30 July 2015 External T.I. 2014-0552041E5 F - Permis XXXXXXXXXX -- translation

Principal Issues: 1 - Is a XXXXXXXXXX license depreciable property to be included in class 14 or is it instead eligible capital property?; 2 - In the event the XXXXXXXXXX license is depreciable property, can prior years be reopened to claim CCA?

Position: 1 - Question of fact. In this case, an eligible capital expenditure instead; 2 - Yes, but only in certain conditions.

Reasons: 1 - The life of the license includes renewals; 2 - See hyperlinks included

XXXXXXXXXX
J. Lacharité, CPA, CGA
2014-055204

July 30, 2015

Dear Sir,

Subject: XXXXXXXXXX Licences

This is in response to your fax of October 15, 2014 in which you requested our views on the above-noted subject. Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (the "Act").

You described a situation where XXXXXXXXXX XXXXXXXXXX licences were acquired by a taxpayer in the years XXXXXXXXXX and XXXXXXXXXX. These licences are renewable with the XXXXXXXXXX government each year in the amount of $XXXXXXXXXX. No amount has been claimed to date by the taxpayer in respect of these licences, either as capital cost allowance ("CCA") or cumulative eligible capital ("CEC").

You wish to know whether the XXXXXXXXXX licences are property that can be included in Class 14 of Schedule II of the Income Tax Regulations ("ITR") and whether it would be possible to claim CCA retroactively for the XXXXXXXXXX and following years. In the alternative, you wish to know whether the licences are XXXXXXXXXX eligible capital property under section 14.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The classification of a licence as a depreciable or eligible capital property must be made according to its remaining useful life at the time of acquisition, which is a question of fact which cannot be determined until after a comprehensive analysis of all the facts of a given situation.

Class 14 of Schedule II of the ITR includes a patent, franchise, concession or licence for a limited period, apart from some exceptions. Under paragraph 1100(1)(c) of the ITR, the maximum allowable CCA for properties in Class 14 is the lesser of the aggregate of the amounts for the year obtained by apportioning the capital cost to the taxpayer of each property over the life of the property remaining at the time the cost was incurred, and the undepreciated capital cost to the taxpayer at the end of the taxation year of the property of the class.

In contrast, an expense incurred for the acquisition of a licence to be used in the carrying on of a business is recognized as an eligible capital expenditure if it did not lead to the acquisition of Class 14 depreciable property. Three quarters of that expense is added to the CEC under the CEC definition in subsection 14(5), and is subject to the 7% deduction under paragraph 20(1)(b).

IT Bulletin 477 - CONSOLIDATED ARCHIVED - Capital Cost Allowance - Patents, Franchises, Concessions and Licences (the "Bulletin") explains that the Canada Revenue Agency ("CRA") is of the view that the life of the property generally refers to the maximum period during which the property may be used for the purpose of earning income. Paragraphs 15 to 17 of the Bulletin specify the extent to which extensions or renewals should be taken into account in determining the life of a licence. Where such renewals or extensions are automatic or within the control of the taxpayer, that is, they do not require any further negotiation with or the concurrence or consent of the grantor, the life of the property includes such additional periods. On the other hand, where the taxpayer has the option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of the particular case must be examined to determine whether or not, when the property was acquired, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property. Also, where the periods of renewal and extension are considered part of the length of the property under the criteria above and where the number of such renewals or extensions is indefinite, the property is not for a limited period and does not qualify as a class 14 property.

The classification of the licences in this case must be made in accordance with their actual life established under the above criteria. Accordingly, it appears that the XXXXXXXXXX licences acquired by the taxpayer represent eligible capital properties and not property which can be added to Class 14.

Due to our above comments, your question about the possibility of amending the statements of XXXXXXXXXX and following years in order to claim capital cost allowance no longer seems relevant. However, we assume that for those taxation years, you would claim an amount in respect of the cumulative eligible capital ("CEC"). To this end, we direct you to the following links on the CRA website:

T1
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/chngrtrn-fra.html

T2
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/ftr/rssssmnt/rqst-fra.html

We trust that these comments will be of assistance.

Eliza Erskine
Director
Business and Employment Income Division
Income Tax Rulings Directorate