19 August 1997 Internal T.I. 9713677 - CCA CLASSES FOR TELECOMMUNICATION EQUIPMENT

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:

CCA Classes for modems, routers,"CSU/DSU's", and XXXXXXXXXX

Position:

Question of fact but probably class 8

Reasons:

No other class specific to these types of property

		August 19, 1997

	Montreal Tax Services Office	HEADQUARTERS
	Section 471-3-0		J. Gibbons
(613) 957-8953
	Attention:  Jocelyne Schnegg
		7-971367

CCA Classes for Telecommunication Equipment

This is in answer to your memorandum of May 22, 1997, concerning the CCA classes for electronic telecommunications equipment. The equipment in question consists of modems, CSU/DSU, switches, routers, and XXXXXXXXXX.

Modems are used to transform digital data from a computer terminal to analog form for transmission over communication lines. In our opinion, modems would not qualify for inclusion in class 10, either as general-purpose electronic data processing equipment, as defined in subsection 1104(2) of the Income Tax Regulations (the "Regulations"), or as ancillary data processing equipment. This latter term generally refers to equipment such as tape drives and disc drives if they are used in conjunction with general-purpose electronic data processing equipment that qualifies for inclusion in class 10. Since no other class applies, modems should be included in class 8, per paragraph (i) of that class, which, subject to some exceptions, encompasses any tangible capital property not specifically included in any other class. As regards the CSU/DSU, according to the taxpayer, they are essentially modems for higher speed digital lines. Accordingly, they should also be included in class 8.

With respect to the switches, given the taxpayer's assertion that "mechanical switches have been out for several years today" and "all telecom equipment today is electronic run with custom processors and software," they appear to be principally electronic equipment. In our view, class 17, which includes telephone and data communication switches, would not apply, since it specifically excludes property that is principally electronic equipment or systems software therefor. Since no other class applies, the switches should be included in class 8.

Based on our understanding, routers are devices used in complex networks, where there are many pathways between users in the network, to select an appropriate travel path and route a message accordingly. It is not clear to us whether routers are a type of switch or something else. If they are switches, they should be included in class 8 for the reasons mentioned above. If they are not switches, they are likely "electronic communication control equipment," which is specifically excluded from class 10. Since there is no class specific to routers, they should also be included in class 8.

In the documentation submitted by the taxpayer, XXXXXXXXXX are described as a telecom switch combined with a router and lots of software. In our view, it is doubtful that XXXXXXXXXX is telephone or data switching equipment within the meaning of class 17, since it seems to provide more than switching functions. In any event, since XXXXXXXXXX are likely to be principally electronic equipment, they would be excluded from class 17. The XXXXXXXXXX would also be excluded from class 10 under the specific exclusion for "electronic communications control equipment". Since there appears to be no class specific to this type of asset, it should also be included in class 8.

You should note that if the modems, CSU/DSU, the switches, the routers and the XXXXXXXXXX are part of an integrated system, such that they would not be functional on their own, they would be viewed as a single asset, which would likely be included in class 8.

You also inquire whether software upgrades to a XXXXXXXXXX can be treated as a class 12 asset. In order to qualify as a class 12 asset, the software in the XXXXXXXXXX, as well as upgrades thereto, would have to be computer software, but not systems software as defined in subsection 1104(2) of the Regulations. Given the limited information provided by the taxpayer, we cannot determine whether the XXXXXXXXXX software would be "systems software". However, where software is an integral part of a particular property, the capital cost of that property would include the cost, if any, of the software and any upgrades. Therefore, if, as appears likely, the software for XXXXXXXXXX is essential to its functioning, the software would be considered to be part of an integrated system. Accordingly, the software and any upgrades would be treated as a component cost of the XXXXXXXXXX.

You also indicate that the taxpayer has asked whether any of the above-mentioned assets should be included in class 17, presumably on the basis that they are telephone or data switching equipment. In the taxpayer's view, paragraph (b) of class 17 only includes mechanical switches and such switches have been replaced by electronic switches. Although we cannot confirm that the reference in class 17 to switching equipment only applies to mechanical switches, the exclusion from that class of switches that are principally electronic would seem to indicate that new technology is not intended to be classified as class 17 property.

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch