7958501 Canada Inc. v. Agence du revenu du Québec, 2020 QCCQ 2424, aff'd 2022 QCCA 315

The taxpayer (“501”) was formed to acquire the intellectual property (computer programs, trademark and knowhow) of a related corporation (“SherWeb”), which earned revenue from smaller enterprises, which subscribed to SherWeb’s computer services over the Internet, principally in the form of access to SherWeb software. Such software (which SherWeb had programmed, with the costs thereof claimed as SR&ED expenses) principally permitted such customers to use the Microsoft Exchange program in a “multi-tenanted” manner. Although 501 treated the acquired IP (which it licensed back to SherWeb) as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property (“immobilisations incorporelles”) rather than depreciable property.

Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d), stating (at para. 95, TaxInterpretations translation):

[T]he evidence shows that SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.

Although this alone for the most part disposed of the ARQ’s arguments, he went on to refer to the definition of eligible capital property (which, similarly to the federal definition) relevantly required in effect that the amount to which the taxpayer was entitled for the property’s disposition is “not included in computing the taxpayer's income or any gain or loss of the taxpayer from the disposition of a capital property” (para. 104, paraphrasing part of TA s. 107).

After noting that SherWeb in fact had not claimed any capital cost allowance on the IP, and had not reported a disposition of a capital property, Boutin JCQ stated (at para. 111) that this condition thus had been satisfied, and went on to state (at paras 112-113, 114 and 115):.

Contrary to what the ARQ suggests, it is not possible to conclude from the outset that an asset has a capital cost and is therefore depreciable simply because it generates an enduring benefit. … Denison Mines … [stated] that " the fact that a capital asset, in the sense of an enduring benefit resulting, does not necessarily make the expenditures expended therefor capital expenditures rather than revenue expenditures.”

This is … all the more true in matters of eligible capital property and intangible assets where, with the commercial structure in place, sums are committed on a recurring basis in order to maintain the profitable pursuit of activities: Canada Starch … .

Moreover, we have seen that SherWeb had always deducted its employees' salaries, since these emoluments represent a recurring and current expense in and of themselves.

A private company (“SherWeb”), which provided the use of software developed by it to paying subscribers, transferred its software and other IP to a newly-formed sister company (“501”) at a gain for creditor-proofing reasons (with the IP licensed back to it for continued use in its software services business). Although 501 treated the acquired IP as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property rather than depreciable property.

Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d) (which excludes, from depreciable property, any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37), stating (at para. 95, TaxInterpretations translation) that “SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.”

A private company (“SherWeb”), which provided the use of software developed by it to paying subscribers, transferred its software and other IP to a newly-formed sister company (“501”) at a gain for creditor-proofing reasons (with the IP licensed back to it for continued use in its software services business). Although 501 treated the acquired IP as depreciable property, it considered that Taxation Act s. 99 (equivalent to ITA s. 13(7)(e)) did not apply to reduce the capital cost to it of the acquired IP because, in SherWeb’s hands, the IP had been eligible capital property rather than depreciable property.

Boutin JCQ found that the contrary position of the ARQ foundered on the Quebec equivalent of Reg. 1102(1)(d) (which excludes, from depreciable property, any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37), stating (at para. 95, TaxInterpretations translation) that “SherWeb has consistently claimed the salaries of its employees, first and foremost those of its programmers, as its main expense, and has claimed SR&ED credits year after year.”

Although he considered this to be a largely sufficient ground, he went on to refer to the definition of eligible capital property (which, similarly to the federal definition, relevantly required in effect that the amount to which the taxpayer is entitled for the property’s disposition is “not included in computing the taxpayer's income or any gain or loss of the taxpayer from the disposition of a capital property” (para. 104) - and found that this condition had been met as SherWeb had not reported any disposition of a capital property, and had instead correctly treated the costs of developing its software (its employees’ salaries) as “a recurring and current expense in and of themselves" (para. 115).