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: Whether expenditures made by a taxpayer to develop a "web page" on the Internet would be a capital or current expense.
Position: Where the "web page" will only have a relatively short useful life the related costs should be treated as a current expense. However, if the "web page" is expected to have a long useful life then the costs should be treated as a capital expense.
Reasons: Guidelines explained in the Interpretation Bulletin IT-128R, entitled Capital Cost Allowance - depreciable property at paragraph 4.
November 24, 2010
Dear XXXXXXXXXX :
Re: Web Page Set Up Costs
This is in response to your email of September 15, 2010, wherein you requested our opinion with respect to whether expenditures made by a taxpayer to develop a "web page" on the Internet would be a capital or current expense.
A web page is electronic creation that enables a taxpayer, inter alia, to advertise its business, sell its products and/or services and to provide information about its business to the public through the Internet. From our review of various definitions of a web page, our understanding is that a web page is a text document with HTML tags that tell the browser how to format or display the text and/or pictures. To be able to display a web page two items are needed, a web page and a web server. The Internet Service Provider (ISP) that provides internet access will sometimes allow a client to use its server to display a web page or if the ISP does not allow the client to post a web page, then the client may be able to use a free web hosting server. A web page is not permanent and can be modified, taken down and rebuilt and our understanding is that generally, software and labour costs would be the predominant costs of developing a web page.
As we understand it, your question concerns the tax treatment of the cost of software purchased from third parties to be used to develop a web page and the treatment of the labour cost incurred to design and develop software to carry out the web page functions and/or to create a web page to be displayed.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
There are no fixed rules when determining whether an expenditure is on account of income or on account of capital. The courts often look to what, from a practical and business perspective was the purpose of the expenditure. The jurisprudence suggests a number of guidelines that may be relevant, but also suggests that no one guideline is determinative. The main four guidelines that the courts have identified as being relevant to the determination are "enduring benefit", "maintenance or betterment", "integral part or separate asset" and "relative value". These guidelines, along with some others, are explained in the Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property, at paragraph 4.
Of particular importance to your situation is the guideline in paragraph 4(a) of IT-128R which states:
"Enduring Benefit - Decisions of the courts indicate that when an expenditure on a tangible depreciable property is made "with a view to bringing into existence an asset or advantage for the enduring benefit of a trade", then that expenditure normally is looked upon as being of a capital nature. Where, however, it is likely that there will be recurring expenditures for replacement or renewal of a specific item because its useful life will not exceed a relatively short time, this fact is one indication that the expenditures are of a current nature."
It is our opinion that the appropriate tax treatment of web page development costs requires an analysis of the different components of the various costs in order to determine whether they are current or capital expenditures. One of the factors to be considered includes the expected useful life of the web page. Although a web page may not be permanent and can be modified frequently and in some cases taken down and rebuilt, some components of the development costs are likely capital in nature.
Schedule II of the Income Tax Regulations provides the various classes for depreciable capital property and the applicable rates of capital cost allowance (CCA). Computer software that is not systems software, often referred to as "applications software", is included in Class 12 of Schedule II of the Regulations pursuant to paragraph (o) of that class. It is our opinion that this would include the cost of application software purchased from third parties to be used to develop a web page and the labour costs incurred to design and develop software to carry out the web page functions.
The above mentioned publication is available on the CRA website at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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