3 March 1989 Income Tax Severed Letter 7-3684 - [Interpretation Bulletin Project Number 1494 (Version 3)Revision of IT-283R]

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.

MAR 3 1989

HEAD OFFICE
Specialty Rulings Directorate
C.R. Bowen
(613) 957-2094
SUBJECT: Interpretation Bulletin Project
OBJET:   Number 1494 (Version 3)
         Revision of  IT-283R

We are writing in reply to your memorandum of February 17, 1989, wherein you requested our comments on the draft revision of Interpretation Bulletin IT-283R .

Our Comments

1. Page 1

i) IT-283R2

In the area listing the various subsections of the Income Tax Regulations (the "Regulations") to which this bulletin applies, the reference to 1101(51) should be changed to 1101(5k). This change should also be made on page 10. This revision is required to reflect the changes to the Regulations for certified productions as enacted on December 22, 1988. Also, since subsection 1100(17) of the Regulations excludes class 12(n) and 10(w) from the definition of leasing property, we suggest that this subsection be added to the list.

ii) Summary

After referring to both video tapes and master recording tapes in the opening sentence, the third sentence refers only to a tape being a depreciable asset. The last sentence of the paragraph then indicates that the appendix will determine the applicable capital cost allowance ("CCA") class of the depreciable property. Yet, the appendix lists the CCA class for video tapes, but not for master recording tapes. Therefore, we suggest that either the latter be added to the appendix or the wording of the last sentence be changed to reflect actual content of the appendix.

Page 2 - Video Tapes

The number 1. in front of the first paragraph has been omitted.

3. Page 3 - Video Tapes (continued)

The sentence discussing the capital cost of a) video tapes (paragraph 2) and L) computer software (paragraph 13) are of a general nature and apply to all 4 types of properties described in this bulletin. These 2 paragraphs could be replaced by one sentence to this effect inserted in the second line on page 2.

4. Page 4 - Films

The first sentence of paragraph 5 defines the word "producer" for the purpose of the bulletin as a person involved in the motion picture film industry. However, as correctly indicated at the top of page 2, the word producer is used in all 3 industries relating to films, video tapes and master recording tapes. The word producer is also used in the last paragraph on page 2 in respect of video tapes. Therefore, we suggest that the first part of the sentence in paragraph 5 be revised to read "For the purpose of paragraphs 5 to 9, ...".

5. Page 5 - Films (continued)

The producer should be added to the list of persons receiving remuneration in paragraph 8(b). The list should also be expanded to include a major category of expenses known in the film industry as post-production expenses. These expenses include editorial labour, rental of editorial equipment, post-production laboratory costs, sound effects and sound mixing, titles, and translation.

6. Page 6 - Computer Software

As the definition of systems software may not help those taxpayers who are not computer literate to differentiate systems software from computer software other than systems software, we suggest that you add the following explanatory paragraph at the end of paragraph 10.

In general, "systems software" refers to the general operating system which directs and coordinates the different operations of the computer, including all of the input and output between the keyboard, the CRT screen, the printer, the disk drives and other peripheral equipment. The operating system also serves as the standard program interface for all application programs, as well as providing an environment for program development. Without this software, it would not be possible for the computer to carry out any operations. This software is normally provided to customers by the computer hardware supplier at the time the hardware is purchased. On the other hand, computer software other than systems software usually refers to programs that instruct the computer to carry out specific applications related to managing and processing data and are often referred to as application programs or software. Examples of these programs are 1) accounting programs designed to produce a general ledger and financial statements, 2) spreadsheet tables and 3) word processing. Normally, these programs are either acquired from a supplier or developed in-house by computer programmers.

7. Page 7 and 8 - Computer Software (continued)

i) As the majority of taxpayers in the business of developing and producing software sell a right or licence to use the software to the purchaser and not the actual ownership of or copyright to the software, we suggest that the second line of paragraph 12 be changed to read "… software or the right or licence to use the developed software for sale should,…"

ii) Paragraph 10 indicates that computer software includes a right or licence to use computer software and then lists the possible CCA classes into which the software may be included. As a result, paragraph 14 is redundant.

8. Page 8 - Master Recording Tapes

i) Master recordings in the music industry take place on not only tapes, but on digital type recordings and on disks. As the technology relating to the recording industry is constantly evolving, we suggest that the phrase master recording tape throughout the bulletin should be replaced by master recording medium.

ii) The producer should be added to the list of persons receiving remuneration in paragraph 15(b).

iii) As compact disks have been in existence for many years now (and will eventually make records obsolete), we suggest that line 2 in paragraph 15 be changed to "... making of records, tapes and compact disks... " and that the first and second line in paragraph 16 add references to tapes and compact disks.

