29 October 2013 T.I. 2013-0507121E5 - Website costs
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether expenditures made by a taxpayer to develop a website would be a capital or current expense.
Position: Where the website will only have a relatively short useful life the related costs should be treated as a current expense. However, if the website is expected to have a long useful life then the costs should be treated as a capital expense.
Reasons: Guidelines explained in the Interpretation Bulletin IT-128R, entitled Capital Cost Allowance - depreciable property at paragraph 4.
October 29, 2013
Re: Website Development Costs
This is in response to your email of October 2, 2013, wherein you requested our opinion with respect to whether expenditures made by a taxpayer to develop a "website" would be a capital or current expense.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, "Advance Income Tax Rulings".
A website is an electronic creation that enables a taxpayer, inter alia, to advertise its business, sell its products and/or services and to provide information about its business to the public through the Internet. From our review of various definitions of a web page, our understanding is that a web page is a text document with tags (i.e., HTML tags) that tell the browser how to format or display the text and/or pictures. To be able to display a website two items are needed, a website and a web server. The Internet Service Provider (ISP) that provides internet access will sometimes allow a client to use its server to display a website or if the ISP does not allow the client to post a website, then the client may be able to use a free web hosting server. A website can be changed or modified and our understanding is that generally, software and labour costs would be the predominant costs of developing a website.
There are no fixed rules when determining whether a particular expenditure is on account of income or on account of capital and in order to make a determination a complete understanding of all the relevant facts would be required. However, the courts often look to what, from a practical and business perspective was the purpose of the expenditure. The jurisprudence suggests a number of guidelines that may be relevant, but also suggests that no one guideline is determinative. The main four guidelines that the courts have identified as being relevant to the determination are "enduring benefit", "maintenance or betterment", "integral part or separate asset" and "relative value". These guidelines, along with some others, are explained in the Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-128R, "Capital Cost Allowance Depreciable Property", at paragraph 4. Of particular importance to your situation is the guideline in paragraph 4(a) of IT-128R which states:
Enduring Benefit - Decisions of the courts indicate that when an expenditure on a tangible depreciable property is made "with a view to bringing into existence an asset or advantage for the enduring benefit of a trade", then that expenditure normally is looked upon as being of a capital nature. Where, however, it is likely that there will be recurring expenditures for replacement or renewal of a specific item because its useful life will not exceed a relatively short time, this fact is one indication that the expenditures are of a current nature.
The appropriate tax treatment of website development costs requires an analysis of the different components of the various costs in order to determine whether they are current or capital expenditures. One of the factors to be considered includes the expected useful life of the website. Although a website can be changed or modified frequently, some components of the development costs are likely capital in nature.
Schedule II of the Income Tax Regulations ("Regulations") provides the various classes for depreciable capital property and the applicable rates for the purpose of claiming a deduction for capital cost allowance ("CCA") on depreciable property under paragraph 20(1)(a) of the Act. Computer software that is not systems software, often referred to as "applications software", is included in class 12 of Schedule II of the Regulations pursuant to paragraph (o) of that class. This class would include the cost of application software purchased from third parties to be used to develop a website and the labour costs incurred to design and develop software to carry out the website functions.
Property described in class 46 includes property acquired after March 22, 2004 that is "data network infrastructure equipment" (this term is defined in subsection 1104(2) of the Regulations) and "systems software" for that equipment that would, but for class 46, be included in class 8(i) of Schedule II of the Regulations. It is possible, in some situations, that some of the website development expenditures could be included in class 46.
In addition, if a particular expenditure is considered to be a capital expenditure that is not a depreciable property it might be an "eligible capital expenditure" as defined in subsection 14(5) of the Act. As explained in paragraph 2 of Interpretation Bulletin IT-143R3, "Meaning of Eligible Capital Expenditure" an eligible capital expenditure may be broadly described as an outlay or expense made or incurred by a taxpayer:
- (a) in respect of a business,
- (b) as a result of a transaction occurring after 1971,
- (c) on account of capital, and
- (d) for the purpose of gaining or producing income from the business. The above-noted publications are available on our website at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Michael Cooke, C.P.A., C.A.
Business and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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