11 June 1998 Internal T.I. 9814567 - YEAR 2000 EXPENDITURES QUESTIONS AND ANSWERS

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.

Questions and Answers
final
Millennium Bug Expenditures

The Department of Finance released amendments to the Income Tax Regulations (the “Regulations”) to assist small- and medium-sized businesses address the year 2000 computer compliance problem.

Subsection 1100(1) of the Regulations will be amended to provide accelerated capital cost allowance (CCA) deductions of up to $50,000 to small- and medium-sized firms for computer hardware and software acquired between January 1, 1998, and June 30, 1999, to replace similar property acquired before 1998 that is not year 2000 compliant.

Q: What is the amount of the allowance?

A: Under proposed paragraph 1100(2)(zg) and (zh) of the Regulations, eligible taxpayers will be entitled to a maximum of $50,000 of accelerated capital cost allowance (CCA) so that eligible expenditures that are made to replace property that is non-year 2000 compliant may be subject to a full write-off for tax purposes in the year of acquisition. The accelerated CCA can be claimed in any taxation year in which eligible expenditures are made. The $50,000 limit must be shared between members of an associated group.

Example

On July 1, 1998, Xco purchases new hardware and software to replace its old non year 2000 compliant computer system that was acquired in 1987. The hardware costs $50,000 and software costs $50,000.

Regular CCA
	Hardware ($50,000 X 30% X 1/2) 		$7,500
	Software ($50,000 X 100% X 1/2)		$25,000
Accelerated CCA
	$50,000 X 85%	$42,500
	$50,000 X 50%	$25,000
	$67,500

Maximum accelerated CCA $50,000

Q: How is the allowance claimed?

A: An eligible taxpayer must file a letter with the taxpayer’s return for the year in which the eligible property is acquired. The letter should disclose a description of the property acquired, its cost, date of acquisition, a description of the non-compliant property it replaces and the date of acquisition of the property being replaced. The taxpayer must be able to substantiate the basis for the material risk of malfunctioning because of the change to the calendar year 2000.

Q: Who can claim the accelerated CCA?

A: Any taxpayer who provides the above letter, except:

• a large corporation (as defined in subsection 225.1(8)), and
• a partnership any member of which as a large corporation (as defined in subsection 225.1(8))

Q: What expenditures qualify for the accelerated CCA?

A: In order to qualify for the accelerated allowance, an expenditure must meet all of the following requirements. The expenditure must be:

• made during the period between January 1, 1998, and June 30, 1999,
• to acquire property included in:

paragraph (f) of Class 10, or
paragraph (o) of Class 12

• to replace property described in either of these paragraphs that was acquired before 1998 that has a material risk of malfunctioning because of the change of the calendar year to 2000.

Q: What types of equipment are covered under paragraph (f) of Class 10 and paragraph (o) of Class 12. Are fax machines, printers, security systems or other machinery considered?

A: Paragraph (f) of Class 10 refers to general purpose electronic data processing equipment and systems software while paragraph (o) of Class 12 includes computer software other than systems software. Fax machines and other office equipment or machinery are not included in either of these paragraphs and are therefore not eligible for the accelerated allowance.

Q: Does this apply to capital additions to existing property?

A: Betterments to existing property included in paragraph (f) of Class 10 and paragraph (o) of Class 12 are eligible for the accelerated allowance as long as the expenditure was made during the period between January 1, 1998, and June 30, 1999, to replace property described in either of these paragraphs that was acquired before 1998, and that has a material risk of malfunctioning because of the change of the calendar year to 2000.

Q: How is the amount of $50,000 shared among an associated group; is an agreement required to be filed?

A: No agreement is required to be filed. However, members of an associated group should agree as to the manner by which the allowance will be shared. Any portion of the allowance that is claimed by a member of an associated group will reduce the amount that another member of the group may claim.

Q: Does the February 11, 1998, Technical Newsletter #12 still apply?

Yes, Technical Newsletter #12 that discusses whether a particular year 2000 expenditure should be expensed or treated as a capital expenditure remains relevant. The Department of Finance has indicated in their backgrounder accompanying the amendments to the Regulations that expenditures on computer chips and firmware (software that is embedded in a computer chip) made to ensure functionality in the year 2000 (i.e., a repair) are fully deductible in the year incurred.

Q: I was a member of a partnership during the year. However, now I am not. No acquisitions fitting this description were made prior to our dissolution but I now want to take advantage of the accelerated CCA. Are there any restrictions for me?

A: Partnerships having a large corporation as a member are not entitled to the accelerated allowance. A taxpayer who, in a particular taxation year, is not a member of a partnership would not be prevented from claiming the accelerated allowance. However, the amount of the taxpayer’s claim may be restricted if a corporation claimed all or part of the accelerated allowance in a taxation year in which the corporation was associated with the taxpayer.

Q: What happens if I upgrade, i.e., purchase more sophisticated versions of the product which also happen to be year 2000 compliant. Is only a portion of the purchase price allowable?

A: Whether a less expensive product exists to fix the taxpayer’s year 2000 compliance problem is irrelevant in the determination of the amount of accelerated CCA. The accelerated CCA is calculated on the basis of the capital cost to the taxpayer of eligible property acquired during the year. However, in determining whether property is eligible, it remains a question of fact as to whether the property was acquired to replace the existing non-compliant property.

Q: What if my business is operating in a loss position? Can I still claim 100% of the cost of my computer equipment? Can I carry forward the loss?

A: Businesses operating in a loss position are entitled to claim the allowance. Such businesses may also choose not to claim the accelerated CCA and save regular CCA deductions for future years. The accelerated CCA has no effect on the ability of a taxpayer to carry forward any losses whether or not the losses are created by claiming the accelerated CCA.

Q: Is this CCA deduction also available to large firms?

A: A large corporation, as that term is defined in subsection 225.1(8), is not entitled to claim the accelerated allowance. Under that subsection, a large corporation for a particular taxation year generally includes a corporation who has to pay the “large corporation tax” under Part I.3.