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.
Principal Issues: (1) What is the proper CCA class for the small multi-functional printers described below? (2) What is the proper CCA class for the large multi-functional printers described below?
Position: (1) Generally, class 45. (2) Generally class
Reasons: (1) Each small printer is likely "ancillary data processing equipment". (2) Generally, large printers are not computers but printers and/or special-purpose equipment.
XXXXXXXXXX
Large File Case Division
XXXXXXXXXX Tax Services TSO 2005-016333
Shelley Lewis
May 10, 2007
Dear XXXXXXXXXX:
Re: Technical Interpretation: Multi-Functional Printers
We are writing in response to your correspondence dated December 2, 2005, wherein you inquired in to which class various multi-functional printers fall. This response also reflects our subsequent conversations and those with the taxpayer's representative. We apologize for the delay in responding.
Hereinafter all references to classes are references to Schedule II of the Income Tax Regulations (the "Regulations").
Facts
A taxpayer is a lessor that leases multi-functional printers and publishing equipment. The multi-functional printers have a range of functions and are connected through a LAN or a modem system. Originally these assets were treated by the taxpayer as class 8; however, the taxpayer now wishes to reclassify the equipment as class 45. At issue is whether the printers fall into class 45 or class 8.
The smaller multi-functional printers cost about $3000- $10,000 and are generally leased by small and medium businesses. These printers are usually connected by the lessor's client through a LAN system. Their capabilities include faxing, photocopying, scanning and printing.
The medium multi-functional printers cost in excess of $10,000 and are generally used in printing low volume presentation documents in addition to being used as a photocopier, and as a fax machine. The manufacturer provides a five-year warranty on both the medium multi-functional printers and the larger units discussed below. The larger units cost in excess of $100,000 and are generally used in print shops and larger businesses. Each larger unit includes its own CPU that controls the operation of the unit and is usually interfaced through another computer through a LAN and/or modem system. One example of such larger units is the XXXXXXXXXX.
XXXXXXXXXX
The Taxpayer's Position
The taxpayer submits that all the printers fall under class 45. In particular, the small and medium printers are "ancillary data processing equipment" (i.e., ancillary to general purpose electronic data processing equipment) and the medium and large printers can be classified as "general-purpose electronic data processing equipment," as defined in subsection 1104(2) of the Regulations. The taxpayer relies on the definition of general-purpose electronic data processing equipment and the Tax Court decision of Garon J. in Funtronix Amusement Ltd. v. M.N.R. 89 DTC 545.
The Tax Services Office's Opinion
It is your opinion that the small printers are likely ancillary data processing equipment because they are principally used as printers and are usually connected to a computer through a LAN system. The medium printers should be classified as ancillary data processing equipment to the extent that they are used in a similar manner as the small printers. To the extent that they are not so used, they will fall into the same class as the larger printers discussed below.
It is your opinion that the larger printers should remain in class 8(i) as tangible capital property because they do not or will not be used for a "general" purpose but are actually publishing equipment. Although the larger units each include its own CPU that may interface through another computer, they should not be included in class 45 because they are stand-alone, special-purpose equipment.
We agree with your opinion and for similar reasons that the small printers would fall into class 45. These printers are attached to and used as part of a LAN and so they are considered ancillary to general-purpose electronic data processing equipment. The medium sized printers would fall into class 45 as ancillary data processing equipment to the extent that they are used in a similar fashion as the small printers. To the extent that the medium sized printers are not ancillary data processing equipment it is our view that they would not qualify as general-purposes electronic data processing equipment for reasons not dissimilar to those for large printers, as discussed below.
Although the issue is not free from doubt, and there are arguments on both sides, we share your view that the better interpretation is that large printers should be included in class 8.
Legislation
Schedule II of the Regulations provides the various classes for depreciable capital property and the applicable rates of capital cost allowance ("CCA"). In particular, paragraph (i) in class 8 includes all tangible capital property that is not found in any other class. Class 45 includes general-purpose electronic data processing equipment, systems software for that equipment, and ancillary data processing equipment.
The definition of general-purpose electronic data processing equipment that is found in subsection 1104(2) of the Regulations states:
"general-purpose electronic data processing equipment" means electronic equipment that, in its operation, requires an internally stored computer program that
(a) is executed by the equipment,
(b) can be altered by the user of the equipment,
(c) instructs the equipment to read and select, alter or store data from an external medium such as a card, disk or tape, and
(d) depends upon the characteristics of the data being processed to determine the sequence of its execution.
Neither the phrase ancillary data processing equipment nor the word "ancillary" is defined in the Income Tax Act. Black's Law Dictionary defines ancillary as "aiding, attendant upon, auxiliary or subordinate". In previous interpretations equipment has been said to be ancillary when it is necessarily auxiliary or subordinate to general-purpose electronic data processing equipment.1
Whether or not the multi-functional printer is ancillary data processing equipment, if the printer falls into an exception in paragraph (a) - (d) of class 45 it will be excluded from the definition of general-purpose electronic data processing equipment and thus be classified as class 8 depreciable property. However, it is our view that based on the capabilities and intended use of the printers they will generally not fall into any of the above-mentioned exclusions.
