Tax considerations when transferring a representative's trademark rights to a corporation

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When a business starts as a sole proprietorship and expands to establish a corporation, there are cases where the corporation retains the trademark registered in the initial representative's name. Later, as the company leverages the trademark, sales grow, and brand awareness improves, it's advisable to transfer the trademark to the corporation.

Furthermore, there are many cases where a representative, while employed by a corporation, registers a trademark in his or her personal name, uses it for the corporation, and then transfers the trademark to the corporation. In such cases, the process of transferring the representative's personal trademark to the corporation can raise various tax issues. Therefore, we will examine the tax considerations to consider when transferring trademark rights to the corporation.

1. Transfer of trademark rights by representative

Depending on the timing of the trademark development by the representative, the tax burden varies when a corporation acquires the trademark for a fee.

 If the trademark was developed and used prior to the establishment of the corporation.

If a trademark was developed prior to the incorporation of the corporation, i.e., while the representative was operating as a sole proprietor, the corporation may acquire it for a fee. However, documentation proving that the individual independently created the trademark must be available. However, caution is advised, as if the corporation were to use the trademark without payment after the incorporation, the representative's personal business income may be omitted due to unpaid royalties.

 If the trademark is registered while employed by a corporation

In many cases, trademarks conceived by a representative while employed by a corporation are not considered to be owned by the representative. Even if the company's resources and expenses were invested in the trademark development process and the representative participated in the development, this is often considered to be the performance of the corporation's original duties. Therefore, unless the representative can prove that the trademark was developed independently of the company's business, a paid assignment of trademark rights from the representative is unlikely to be recognized for tax purposes.

2. Value-added tax imposed upon transfer of trademark rights

According to the Value Added Tax Act, the transfer of a business's trademark rights is considered a supply of goods and is therefore subject to taxation. Therefore, whether or not value added tax is imposed must be considered when transferring trademark rights.

3. Taxation of other income upon transfer of trademark rights

The consideration received for transferring trademark rights is classified as miscellaneous income under the Income Tax Act, and the date of payment is considered the withholding tax date. Furthermore, the tax year in which the transfer occurred is considered the date of receipt of miscellaneous income.

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