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.
Please note that the following document, although believed to be
correct at the time of issue, may not represent the current
Position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut
ne pas représenter la position actuelle du ministère.
Principal Issues:
XXXXXXXXXX
The D.O. is of the opinion that the taxpayer overstated their
class 12(o) additions as this purchased software, for the most
part, was not going to be used internally by the firm. How
should this particular asset "software" be treated for tax
purposes.
Position TAKEN:
Although the allocation to class 12 appears somewhat overstated
(the companies assets were purchased as going concerns and there
were no allocations to goodwill or other intangibles), an
outright purchase of software (proprietary software) including
all rights attached thereto would be an addition to class 12,
where the property was capital property to the taxpayer.
Reasons FOR POSITION TAKEN:
The purchase of all the rights associated with software must be
differentiated from a purchase of a"right to use" or "a right to
market" which are either class 14 or eligible capital
expenditures. With outright ownership, there is no need to
separate out vaguely defined rights as the cost of the asset
belongs in class 12.
April 13, 1994
Audit Division Head Office
Mississauga District Rulings Directorate
4th Floor East L. Holloway
Raffaela Sinopoli (613) 957-8953
940088
XXXXXXXXXX
This is in reply to your memorandum dated January 5, 1994, requesting our assistance in determining whether or not the
taxpayer's treatment of the XXXXXXXXXX asset purchases is appropriate.
In particular, you are concerned that the amounts assigned to class 12(o) as computer software are overstated and that this
allocation should be reevaluated and reassigned to class 14 and eligible capital property as appropriate.
Facts
You have provided us with the following facts:
XXXXXXXXXX
Your Position
You are of the opinion that amounts allocated to class 12 are inappropriate and that more of the total purchase price should
have been allocated to class 14 or as Eligible Capital Expenditures. It is your understanding that class 12 additions are made in respect of computer software that has been purchased for internal purposes and that only a small amount should be
allocated to class 12 since the software purchased was not to be used internally.
Paragraph 2 of IT-128R states that: "Capital cost allowance may only be claimed in respect of capital expenditures made in
respect of property owned by the taxpayer or in which the taxpayer has a leasehold interest." In order to own software a
taxpayer must hold an undivided proprietary interest therein either alone or jointly with other persons. For example an owner would have copyright or the right to secure copyright and he would also have an unrestricted right in perpetuity to sell the software or to grant leases of the use of the software. In the current case you have told us that XXXXXXXXXX purchased the net assets of XXXXXXXXXX, therefore we have concluded that they have purchased all the assets outright and have not merely acquired some vaguely defined rights of use, or marketing rights with respect to the software in question. Secondly we have also assumed that XXXXXXXXXX has purchased the software assets of XXXXXXXXXX as capital assets of enduring value, not as inventory.
Where a taxpayer has acquired "proprietary application software" (i.e. where the owner has all the rights of ownership associated with a software product), we have previously opined that such expenditures would belong in class 12. We are of the same opinion in this case since XXXXXXXXXX has acquired all the rights of ownership of the XXXXXXXXXX software, even though they will not use the products internally. Regulation 1104(2) expands the definition of computer software to include a right or licence to use computer software, however if a taxpayer owns the software outright, there is no need to look at the expanded definition.
We do however, share your concern that perhaps some of the purchase price could in fact have been paid to acquire intangible assets such as goodwill. In this respect we have neither the expertise nor the responsibility to review the values placed on any of the assets purchased and as you have mentioned this task would be more properly performed by the valuations group. When purchasing the assets of a computer software business, possible allocations of a lump sum purchase price may be for:
application software (including all rights attached thereto) - class 12
goodwill - eligible capital expenditure
trademarks - eligible capital expenditure
special technology & /know-how & copyrights - part of software costs (class 12)
customer lists - eligible capital expenditures
software available for sale - inventory
A valuation may reveal that the amount of the purchase price assigned to class 12 assets has been overstated.
We trust the forgoing comments will be of assistance.
R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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