9. Page 9 - Other Comments

i) The concept of a taxpayer needing certification from the Minister of Communication in order for a property to qualify as a certified production has not been explained or introduced in this bulletin. Therefore, we suggest that the first 2 lines of paragraph 17 be changed to read "The application forms necessary for the certification by the Minister of Communications of films and video tapes referred to in the definition of "certified production" in subsection 1104(2) of the Regulations may...".

ii) As the Secretary of State has not issued certificates for films since 1981 and is not referred to in the definition of certified production or certified feature film, we recommend that the reference to that department be eliminated from the fifth and sixth line of paragraph 18.

iii) In the last sentence of paragraph 18, you could reference the applicable subsection 1100(17) of the Regulations which excludes class 12(n) and 10(w) from the definition of leasing property.

10. Page 9 - Appendix

i) In order to avoid confusion for the readers between class 10(s) which relates to a non-certified film or tape and the newly created class 10(w) for a certified film or tape, we suggest that the applicable paragraph reference in class 10 be indicated throughout the appendix.

11. Page 10 - Appendix (continued)

i) The two statements at the bottom of page 10 concerning a separate CCA class and the one half year rule are applicable to both films and video tapes that are certified productions, but they have only been listed under the section dealing with films. The Department of Finance uses the phrase "the half-year rule" rather than "the one half year rule". You may also wish to mention that for class 10(w) an additional allowance of up to the remaining cost of the file may be claimed against film income.

ii) The reference to "or tape" throughout subparagraph (b)(ii) of class 10 should be eliminated as that subparagraph is referring to a film and not a tape.

iii) The fifth line of subparagraph (b)(ii) of class 10 should read "of this subparagraph and the", as subparagraph (i) and (ii) are not dependant upon or related to each other.

12. Page 11 - Appendix (continued)

i) As class 18 applies only to films acquired before 1976, it should be deleted.

ii) In paragraph (b) of class 10 relating to video tapes, the reference to class 10(b) under Motion Picture Films should indicate that the word film should be substituted with the words video tape.

13. Pages 9 - 11 - Appendix (continued)

As the CCA classes relating to video tapes and motion picture films are identical except for class 18 which should be deleted and certified feature films, we suggest that the 2 categories be combined.

Below is a suggested format which also corrects all other issues listed in points 10 to 12 above.

Motion Picture Films and Video Tapes

Class 10(s) a motion picture film or video tape other than one (30%) included in class 12 or 10(w)

Class 10(w) a motion picture film or video tape that is a
(30%)       "certified production" (as defined in subsection 1104(2)
            of the Regulations) acquired after 1987, other than
            a certified production

i) acquired after 1987 pursuant to an agreement in writing entered into by the taxpayer before June 18, 1987, or pursuant to a prospectus, preliminary prospectus, registration statement or offering memorandum filed before June 18, 1987 with a public authority in Canada where the document was required to be filed before any trade in securities could commence, or

ii) that is a film or tape acquired in 1988 that is part of a series of films or tapes where the series includes films or tapes that are included in class 12, otherwise than by reason of this subparagraph and the film or tape is produced at a fixed price or by reference to a formula under a production option agreement entered into by a licensed broadcaster, or bona fide film or tape distributor, before 1988.

Class 12 a) a motion picture film or video tape that is a (100%.) television commercial message

b) a motion picture film that is a "certified feature film" as defined in subsection 1104(2) of the Regulations

c) a motion picture film or video tape that is a certified production, other than a certified production included in class 10(w)

Note

Subsection 1101(5k) of the Regulations prescribes a separate class for a certified production included in class 10(w). A certified production in class 10(w) will also be eligible for an additional allowance equal to the lesser of the undepreciated capital cost of the certified production and the net income for the year from all certified productions owned by the taxpayer.

In the year a property is acquired, subsection 1100(2) of the Regulations contains the half-year rule that in general terms provides that only one half of the normal capital cost allowance may be claimed in the year a property is acquired. This rule does not apply to a certified production included in class 10(w).

14. Page 12 - Computer Software

In paragraph (a) of class 29, you may wish to reference paragraphs 2 and 6 of Interpretation Bulletin IT-147R2 and paragraph 30 of IT-145R , as the explanation provided for that class is brief.

15. Pages 13 and 14 - Computer Software (continued)

You may wish to note at the bottom of page 14 that class 39 property is subject to transitional CCA rates for the years 1988 to 1991. In addition, Class 10 property acquired after 1987 which would have qualified for class 29 if it was acquired before 1987 will be subject to transitional CCA rates in 1988 and 1989.

We trust these comments will be of assistance to you.

ORIGINAL SIGNED BY

Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch