30 December 1992 External T.I. 9227025 F - Computer And Related Systems - CCA

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.

24(1)

Attention:    19(1)

December 30, 1992

Dear Sirs:

Re: Licence to Use Computer Software

We are responding to your correspondence of September 11, 1992 which was a follow-up query with respect to our letter of August 14, 1992, file number 921331.

You find it difficult to reconcile commercial practice with our views that:  "An outright sale of computer software can only occur, in our view, where there has been an absolute transfer of all intellectual property interests in the software and where the transferee obtains an unrestricted right to sell or lease the software.

In our view an outright sale does not arise where the transferor or any party other than the transferee maintains proprietary rights, or, where the transferee has committed itself to restrictions not normally associated with ownership such as restrictions regarding secrecy."  You cite three cases which you believe mitigate against our position and you have asked specifically if a taxpayer acquiring the exclusive rights to market a software product in Canada is considered not to have acquired the software for use because of the restriction to Canada as a geographic region.

In our view, the three cases cited do not refute our views on when the sale of computer software is considered to occur nor do they refute our views that a `license to use computer software does not include a contractual right to buy and resell, or to otherwise market computer software'.  In our view, the taxpayer acquiring the exclusive rights to market a software product in Canada has not acquired computer software as defined in subsection 1104(2) of the Income Tax Regulations ("Regulations") which includes systems software and a `right or licence to use computer software'.  Our views are based on the case law in respect of the "use of or right to use" found in subparagraph 212(1)(d)(i) of the Act.  As reflected in paragraphs 10 to 14 of IT-283R2, this `right or licence to use computer software' relates to computer software that has been acquired primarily for use in the taxpayer's business and not to contractual rights or licences of a capital nature to buy and resell, to sublet or to otherwise market computer software.  Computer software that has been acquired primarily for use in the taxpayer's business is excluded from Class 14 by virtue of part (d).  The nature, purpose and anticipated life of this computer software should be considered in determining whether the acquisition costs should be written off in the year the cost was incurred or whether the costs should be capitalized and included in Class 12.  However, contractual rights or licences of a capital nature to buy and resell, to sublet or to otherwise market computer software regardless of any geographic restrictions are included in Class 14 if such a right or licence is for a limited period, or may qualify as eligible capital property if the right or licence is in perpetuity.

We trust that these comments will be of assistance.

Yours truly,

E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch