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.
Dear XXX
RE: Your File No. XXX
This is in reply to your letter of June 9, 1987, requesting confirmation of the Department's interpretation of the words "licence to use" as found in the definition of "computer software" in subsection 1104(2) of the Income Tax Regulations (the "Regulations").
You ask for our confirmation that a licence to manufacture, use internally, sell or lease or otherwise market computer software constitutes a "licence to use" computer software as defined in Regulation 1104(2) and that such a licence or right would be included in Class 12 of Schedule II to the Regulations, pursuant to paragraph (o) thereof. You indicate that the phrase "use of or right to use" found in subparagraph 212(1)(d)(i) of the Income Tax Act (the "Act") has been interpreted broadly in the cases of The Queen v. Farmparts Distributing Ltd. 80 DTC 6157 and The Queen v. Saint John Shipbuilding & Dry Dock Co. Ltd. 80 DTC 6273. In addition, with regard to the word "use" you look to the ordinary dictionary meaning and to the Federal Court of Appeal decision in Qualico Developments Ltd. v. The Queen 84 DTC 6119, both of which adopt a broad meaning.
The term "cocputer software" is defined in Regulation 1104(2) to include systems software and a right or licence to use computer software. In our view a right or licence to use includes the right to use internally but does not include the right to sell, sublet or to otherwise market. Our reading of the case law in respect of the phrase "use of or right to use" found in subparagraph 212(1)(d)(i) of the Act indicates that this phrase does not include the right or licence to buy and resell in the Farmparts case it was held that an exclusive right to buy and resell a particular machine did not constitute the use or the right to use the machine for the purposes of subparagraph 212(1)(d)(i) of the Act. In our view the same principle applies to a right to sublet or to otherwise market. We note that neither the Qualico Developments case nor the Saint John Shipbuilding case dealt with a right or licence to buy and resell, to sublet or to otherwise market.
In our view, a contractual right or licence of a capital nature to buy and resell, to sublet or to otherwise market computer software is a "franchise, concession or licence" and is included in class 14 of Schedule II to the Regulations if such a right or licence is for a limited period, or, may be eligible capital property if the right or licence is in perpetuity. We refer you to paragraph 11 of Interpretation Bulletin IT-143R2 for further discussion concerning eligible capital property.
Where after May 25, 1976, a contractual right or licence is acquired by a taxpayer to use computer software primarily for internal purposes in the taxpayer's business, or, is used in providing services to third parties, such right or licence will be a class 12 asset in the case of computer software other than systems software, or a class 8, 10 or 29 asset in the case of systems software. If ownership of computer software is acquired and the software is used in any aspect of the owner's business including leasing or licencing to third parties, it is our view that such software could also qualify as property described in class 12 in the case of computer software other than systems software or class 8, 10 or 29 for systems software.
In connection with acquiring ownership to computer software, in our view software is owned by the creator of the software or by a person who acquires the software in an outright sale. 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.
As your request for an interpretation does not relate to specific facts, the views expressed herein are generalizations and, as such, may not be appropriate in every case.
We trust this will be of assistance.
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© Her Majesty the Queen in Right of Canada, 1987
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© Sa Majesté la Reine du Chef du Canada, 1987
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