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 right to licence, reproduce and sell software is a right or licence to use for purposes of class 12.
Position TAKEN:
No this would be class 14 0r ECP as it is beyond the scope of what was intended in class 12. Use means to be used by the taxpayer to run his own computers.
Reasons FOR POSITION TAKEN:
Reg. 1104(2) reads "... a right or licence to use computer software". Since outright ownership is not acquired but rather a restricted right to use the software, that use must be by the taxpayer.
September 28, 1995
Ottawa Tax Services HEADQUARTERS
SR & ED, 6th Floor A.M. Brake
Gilles Rochette (613) 957-8953
950984
Computer Software, Class 12 v. ECP
This is in reply to your memorandum of April 6, 1995 wherein you submitted a fact situation together with a copy of a computer software agreement between the seller,
XXXXXXXXXX, the purchaser and taxpayer under consideration.
Facts
The taxpayer believes that the complete ownership of a software package (including all property described in the various options) was transferred on XXXXXXXXXX, the date on which the agreement was signed. It is your view that the agreement does not transfer complete ownership but in fact only transfers property known as the R&D Option (for restricted use) as described in section XXXXXXXXXX of the agreement on the date it was signed. Other provisions of the agreement read as follows:
XXXXXXXXXX
It is the taxpayer's view that commercial use would include "the right to sell or market". You feel that this goes beyond the Department's interpretation of use in the context of the "right or licence to use" in order to qualify for class 12.
Class 12, in part, reads,
"Computer software acquired after May 25, 1976 but not including systems software..."
Regulation 1104(2), in part reads,
"Computer software includes systems software and a right or licence to use computer software"
"Systems software means ... and includes a right or licence to use systems software"
Hence, computer software in Class 12 would consist of computer software the ownership of which was actually acquired outright and the cost of acquiring a right or licence to use computer software but would not include systems software or the right or licence to use systems software.
We agree with your view that use would be restricted to the taxpayer using the software in his own computer(s) to execute the actual functions it was developed to perform. In this regard it would be a question of fact as to whether the taxpayer has i) acquired outright ownership of the software, ii) the right to use computer software or, iii) a right to sell or market computer software which depending on the life of the right to sell or market would either be class 14 or is eligible capital property. The right to market would not qualify as use for purposes of class 12. Computer software in i) and ii) that is not systems software would be class 12.
The questions to be answered here are what was purchased, when was it purchased and what is the treatment to be accorded each particular amount.
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. An outright sale does not arise where the transferor or any party other than the transferee maintains priority rights, or, where the transferee has committed itself to restrictions not normally associated with ownership such as restrictions regarding secrecy.
In cases where the transferee has acquired something less than outright ownership of computer software, it will be a question of fact whether the transferee has acquired a right to use the computer software (Class 12) or a right to sell or market computer software (Class 14 or eligible capital). Interpretation Bulletin IT-283R2, paragraph 14 contains further comments.
XXXXXXXXXX
Such a condition or restriction is clearly an indication that ownership of the software was not acquired outright and the R&D Option is merely a restricted right for XXXXXXXXXX to use the software. Hence, it is clear that the $XXXXXXXXXX was an outlay for other than the acquisition of outright ownership of the software.
While not defined in the Act, a simple definition of option is "a privilege of demanding fulfilment of a contract on any day within a specified time". An option to acquire property is a property in its own right.
The R&D property while referred to as an option in the agreement was not an option as such. The agreement was, inter alia, a purchase and sale agreement of the R&D property together with the vendor granting options to XXXXXXXXXX to sell it other described properties should XXXXXXXXXX choose to exercise these options within the specified time frames at the guaranteed specified prices. In our view, on the date of the agreement, the property acquired by XXXXXXXXXX can be described as a class 12 restricted right for it to use the software (known as the R&D Option) together with options to purchase other properties (Data Base Service Option {the "DBSO"} and Resale Option) described in the agreement. The optioned properties will not be considered to have been sold or acquired at the time the option was granted but will only be considered to have been sold or purchased on the date the option is exercised, if and when it is exercised.
In our view, in the absence of some portion of the $XXXXXXXXXX being attributed to consideration paid the vendor for the options, per se, that entitle XXXXXXXXXX to acquire additional properties (the DBSO and Resale Option), within specified time frames at a guaranteed price, the $XXXXXXXXXX would properly constitute class 12 as the cost of the right to use computer software.
If the property described as the DBSO was acquired subject to the conditions and restrictions contained in section XXXXXXXXXX of the agreement, in our view, there would not be an acquisition in the form of outright ownership. It would, however, qualify for class 12 as the cost of the right to use the software in a data base service in order to:
XXXXXXXXXX
The utility of the DBSO is restricted by the agreement at,
XXXXXXXXXX
Such a restriction is an indication that outright ownership was not acquired, but, in our view, would be a right or licence to use by XXXXXXXXXX as envisaged in class 12.
With regard to the Resale Option described in section XXXXXXXXXX of the agreement, it is our view that outright ownership will not have been acquired if and when the option is exercised to purchase the property described therein and neither will it qualify for class 12 as a right or licence to use the software. The right to reproduce and market computer software would not, in our view, qualify as use for purposes of class 12 but rather would fit within class 14 if the right or licence was for a limited period or as an eligible capital property if not for a limited period.
In summary, it is our view that the R&D Option qualifies as a class 12 acquisition, at the time the agreement was signed, as a right or licence to use computer software. The DBSO, if and when exercised, could qualify as class 12 at that time as a right or licence to use the software. The Resale Option, when and if, acquired would not give XXXXXXXXXX outright ownership of the software and neither would it be a right or licence to use. It would, therefore, not qualify as class 12 but rather would be class 14 or an eligible capital property depending on the duration of the right acquired.
We apologize for the delay in replying.
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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