26 April 1995 Internal T.I. 9506797 - CCA - BOOKPLATE 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

classification bookplate costs

Position TAKEN:

	class 8 or may be written off in year if property 	consumed within the year. 

Reasons FOR POSITION TAKEN:

Previous memorandum position and IT.

	TORONTO TAX SERVICES	Income Tax Rulings and
G. E.Taylor 	 Interpretations
 	Director 	 Directorate
F. B. Fontaine
	Attn:  D. Zourbanos
	     Section 453-1-6
7-950679

XXXXXXXXXX
Classification of Bookplate Costs for Capital Cost Allowance Purposes

This is in reply to your memorandum dated March 3, 1995 concerning the above-noted subject.

Our understanding of the situation is as follows:

1.XXXXXXXXXX is involved in the production of various publications through its numerous divisions
XXXXXXXXXX

2.XXXXXXXXXX incurs certain costs referred to as bookplate costs which are capitalized for accounting purposes but are treated as class 12 assets for tax purposes. These costs include:

-the preproduction costs of developing, internal designing and editing a manuscript;

-amount paid for permission to use someone else's text, photographs and artwork;

-costs for outside editing, design and artwork;

-internal costs such as salaries for editing, typesetting and artwork and preparation of disk of the manuscript;

-costs of films made from the manuscript and of plates that are "burned" with the use of the films.

3.A hard copy of the manuscript together with a disk copy thereof are sent to the printer who creates films of the particular text from the disk. The printer uses the films to create "burned" plates which are then used in another process that includes the exposure of the burned plates to light. The burned plates are then ready for use to print the particular text. For ease of reference, the burned plates are hereinafter referred to as "bookplates". XXXXXXXXXX is invoiced by the printer for the cost of the finished film, the bookplate and printing the particular book. While the bookplates are stored at the printers, there is no question that they are the property of XXXXXXXXXX

4. XXXXXXXXXX

XXXXXXXXXX

5. Generally, the useful life of a bookplate depends on the number of copies produced by it and the quality of the metal used in the manufacture of the bookplate. A light weight and less expensive metal will be used for a bookplate required for short print runs (of say 3,000 to 5,000 copies). Bookplates for longer runs will be made from a heavier and more expensive metal. A short print run normally will be produced within a year which time will also determine the life of the bookplate while the bookplate life for longer runs will extend to a period longer than a year. However, generally, bookplates are recyclable and can be used again after completion of the recycling process.

6.XXXXXXXXXX treats all bookplates as property described under paragraph (d) of class 12 of Schedule II of the Income Tax Regulations (the "Regulations"). XXXXXXXXXX contends that a bookplate meets the definition of the terms "pattern", "mould" or "die" used in that class and cites support from the Howden Brothers Construction case which dealt with whether assembled metal sheets constituted a "mould".

You request our opinion as to whether:

(a)the bookplate costs constitute three identifiable assets or only one, since the final property is the plate;

(b)the bookplate costs should be categorized for capital cost allowance purposes as property of class 8 or class 12 of the Regulations; and

(c)the legislative intent of property in class 12(d) of the Regulations would include or preclude bookplates.

Our comments are as follows:

(1)In our opinion, the particular situation is similar to the situation described in our reply dated July 9, 1987 to Kitchener District Office (the "1987 reply"), regarding XXXXXXXXXX a copy of which you sent us. Notwithstanding the identical subject matter, including the arguments made by XXXXXXXXXX that the bookplates should be treated as class 12(d) properties, it is your view that our position stated in the 1987 reply does not apply to your situation because XXXXXXXXXX in your opinion, does not carry on the manufacturing or processing of publications.

