29 June 1998 External T.I. 9816545 - COSTS TO ASSESS NON COMPLIANCE TO YEAR 2000

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 the cost of Industry Canada’s “year 2000 first step” program to evaluate hardware and software to see if it is "year 2000 compliant” would be considered current or capital expenditures

Position: Question of fact but should normally be current.

Reasons: Similar to position in IT-475 par.s 4 and 5.

Mr. Jonathan T. Sunderland
Project Officer
The Student Connection Program 						5-981654
Industry Canada 								Roxane Brazeau-LeBlond, CA
400 - B6
235 Queen Street
Ottawa ON  K1A 0H5     

June 29, 1998

Dear Sir:

We are replying to your letter of June 22, 1998, concerning the income tax treatment for the fee to benefit from Industry Canada’s “Year 2000 First Step” program. More specifically, during a telephone conversation (Brazeau/Sunderland) you inquired whether these costs would be considered to be capital expenditures that would be deductible through the capital cost allowance system or whether they would be current expenditures and fully deductible in the year incurred.

We understand that the payment of a $195 fee entitles the client to a customised hands-on evaluation by a post-secondary student who will visit the client’s workplace to assess the client’s computer system and software and discuss what is to be done to prepare for the future. This assessment is to include an explanation of the effect that the passage to the year 2000 will have on the client’s technology and business relationships, an inventory of the client’s computer systems, a simple diagnosis of software and hardware (including up to 10 PCs), a review of the client’s business risks and a detailed report including a suggested action plan.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

The determination of whether a particular expenditure should be expensed or treated as a capital expenditure is a question of fact that is to be determined based on an appreciation of all of the surrounding circumstances. The Department's position on the tax treatment of expenditures that are of a capital nature versus those that are of a current nature is generally covered in Interpretation Bulletin IT-128R, Capital cost allowance — Depreciable property. To determine whether expenditures incurred to eliminate the millennium bug are of a capital or current nature, consideration should be given to whether the expenditure was made with a view to bringing into existence an asset or advantage of enduring benefit. For instance, if a particular software program is only restored to its original condition so that it performs the same applications but the problems of the millennium bug have been eliminated, the expenditures incurred to eliminate the bug would normally be considered to be of a current nature. However, any expenditure that would improve or enhance the software would usually be looked upon as being on account of capital.

Interpretation Bulletin IT-475, Expenditures on research and for business expansion, provides that expenditures made as part of a taxpayer’s ordinary business in respect of research to determine whether a capital asset should be created or acquired, but which themselves are not directly linked to the creation or the acquisition of a capital asset, are current operating expenses which are deductible in the year incurred. In our view, if the “Year 2000 First Step” program’s clients are making this expenditure as part of their ordinary business to determine whether assets should be created or acquired, the fee should be deductible in the year incurred.

We trust these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch