extensively in another country such that there has been significant spillover advertising in Canada. However, the standard of “acquired distinctiveness” under subsection 12(2) requires that the name be “used” extensively in Canada so as to have acquired a secondary meaning by the time the trademark application was filed. Further complicating matters, if the applicant cannot provide evidence to establish that such applied-for name has become distinctive under subsection 12(2) throughout Canada, the registration may be restricted to certain territorial areas in Canada in which the applied-for name is shown to have become distinctive as a trademark.[6]

Currently, section 14 provides an advantage to foreign applicants with a foreign registration over domestic applicants. However, amendments to the Trade-marks Act are expected to come into force sometime in late 2018 or early 2019 repealing section 14.  Once in force, pending applications which have not yet been advertised in the Trade-marks Journal will no longer be able to rely on the less onerous section 14 option for overcoming a paragraph 12(1)(a) objection.

Given the amount of information required to claim the benefit of subsection 12(2) or section 14 as mentioned above, there is generally a certain level of resistance from applicants to provide such evidence. One reason for resistance is confidentiality. All documents filed with the Canadian Intellectual Property Office become part of the public record and so all of the information contained in the required affidavit or statutory declaration will be released to the public if so requested. Another reason for resistance is cost. While the amount of evidence necessary to establish that a trademark has “acquired distinctiveness” or is “not without distinctive character” varies in each case, the time required by a trademark attorney to compile such evidence and to prepare an affidavit or statutory declaration is fairly significant.

Unfortunately, in some cases, even if the applicant is willing to adduce evidence to claim the benefit of either subsection 12(2) or section 14, the evidence may not be sufficient to establish that the “acquired distinctiveness” or “not without distinctive character” requirement is met. For example, the name may not have been used as a trademark per se but merely as a name. The name is used as a “trade-mark” only if it is “a mark that is used by a person for the purpose of distinguishing or so as to distinguish goods or services manufactured, sold, leased, hired or performed by him from those manufactured, sold, leased, hired or performed by others”.[7]  A name is not considered to be used as a trademark per se if, for instance, the name is not displayed in a manner so as to distinguish it from the surrounding text or if the name is not marked on the applied-for goods themselves or on the packaging of such goods at the time of transfer or in the performance or advertising of the applied-for services.

To overcome the above disadvantages and obstacles, alternatives to registering a famous name include, for example, registering the name in combination with a design element or other additional matter. The addition of other matter is generally sufficient to avoid a paragraph 12(1)(a) objection because a trademark is only refused if it is “primarily merely” a name or surname.

While registering the name of famous individuals as trademarks in Canada poses challenges, different options may be available to those interested applicants who wish to protect famous names as trademarks in Canada. If you wish to obtain a trademark registration for a name of an individual, you should first consult a trademark lawyer to discuss possible strategies for your particular scenario.

[1] Trade-marks Act, RSC 1985, c T-13 (the “Trade-marks Act”), s 12(2).

[2] Ibid, s. 14.

[3] Ibid, s 32(1).

[4] Ibid, s 31(2).

[5] “Use” is defined under section 4 of the Trade-marks Act: “A trade-mark is deemed to be used in association with goods if, at the time of the transfer of the property in or possession of the goods, in the normal course of trade, it is marked on the goods themselves or on the packages in which they are distributed or it is in any other manner so associated with the goods that notice of the association is then given to the person to whom the property or possession is transferred. A trade-mark is deemed to be used in association with services if it is used or displayed in the performance or advertising of those services.”

[6] supra, s 32(2).

[7] supra, s 2, definition of “trade-mark”.