(2)We agree with the comments expressed in the 1987 reply. Based thereon and on our understanding of your situation described above, it is our view that:

a)for tax purposes, the ultimate useful assets created for printing purposes are the plates and that all activities carried on for the creation of the manuscript, disk or film should be considered as a continuous process for the production of this ultimate capital asset, i.e., the bookplate, that is used in the production of a finished product for sale. In this regard, we agree with XXXXXXXXXX response #2, in the first paragraph on page 3, that the film is an intermediate medium creating no enduring asset while the bookplate would be, as it is actually used in the production of the books;

b)none of the words listed in paragraph (d) of class 12 of the Regulations, as far as we are aware, describe assets used in book printing. Accordingly, we do not agree with XXXXXXXXXX argument that the bookplates should be considered as patterns, moulds or dies.

In our opinion, each of the words in this paragraph is specific and should be given its ordinary meaning in the absence of definitions provided in the Income Tax Act; and

c)except for the definitions of the term "pattern" in The Webster's New Collegiate Dictionary ("Webster's") and The Concise Oxford Dictionary ("Concise Oxford"), none of the definitions given by XXXXXXXXXX meet the definitions provided by Webster's and the Concise Oxford. However, with regard to the meaning of "pattern", it is our view that a bookplate cannot be considered as a model or design for any part of a book. Also, the phrase "yielding a product identical each time in the form determined by the die, jig, etc.", as used by Judge Maguire in the Howden Brothers case 80 DTC 6394, contain the terms "die" and "jig". The use of these terms in such phrase would appear to conclude that the ordinary dictionary meanings of these terms would apply and that the words used by the judge may be considered an extended definition of the term "mould".

(3)Paragraph 1 of the Special Release to Interpretation Bulletin IT-145R states that:

"...where the goods are being manufactured...by another party on behalf of the corporation and the corporation exercises extensive involvement and control over the content, design and physical qualities of the goods from the inception to completion, the corporation will qualify for the deduction."

Paragraph 5 of the Special Release provides that the activities of a publishing firm that include typesetting, printing, collating, folding and bundling would qualify as manufacturing and processing. The paragraph also states that artwork and editing would so qualify where:

"such manufacturing activities are carried out by another party on the taxpayer's behalf (and) the taxpayer maintains extensive control over the content, design and physical qualities of the publication and sells the published product."

(4)It is our opinion that XXXXXXXXXX had control of the content, design and physical qualities of the texts published by it from the inception and that such control would be maintained by XXXXXXXXXX up to the time the texts were printed. This would be so since the printer does not change the manuscript or the disk produced by XXXXXXXXXX which, in our opinion, contain the content, design and the physical qualities of the final text. As explained above, the films and the plates are considered part of the continuing process of the production of the finished product. In any event, these latter assets contain the same information that is contained on the manuscript and the disk and do not change the content, design and physical qualities of the final product.

(5)Based on our comments in (2) above, it is our view that the plates should not be included in class 12 and, subject to (6)(b) below, should be considered as property of class 8 of the Regulations. However, as indicated in (3) and (4) above, it is also our view that XXXXXXXXXX would be considered to be engaged in manufacturing and processing goods for sale. Accordingly, since the plates were acquired during the 1989 and 1990 taxation years, they would be considered as property of class 39 or 40 of the Regulations. Property included in class 39 or 40 includes property acquired after 1987 (and before February 26, 1992, in the case of class 39 and before 1990, in the case of class 40) that otherwise would have been included in class 29. See the "summary" paragraphs and paragraphs 1 to 4 of Interpretation Bulletin IT-147R3.

(6)With regard to whether the legislative intent includes or excludes the bookplates in or from class 12 of Schedule II of the Regulations, we would add that:

(a)in some cases, it would be difficult to substantiate such intent based on the particular rate of write-off allowed under the Regulations on an asset and the fact that capital cost allowance on the asset is computed on the declining balance method;

(b)it is our view that where the useful life of an asset is one year or less, generally accounting principles would require that the cost of the asset be written off in the year in which the cost was incurred. These would include bookplates that were made from light-weight metal for the production of short print runs, as described in 5 above where the cost thereof can reasonably be determined. In this case, such bookplates may not be included in any class; and

(c)it is also our view that generally, the inclusion of an asset in a particular class would depend on the description and particular use of the asset and the strict interpretation of the words of that class.

We hope that the above comments will be helpful to you.

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch