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:
Whether the capital portion of lease payments for certain computer equipment should be included in paragraph (f) of Class 10 or in Class 41.
Position TAKEN:
Paragraph (f) of Class 10, subject to the exceptions specified therein.
Reasons FOR POSITION TAKEN:
Determination based upon the facts of the situation and the broad nature of the term "general-purpose electronic data processing equipment" found in that paragraph.
June 28, 1994
St. John's District Office Head Office
S. A. Scott Rulings Directorate
Chief of Audit A.A. Cameron
(613) 957-8975
Attention: J.W. Hillier
Large File Case Section
941304
XXXXXXXXXX
Classification of Computer Equipment
This is in reply to your memorandum of May 18, 1994 wherein you requested our views as to the appropriate classification for capital cost allowance purposes under the Income Tax Act (the "Act") of certain computer equipment acquired by XXXXXXXXXX
Unless otherwise stated, all references to the Act are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993.
You have summarized the facts regarding this situation as follows:
XXXXXXXXXX
XXXXXXXXXX
As indicated in the Edmonton Memo, the determination of whether a property acquired by a taxpayer is to be included in a particular class of property (or paragraph thereof) found in Schedule II of the Income Tax Regulations (the "Regulations"), is primarily a question of fact (each such class being a "Class").
In order for a property to be included in Class 41 pursuant to paragraph (b) thereof, it must be a property which "would otherwise be included in" certain specified paragraphs of Class 10 (see paragraph 5 of Interpretation Bulletin IT-285R2 for comments concerning the effect of such phrase). In addition, those of such specified paragraphs which fall after the mid-amble contained in Class 10 (being all of them except for paragraph (f.1)) must also satisfy the requirements contained therein. In respect of property acquired after 1987, the mid-amble to Class 10 requires that it be "property that would otherwise be included in another class in this Schedule, other than Class 41". As a result, in our view, property included in Class 10 pursuant to paragraphs (a) through (f.2) thereof could not satisfy this requirement (it should also be noted that, pursuant to the preamble to Class 10, property encompassed by such paragraphs would first have to be "property not included in any other class"; see paragraph 6 of IT-285R2 for comments concerning this phrase). Therefore, in the situation at hand, if the above-mentioned computer equipment is property included in paragraph (f) of class 10, it would not so qualify for inclusion in Class 41.
The computer equipment referred to above will be included in paragraph (f) of Class 10 if it is not included in any other Class and is "general-purpose electronic data processing equipment and systems software therefor, including ancillary data processing equipment" subject to certain exceptions (the "Exceptions") which are presented therein as follows:
property that is principally or is used principally as
(i)electronic process control or monitor equipment,
(ii)electronics communication control equipment,
(iii) systems software for a property referred to in subparagraph (i) or (ii), or
(iv)data handling equipment unless it is ancillary to general-purpose electronic data processing equipment.
The phrase "general-purpose electronic data processing equipment" is defined, for the purposes of Part XI and Schedule II to the Regulations, in subsection 1104(2) of the Regulations as you have noted. It is indicated in such definition that this phrase:
means electronic equipment that, in its operation, requires an internally stored computer program that
(a)is executed by the equipment,
(b)can be altered by the user of the equipment,
(c)instructs the equipment to read and select, alter or store data from an external medium such as a card, disk or tape, and
(d)depends upon the characteristics of the data being processed to determine the sequence of its execution.
In our view, this definition and the provisions of paragraph (f) of Class 10 are quite broad in nature such that, subject to the Exceptions, computer hardware and systems software (note that a definition of the latter term is also contained in subsection 1104(2) of the Regulations) would generally be included in such paragraph of Class 10. Although there has been very little jurisprudence concerning the phrase "general-purpose electronic data processing equipment", we would note that the decision of the Tax Court of Canada in the Funtronix Amusements Ltd. case (89 DTC 545) would appear to support the view that such provisions are broad in nature. In that case it was decided, basically, that certain electronic video games satisfied the requirements of such definition.
In the Edmonton Memo it was indicated, in part, that:
Whether or not property qualifies for inclusion in Class 10(k) is primarily a question of fact. This is particularly relevant to property that has a broad range of uses. For example, electronic data processing equipment that may qualify in either of Class 10(f) if the equipment is general-purpose electronic data processing equipment or 10(k) if the equipment is acquired principally for the purpose of gaining or producing income from one or more mines operated by the taxpayer. In other words, if the data processing equipment is to be used for general purposes, then 10(f) applies and the Class 10 mid-amble is not satisfied which precludes inclusion in 10(k). On the other hand, if the equipment is not for general purposes so that Class 10(f) does not apply, some other class (possibly 8) would be applicable. As a result, if acquired for the purpose of gaining or producing income from a mine, the data processing equipment would qualify for inclusion in Class 10(k).
(underlining added)
The phrase underlined above provided a pre-condition to computer equipment being excluded from paragraph (f) of Class 10 and therefore to its potential ultimate qualification for inclusion in Class 41. Implicit in the reference to "equipment...not for general purposes" was the requirement that the computer equipment would satisfy one of the Exceptions, e.g., that it would be used principally as electronic process control or monitor equipment, etc..
As noted in paragraph 5 above, XXXXXXXXXX has put forth the argument that this computer equipment is " XXXXXXXXXX ". In our view, although this computer equipment may be "integral to the acquisition" of certain other assets unless it lost its separate identity, i.e., unless it was fully "consumed" in the construction of those other assets or became an integral part of such assets, it would remain an asset separate from the assets under construction. The fact that XXXXXXXXXX acquires ownership of the computer equipment at the end of the respective agreements referred to in paragraph 2 above would appear to support the view that such assets retain their separate identity. (Even if the cost of certain of this equipment could so be considered to form the cost of another asset, as you have noted, this other equipment would have to meet the definition of "gas or oil well equipment" found in subsection 1104(2) of the Regulations in order to be included in paragraph (j) of Class 10).
Summary
Based upon the above information, in our opinion, payments being made for XXXXXXXXXX as described in paragraph 2 above to the extent they reasonably relate to the cost of acquisition of computer hardware and systems software (such latter term having the meaning contained in subsection 1104(2) of the Regulations) by XXXXXXXXXX should, subject to the Exceptions, be included in paragraph (f) of Class 10. As discussed in paragraphs 10 and 11 of Interpretation Bulletin IT-283R, computer software other than "system software" which has a useful life anticipated to last beyond one year should be included in paragraph (o) of Class 12. With regard to the portion of the payments being made for the XXXXXXXXXX which should be allowed as current expenditures (relating to maintenance, support staff, etc.), we have no objections to your accepting the amount suggested by XXXXXXXXXX as described in paragraph 7 above provided that your review indicates that such amount is reasonable in relation to the cost of the services in question.
If you have any further questions concerning this matter, please contact the writer or John Chan at (613) 957-8976.
A/Chief
Resource Industries Section
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
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