Why Section 13 of the Copyright Act Is a Trap for Canadian Startups

The Default That Costs Startups Millions

Most Canadian founders assume they own the intellectual property their team creates. The assumption is reasonable — you hired the person, you paid them, the work was done for your company. But Canadian intellectual property law does not operate on assumptions. It operates on statutory defaults and contractual assignments, and the defaults do not work the way most founders expect.

The Copyright Act, RSC 1985, c C-42, s.13(3) provides the starting point: "Where the author of a work was in the employment of some other person under a contract of service or apprenticeship and the work was made in the course of his employment by that person, the employer shall, in the absence of any agreement to the contrary, be the first owner of the copyright." This provision creates three traps that catch Canadian startups with alarming regularity.

Trap 1: It Only Applies to Employees

Section 13(3) requires a "contract of service" — which means an employment relationship. Independent contractors, freelancers, and consultants are not covered. For work created by a contractor, the default is the opposite: the contractor retains full ownership of the copyright, even if you commissioned the work, specified the requirements, and paid for every hour.

This is the single most common IP ownership issue we see in startup due diligence. The founding team hired contractors to build the initial version of the product, never executed IP assignment agreements, and now the contractors own the copyright in the code they wrote. The company has an implied licence to use the work — but that is not the same as ownership, and an implied licence is not transferable to an acquirer or enforceable against a third party who obtains the copyright from the contractor.

Trap 2: It Only Covers Copyright

Even when s.13(3) applies — even when the worker is a bona fide employee — the provision only transfers copyright. It does not transfer:

• Patent rights: Under the Patent Act, the inventor is the first owner of patent rights. An employer can claim ownership only if there is a specific contractual assignment. The leading case, Comstock Canada v. Electec Ltd. (1991), confirmed that employment alone does not transfer patent rights unless the employee was hired specifically to invent.
• Trade secrets: Trade secret rights are governed by the common law, not the Copyright Act. While an employee has a duty of confidence during employment, the question of who "owns" the trade secret depends on the circumstances of its creation and any contractual provisions.
• Industrial designs: The Industrial Design Act does not contain an employer ownership provision equivalent to s.13(3).
• Data and databases: Compilations of data may be protected by copyright if they involve sufficient skill and judgment in selection and arrangement (following CCH Canadian Ltd. v. Law Society of Upper Canada, 2004 SCC 13), but the protection is thin and the ownership rules follow the same s.13(3) framework.

Trap 3: "Course of Employment" Is Narrower Than You Think

Section 13(3) only applies to work created "in the course of employment." Canadian courts have interpreted this phrase narrowly. Work created outside of working hours, outside the scope of the employee's assigned duties, or using the employee's own equipment may not be "in the course of employment" — even if it is related to the employer's business.

Consider a developer who works on a side project on weekends that solves a problem related to your company's product. If the developer was not directed to work on that project, did not use company resources, and the project falls outside the scope of their job description, there is a real argument that s.13(3) does not apply — and the developer owns the copyright. A well-drafted IP assignment agreement eliminates this ambiguity by covering all intellectual property created in connection with the company's business, regardless of when or where it was created.

Moral Rights: The Right You Cannot Assign

Under the Copyright Act, s.14.1, the author of a work has moral rights — including the right to the integrity of the work, the right to be associated with the work, and the right to remain anonymous. Moral rights cannot be assigned. They can only be waived. A waiver must be specific and voluntary.

For software companies, moral rights are rarely a practical issue — nobody claims attribution rights for backend code. But for companies in creative industries — design, content, media, branding — moral rights can create complications if a former employee or contractor objects to how their work is being modified or used. The solution is a moral rights waiver in every IP assignment agreement.

What a Proper IP Assignment Agreement Covers

A proper IP assignment agreement, tailored for Canadian law, should include:

• Broad definition of intellectual property: Copyright, patent rights, trade secrets, industrial designs, trade-marks, and all other intellectual property rights — not just copyright.
• Assignment of all IP created in connection with the company's business: Not limited to work "in the course of employment" — broader language that covers side projects, after-hours work, and work using personal equipment, to the extent related to the company's business.
• Pre-existing IP exclusions: A schedule listing any intellectual property that the assignor created before joining the company and is not assigning. If the schedule is blank, the agreement should state that there is no pre-existing IP to exclude.
• Moral rights waiver: A specific, voluntary waiver of moral rights in all assigned works.
• Obligation to assist: A commitment to execute any further documents necessary to perfect the company's ownership — because IP registration (patent applications, trade-mark registrations) may require the inventor's or author's cooperation.
• Confirmation of consideration: The assignment must be supported by consideration. For employees, continued employment is sufficient. For contractors, the payment under the services agreement is typically sufficient, but it should be explicitly referenced.

Retroactive Fixes and the Due Diligence Crunch

If you are reading this article and realizing that you have IP assignment gaps, fix them now — not during a financing round or an acquisition, when every deficiency is leveraged against you. Track down every person who contributed to your product — founders, employees, contractors, advisors, interns — and execute proper assignments. For founders, this includes assigning any pre-incorporation IP that was later contributed to the company.

An IP assignment agreement is not paperwork. It is the document that establishes your company's ownership of its most valuable asset. Without it, you own less than you think.