Who is entitled to the profit from a patent our offshore company owns?
Not necessarily the company whose name is on the registration. Legal ownership records who holds the right; it does not decide who is entitled to the return the right produces. That follows from the functions performed around the intangible, from who controls the risks attached to it, and from who has the financial capacity to bear those risks. A registered owner that performs no functions and controls nothing is providing funding, and a funding return is what it earns. The residual profit goes where the development, enhancement, maintenance, protection and exploitation work is actually done.
What does DEMPE mean and why does it decide the answer?
It stands for development, enhancement, maintenance, protection and exploitation: the five things somebody has to do for an intangible to be worth anything. The analysis matters because it moves the question from paperwork to conduct. Instead of asking which entity holds title, you ask which entity decides the research programme, which one funds it and could absorb its failure, which defends the rights, and which brings the intangible to market. Those answers, entity by entity and function by function, determine how the return is divided, and they are answered from evidence rather than from the group chart.
Our intellectual property holding company has no employees — is that a problem?
It is a problem for the profit allocation, not necessarily for the structure. An entity with no people performs none of the five functions and controls none of the associated risks, so there is no basis on which it can be entitled to the residual return from the intangible. What it can earn is a return for the capital it has provided. Groups are often surprised by how much that changes the numbers. If the intention is for the entity to earn more, the functions and the decision-making capability have to genuinely sit there, which is a business change and not a drafting exercise.
Is a funding return the same thing as a royalty?
No, and conflating them is how these structures come apart. A royalty is what somebody pays for the right to use an intangible. A funding return is what a provider of capital earns for putting money at risk in developing one. An entity that holds title, provides the money and does nothing else is in the second position, so its reward is measured against the funding it provided and the risk it genuinely controls, not against the value of the intangible it happens to own. The difference in outcome is usually large.
Can a company control a risk when the work is done by another entity?
It can, but control means something specific and it is tested on evidence. Control involves deciding whether to take the risk on, deciding how to respond as it develops, and having the capability and the authority to make those decisions. Approving a budget somebody else prepared, or signing minutes drafted elsewhere, is not control. So an entity that outsources research can still control the development risk if its own people set the programme, judge the results and decide whether to continue. If the decisions are being taken in another country, the risk sits there.
How do we document who performs the DEMPE functions?
Function by function and entity by entity, supported by evidence that already exists. For each of development, enhancement, maintenance, protection and exploitation, record who does the work, who takes the decisions and what that conclusion rests on: board and committee papers, research plans, employment records and job content, the correspondence behind registrations and enforcement, and marketing approvals. Then record who bears each risk and what financial capacity they have to bear it. The file is stronger for saying which entity performs a function poorly or partly than for claiming a tidy allocation the documents do not support.
How much foreign income is tax-free in Canada?
None of it is tax-free for being foreign. A Canadian resident is taxed on worldwide income, so foreign salary, interest, dividends, rent and gains all go on the return, converted to Canadian dollars. What genuinely reduces the bill is the basic personal amount, the credit for foreign tax already paid, and any treaty article that exempts a specific type of income. The reporting thresholds people have in mind — the foreign property statement, for one — govern reporting, not exemption. See the foreign tax credit.
What happens if the two countries disagree about which of them can tax me?
The treaty has a procedure for exactly that. You apply to the competent authority in your residence country, which takes the case up with its counterpart, and the two negotiate a position that removes the double taxation. Some treaties add binding arbitration if they cannot agree. It is slow and it runs on documents, so the practical work is preserving the record and filing protective claims while the clock runs. See our treaty work.
