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: How should the costs associated with producing a music CD be treated?
Position: The costs should be capitalized. A master audio-tape or a master disc is a class 8 asset, while; a master die (stamper) for processing CDs is a Class 12 asset.
Reasons: The production of a music CD brings into existence an asset of an enduring benefit and should be capitalized. Various types of tangible capital property that are not included in any other class in Schedule II come within Class 8 by reason of the provision of paragraph (i). A die is specifically included in Class 12 by paragraph (d).
August 7, 2007
Scott Prentice HEADQUARTERS
Income Tax Technical Advisor Charles Rafuse
St. Catherines TSO 613-957-8967
Music CD Production- CCA Class
This is in reply to your email of June 13, 2007, concerning the treatment of expenses incurred to produce a music compact disc (CD).
Our understanding of the facts is as follows:
1. A company produced a music CD.
2. The costs incurred totalling $XXXXXXXXXX were for studio fees, mixing, song writing, and musicians' fees.
3. The company has the sole right to sell the CD, paying royalties where applicable on a percentage of sales.
You have asked whether the $XXXXXXXXXX is a current or capital expense and if it is a capital expense the appropriate class it should fall into for capital cost allowance (CCA) purposes.
Generally, there is a capital expenditure when depreciable property is acquired or improved, and a current expenditure that is deductible in the period when it is in respect of the maintenance or repair of a property. As general guidelines, some of the elements denoting an expenditure amount to be a current expense are:
- the amount is a recurring expense for the replacement or renewal of a specific item,
- the useful life of the property acquired with the expenditure is relatively short and provides little long-term benefits,
- the amount is to repair, maintain or restore an asset to its original condition.
As general guidelines, some of the elements denoting an expenditure to be a capital in nature are:
- the expenditure provides a lasting or enduring benefit,
- the expenditure improves or enhances the property beyond its original condition,
- a separate asset has been acquired,
- the amount of the expenditure in relation to the value of the whole property or in relation to previous average maintenance and repair costs is high,
- the costs were incurred to repair used property acquired so that it is in a suitable condition for use, and
- the repairs were made in anticipation of the sale of the asset.
In paragraph 15 of IT-283R2 CCA - Video tapes, Videotape Cassettes, Films, Computer Software and Master Recording Media, it is indicated that:
"The capital cost of a master recording medium (e.g., a tape or disk) used in the music industry for the making of records, tapes and compact disks is considered to include the costs related to the production of the master recording medium. Such costs would include applicable overhead plus expenditures for
(a) scripts, musical arrangements and materials,
(b) remuneration of writers, producers, directors, musicians, performers and technicians, and
(c) the rental or other costs of a studio and of sound recording and other equipment."
While IT-283R2 has been archived, we are of the opinion that the above statement in paragraph 15 is still valid. In our view, the $XXXXXXXXXX recording costs in the situation provided are capital in nature and constitute the capital cost of a master recording medium.
In regard to the CCA class, paragraph 8 of IT-472 - Capital Cost Allowance - Class 8 Property, indicates that:
"Various types of tangible capital property that are not included in any other class in Schedule II come within Class 8 by reason of the provision of paragraph (i). The Department considers the following property to be so included in Class 8:
(q) A master audio-tape or a master disc used in the phonograph record industry. However, a master die (stamper) for processing records is a Class 12;"
We trust this information is helpful.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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