Jurisprudence
As noted by the taxpayer, the application of this definition of general-purpose electronic data processing equipment, has been subject to judicial interpretation in the Tax Court of Canada decision of Funtronix Amusement Ltd. v. M.N.R. 89 DTC 545. In Funtronix Justice Garon held that a coin-operated electronic video game machine had all the qualities found in the definition of general-purpose electronic data processing equipment and should be included in class 10.
When Justice Garon determined that the internally stored computer program could be altered by the user of the equipment, he noted that the ability to alter the computer was an important use of the equipment by its user (owner) and was directly related to the user's ability to earn revenue from the equipment.
Analysis
In The Queen v. Canada Trustco Mortgage Company, [2005] 2 S.C.R. 601, the Supreme Court of Canada reviewed the principles of statutory interpretation. In doing so, the Court reiterated, "all statutes, including the Act, must be interpreted in a textual, contextual and purposive way." In determining which is the proper class for a particular type of equipment, it is appropriate and necessary to look at the context and purpose of the CCA provisions as a whole as well as the context and purpose of the specific provision. The Context and Purpose of the CCA provisions
The purpose of the CCA provisions was described by Justice Bowie in the following manner:
The purpose of capital cost allowance is to reflect in the computation of profit the diminution in value from year to year of the capital assets used in the business. The rates of capital cost allowance which may be charged are fixed by Regulation, and they appropriate the rates at which various capital assets are consumed.2
The Department of Finance has recognized that computers, and equipment that is ancillary to computers, rapidly depreciate and has placed such equipment in a class that reflects that rapid depreciation. Class 45 currently allows for 45% write-off per year, while the proposed amendments call for a 55% write-off per year.3 With this proposed amendment approximately 85% of the value of the asset will be written-off within three years.4 Such equipment's value is usually largely related to its computerized components, as was the case with the electronic video game machine in Funtronix.
Equipment that contains a computer or computer chip, but the bulk of the value is in the physical machinery as opposed to the electronics, is generally expected to last longer and retain its value longer than computers, and in our view should not fall within class 45. It appears to be illogical to classify equipment solely based on the existence of a small computer or computer chip that has little or no relation to the value or life of the asset. Moreover, it would be contrary to the intent of the CCA provisions as a whole to allow a taxpayer to write-off substantially all of the cost of the asset long-before the asset is consumed and, as in the case of the XXXXXXXXXX, while the manufacturer's warranty is still in effect. The better approach in classifying equipment is to look at where the value of the equipment lies. This is reflected in an analysis of what the equipment does as well as its component parts.
In the analysis of the context of the CCA provisions, it should be noted that the Department of Finance has considered the fact that certain class 8 assets may depreciate faster than the rate ascribed to that class and have allowed for increased write-offs. In subsection 1101(5p) of the Regulations there is the opt-out provision for certain quickly-depreciating class 8 assets. The inclusion of this provision further reflects the intent that legislature attempts to match the life of the asset with the rate at which it can be depreciated and indicates that class 8 treatment of equipment, such as the large multi-functional printers, is not obviously unintended.
The Context and Purpose of the Definition of general-purpose electronic processing equipment
Under a contextual, textual and purposive interpretation it is necessary to look not only at the words of the definition of general-purpose electronic processing equipment but also at the context and intent of the definition. The word "general-purpose" reflects both the context and intent of the definition and must be considered when determining whether a certain type of equipment falls within the definition of general-purpose electronic data processing equipment. As such, despite the fact that some equipment might have the characteristics of a computer, if the particular equipment is special-purpose equipment, (as opposed to general-purpose equipment) it would fall outside the definition. This position and method of analysis is consistent with Rulings' previous interpretation of a similar type of equipment in Rulings' document 912310. Further, in our informal discussions with the Department of Finance, it was determined that this position, regarding the classification of printers, is not inconsistent with tax policy.
Although our classification of these large multi-functional printers takes into account a contextual, textual and purposive interpretation, it is also not wholly inconsistent from Justice Garon's decision in Funtronix; for the decision is clearly distinguishable from the present scenario. In Funtronix the value of the video game was linked to, and dependent upon, the electronics within the video game. The end product of the machine was the electronic signals and pictures and sounds that they created. As noted by Justice Garon, in order to maintain consistent revenue from the machine it was necessary to alter the programs from time to time. This is in stark contrast with the printers at issue. For the value of the printer is not primarily in its electronics but in its mechanical assets - namely the components that allow the machine to produce a large number of identical copies of inked paper. In addition, the revenue stream of the taxpayer, and the use of the asset by the taxpayer is not wholly dependant or even significantly dependant on the alteration of any program within the equipment. The program, or computer is essentially ancillary to the printer.
We trust these comments are of assistance.
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 For example, in document 2005-0112331, a printer that was connected to a computer was determined to qualify as ancillary data processing equipment and in document 9713677 tape drives and disc drives were also held to qualify as ancillary data processing equipment.
2 In Duncan v. Canada, [2001] TCJ No. 8, Bowie J's analysis is supported by various Budget speeches, including 1964 and 2007.
3 Budget Plan, Annex 5 (Budget 2007).
4 This includes the application of the half-year rule in subsection 1100(2) of the Regulations.
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