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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: How should the cost of a broadcast licence be apportioned over the remaining life of the property.
Position: Question of fact, like income/capital issues.
Reasons: The term "apportioning" in subparagraph 1100(1)(c)(i) of the Income Tax Regulations does not necessarily mandate an equal apportionment. Parliament has not indicated how the cost should be apportioned over the life of the property.
June 22, 2001
Dan Trahan HEADQUARTERS
Director Denise Dalphy
Large Business Audit Division 957-9231
Audit Directorate
2001-006546
Class 14 Amortization Period
We are replying to your memorandum dated January 15, 2001, in which you requested our views on the above-captioned issue. We also will provide our views concerning e-mails sent to us on June 7 and 12, 2001 by Mr. Phil Jolie.
We have had numerous discussions with officials of the XXXXXXXXXX and we have recently achieved some general consensus with respect to the apportioning of cost in Class 14.
Facts re Contract between XXXXXXXXXX
1. The taxpayer (XXXXXXXXXX), a broadcaster, entered into a contract with another broadcaster, XXXXXXXXXX (the "licensor") from another part of Canada for a licence to broadcast almost all of the series and movies for which the licensor had acquired Canadian rights.
2. Most of the series and movies had been previously broadcast nationally at least once before.
3. The contract runs for several years and can be renewed. If the parties cannot agree to renew, the term of the contract will end XXXXXXXXXX earlier than it otherwise would have under the contract.
4. The fee for each year of the contract is set in advance and does not depend on how many shows the taxpayer broadcasts, or how often.
5. The taxpayer has the right to broadcast some of the shows on multiple occasions over a period of several years.
6. The taxpayer writes off the cost of the annual fee in the year it is due.
7. Advertising revenue in the late-night slots where the reruns are shown is nominal; most of the slots are given free to their best customers.
8. The licensor can "pull-back" shows from the taxpayer after one or two showings without paying much or any consideration.
9. In some cases, a syndicated show is not popular, notwithstanding that the original was.
As you know, last summer we reviewed our position in paragraph 4 of Interpretation Bulletin
IT-477, "Capital Cost Allowance - Patents, Franchises, Concessions and Licenses," which sets out the CCRA's long-standing position that the apportionment of the cost of a Class 14 property over its remaining life should be on an equal, per diem basis. XXXXXXXXXX.
XXXXXXXXXX
We agree that where a series can only be shown once or during one year, the amount paid for the licence would be a current expense.
Where it has been determined that the cost of a licence is a capital expense (using the tests such as enduring benefit, anticipation of sale, etc. in the caselaw), all facts relevant to the situation must be examined in order to determine how the cost of the licence should be apportioned. In this respect, the determination is similar to that that is made on the capital/income issue as stated in M.N.R. v. Algoma Central, [1968] S.C.R. 447, for Parliament has not provided statutory criterion for apportioning Class 14 assets. Prior to 1955, there was such a statutory criterion, for before 1955, subparagraph 1100(1)(c)(i) of the Regulations provided:
(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" [emphasis added]
However, this criterion was removed effective January 1, 1955, when the word "equally" was deleted from the subparagraph.
The use of words in Paragraph 1100(1)(c) of the Regulations regarding Class 14 can be contrasted with other provisions where Parliament states how the apportioning should be made. For example, in subsection 58(5) of the Act, amounts must be "apportioned between them in such manner as is agreed to by them"; subparagraph 147.2(2)(a)(vi) of the Act provides that amounts must be "apportioned in a reasonable manner"; section 1400 of the Regulations, provides for "apportioning ... equally"; and subsection 1100(9) of the Regulations provides for a deduction based on use: "the use of the patent in the year".
In Algoma Central, Fauteux J., as he then was, stated:
"Parliament did not define the expressions "outlay . . . of capital" or "payment on account of capital" ["apportioned"]. There being no statutory criterion, the application or
non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination."
[text in parentheses added to emphasize the analogy]
In the case described in your memorandum, the taxpayer wishes, for income tax purposes, to apportion the cost of its broadcast licences over their useful lives based on their economic value.
In our view, a particular taxpayer may be able to demonstrate that apportioning on the basis of economic value is reasonable in a particular situation, and your Technical Applications and Valuations Division should be consulted with respect to the valuation of a Class 14 asset. However, although the economic value of a right in a year is an important factor to consider, it, in and of itself, is not determinative of how the cost should be apportioned, just as the number of years of a licence, or the terms of the legal agreements, will not, in and of themselves, determine how cost should be apportioned in all cases.
For example, in the XXXXXXXXXX situation described above, the fact that XXXXXXXXXX signed a contract for a certain period of time is quite significant, and an important starting point in considering the appropriate apportioning of the cost of the rights received under the contract. The mere fact that a taxpayer signed a licence for a particular term of years would seem, at least on a preliminary analysis to suggest that the rights under the licence represent either value that could accrue to the taxpayer or could be removed from the licensor. Baring any evidence of the taxpayer, it would at least initially seem appropriate to average the cost over the term of the contract: Class 14 requires us to apportion "over the life of the property remaining". Although the taxpayer may be able to demonstrate convincingly that revenue is not likely to accrue in the final years of a contract (and this is a factor to consider), the fact that the taxpayer "gives" advertising slots to the taxpayers best (not worst) customers is also a factor to consider, and it would seem to demonstrate that the rights under the licence have some value for that year(s), even if no revenue is likely to be generated in those years.
The example to be provided in revised paragraph 4 of IT-477 is just that: an example of one method of apportioning that generally (but not necessarily always) would apply where the number of broadcasts is fixed. However, other facts in a particular case may demonstrate that this method of apportioning may be unreasonable. Further, the paragraph is not intended to be a comprehensive code for the treatment of contracts where the number of broadcasts is fixed. As previously stated, all facts should be considered, and a taxpayer may be able to demonstrate that another method should be accepted. Even where a contract provides for a fixed number of showings, all facts should be considered, and they could result in a more or less generous amortization. In a situation where the number of broadcasts is not fixed, all facts should be considered.
It is our further view that, without considerable supporting evidence, we would not be inclined to accept a self-serving statement such as "although the contract is for 5 years, I would not mind if the licensor revised the contract to provide for a 3 (or 1, etc.) year term" that would result in more generous amortization of the taxpayer's asset.
XXXXXXXXXX Like income/capital issues, each case must be decided on its own merits, although we recognize that we do not as yet have a similar body of caselaw on the issue of Class 14 and apportioning. A determination process whereby an initial presumption of equal apportioning based on the length of the contract, that may be rebutted by a taxpayer who can clearly demonstrate that equal apportioning would be unreasonable, should at least create some impetus for taxpayers to provide the CCRA with any facts and submissions that would support apportioning on a basis that is not equal.
Finally, with respect to an article or draft article on this matter by XXXXXXXXXX (which was provided to us by Phil Jolie), we are concerned that XXXXXXXXXX statement that a taxpayer may use discretion to depreciate class 14 assets on a reasonable economic basis may be misleading. The onus will be on the taxpayer to clearly demonstrate that the previous "equal" method is unreasonable and that another method is appropriate in the particular circumstances.
We trust that these comments will be of assistance.
Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
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