8 September 1997 External T.I. 9714765 - DISTRIBUTION RIGHTS

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 fees paid for a right to distribute would be classified as a class 14 asset or an eligible capital property.

Position:

Likely an eligible capital property, but cannot determine conclusively.

Reasons:

Question of fact. To qualify as a class 14 asset, the right to distribute would have to be for a limited period.

J. Gibbons
XXXXXXXXXX 5-971476

September 8, 1997

Dear Sir/Madam:

We are replying to your letter of May 27, 1997, in which you request our opinion as to whether fees paid by your client for a right to distribute would be classified as a class 14 asset or an eligible capital property.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local tax services office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

The terms franchise, concession or license as used in the description of class 14 of Schedule II of the Income Tax Regulations ( the "Regulations") are not defined in the Income Tax Act (the "Act") or Regulations and must be used in their ordinary business sense. As indicated in paragraph 11 of Interpretation Bulletin IT-477, generally, these words are used to refer to some right, privilege, or monopoly that enables the holder to carry on business or earn income from property, or that facilitates the carrying on of business or the earning of income from property. In our view, a right to distribute could be considered a franchise, concession or license. However, in order to qualify as a class 14 property, the right to distribute would have to be for a limited period . As stated in paragraph 15 of IT-477, renewal or extension provisions that are automatic or within the control of the taxpayer in that they do not require any further negotiation with, or the concurrence or consent of, the grantor, should be included in the life of the property. Where the number of such renewals or extensions is indefinite, the property would not be for a limited period and would therefore not qualify as a class 14 asset. We are enclosing a copy of IT-477 for your information.

An eligible capital expenditure within the meaning of subsection 14(5) of the Act may be broadly defined as any outlay or expense made or incurred on account of capital for the purpose of gaining or producing income from a business. However, the definition of eligible capital expenditure in subsection 14(5) of the Act excludes certain expenditures which would otherwise meet this definition, including any outlay or expense that is the cost or part of the cost of intangible property that is depreciable property. Therefore, a property that is included in class 14 would be excluded as an eligible capital property. We refer you to Interpretation Bulletin IT-143R2, a copy of which is enclosed, for further discussion concerning eligible capital property.

We trust these comments will be of assistance.

Yours truly,

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

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