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: where a licence has a term plus a renewal period must the amortization period include the renewal period where there are risks and uncertainties as to renewal?
Position: Question of fact.(reasonableness test)
Reasons: See comments in IT-477
1999-000891
XXXXXXXXXX S. Tevlin
(613) 957-2093
Attention: XXXXXXXXXX
May 30, 2000
Dear Sirs:
Re: Tax Treatment of Licence Agreement: Paragraph 1100(1)(c) of the Regulations
We are writing in response to your letter dated November 22, 1999 wherein you requested our comments with respect to the tax treatment of a licence agreement that has a provision for renewal.
You describe a situation where a fee is paid in respect of a licence having a term of 35 years which is renewable at the option of the licensee for a further term, say 35 years.
Issue:
Would the licence have to be amortized over the initial 35 year period plus the renewal period even though there are risks and uncertainties that the licence will be renewed? The risks would include technological change, which may make the licensed property obsolete, significant further capital investment in order to utilize the licence, and uncertainty as to the need for the product in the future.
Your view
It is your view that the licence should only be amortized over the initial term since there are significant uncertainties as to whether or not the licence will be renewed. As support you refer to paragraph 15 in Interpretation Bulletin IT-477 ("IT-477") which states "where the taxpayer has an option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of a particular case must be examined to determine whether or not, when he acquired the property, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property."
It is still the position of the Canada Customs and Revenue Agency (CCRA) that 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 concurrence of the grantor, the life of the property will include such additional periods.
As noted, IT-477 indicates that it is the position of the CCRA to apply a reasonableness test to determine if the renewal criteria could be met where such renewals or extensions are not automatic or within the control of the taxpayer. As such it becomes a question of fact in each situation whether there can be certainty as to the operation of the renewal clause in these types of situations.
It would be our expectation that, inter alia, the existence of contentious renewal attributes, in situations where renewal is not automatic, would certainly play an integral part in such a determination.
The forgoing comments are given in accordance with the practice referred to in paragraph 21 of IC-70-6R3, and are not binding on the CCRA.
We trust our comments will be of assistance to you.
Yours truly,
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income tax Rulings Directorate
Policy and Legislation Branch
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