30 August 2000 Internal T.I. 2000-0036857 - CLASS 14; LICENCE; APPORTION

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: meaning of "apportioning" in 1100(1)(c)(i)

Position: need not be on an equal, per diem basis

Reasons: definitions of "apportioning" and "répartissnt"

August 30, 2000

	Headquarters Appeals Branch 				Partnerships Section
Income Tax Appeals Directorate 				Denise Dalphy
(613) 957-9231
	Attention : Don Beamish, Manager
	2000-003685

Meaning of "apportioning" in subparagraph 1100(1)(c)(i) of
the Income Tax Regulations (the "Regulations") __________

We are writing in response to your memorandum dated June 28, 2000 wherein you requested our opinion on the best interpretation to be afforded to the term "apportioning" in subparagraph 1100(1)(c)(i) of the Regulations.

Facts

XXXXXXXXXX enters into contracts for program rights which gives it the right to broadcast programs for a limited period of time, sometimes with a limit on the number of times a program can be broadcast. These contracts are entered into continuously, with more than XXXXXXXXXX contracts in one year alone.

The programs are usually shown more often during the beginning of the contract, with greater advertising revenue being earned for the first showings. XXXXXXXXXX treats the payments for program rights as deferred charges for both accounting and tax purposes. They are amortized over the term of the licence, as follows:

XXXXXXXXXX

IT Bulletin

Paragraph 4 of Interpretation Bulletin IT-477, Capital cost allowance - patents, franchises, concessions and licences, sets out the CCRA's long-standing position on determining the CCA available on a Class 14 asset. It provides:

"4. It is the Department's view that the apportionment of the cost of a class 14 property over the remaining life of the property under 3a above should be on an equal, per diem basis (emphasis added). For example, if a one year franchise were purchased by a taxpayer on a calendar year basis on December 31, 1979, only one three hundred and sixty-fifth of the capital cost of the franchise would become available for depreciation under 3a above in 1979. Similarly, if a Canadian patent (having a 17-year life is granted mid-way through a taxpayer's taxation year, one thirty-fourth of its capital cost would be apportioned to the first and eighteenth taxation years and one seventeenth of its capital cost would be apportioned to each of the sixteen taxation years in between."

XXXXXXXXXX

XXXXXXXXXX

Issue

Is the position that apportioning must be equal and must be made on a per diem basis supported by law?

Our views

XXXXXXXXXX

History

Prior to 1955, the text of subparagraph 1100(1)(c)(i) of the Regulations was as follows:

(i) the amount for the year obtained by apportioning the capital cost to him of the capital cost to him of the property equally over the life of the property remaining at the time the cost was incurred, or"

Effective January 1, 1955. the word "equally" was deleted from the subparagraph. There is no indication why this word was deleted, and, in our view, the fact that the word "equally" once appeared in the Regulation does not support a position that the word "equally" should be "read into" the current provision.

Dictionary definitions of "apportionment"

The dictionary definitions of this term do not import a sense of equal distribution.

Dictionary definitions of "répartissant"

We do not agree that the definition of "répartissant" has an implicit quality suggesting equal division or distribution. See, for example, Petit Robert 1, and The Collins Robert French English English French Dictionary. It is also interesting that the French word for tax assessor is "répartiteur", and, while one may venture to take the view that taxes are imposed or collected fairly, one cannot say that they are imposed or collected "equally".

The Income Tax Act

The words "apportioning" and "apportioned" are used several times in the Income Tax Act. See, for example, subsection 58(5), where amounts must be "apportioned between them in such manner as is agreed to by them"; subparagraph 147.2(2)(a)(vi), where amounts must be "apportioned in a reasonable manner"; subsection 149(6), which provides an "apportionment rule" that, for the purposes of section 149 requires a pro-ration based on number of days in the taxation year; and section 1400 of the Regulations, where the rules provide for "apportioning ... equally". The concept of an equal allocation is not implicit in the Act generally.

Administration of the Act

Although we are of the view that the long-standing position reflected in paragraph 4 of IT-477 provides for ease in administering the Act, that in itself cannot justify maintaining this position.

XXXXXXXXXX submission

While we agree that subparagraph 1100(1)(c)(i) of the Regulations does not mandate an equal apportionment per diem or per annum, it is not immediately obvious to us why it would be a sound (i.e., well-accepted) business (or income tax) practice to apportion a XXXXXXXXXX year contract over the XXXXXXXXXX years, as is described in the Facts above. Although it may be possible in a particular situation to demonstrate that the economic life of a XXXXXXXXXX -year licence is actually XXXXXXXXXX years, one would expect that this would be unusual and that it would be fair to assume that when a party contracts for a XXXXXXXXXX year period, there must be some value to the contract in each year (although not necessarily an equal amount for each year).

Since you have asked us to only consider the Class 14 issue, we have not considered the submission of XXXXXXXXXX that concerns XXXXXXXXXX. If you wish to discuss this matter further, please contact the writer.

Steve Tevlin
A/Manager
Partnerships Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch