22 October 2010 External T.I. 2010-0382581E5 - CCA for Class 14 Franchise Fees

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.

Principal Issues: How CCA is claimed for Class 14 property when a taxpayer terminates one franchise agreement but continues to be a party to another franchise agreement, both of which are Class 14 properties.

Position: The CCA is the lesser of: the aggregate of the CCA that may otherwise be claimed for each property of the class for the year (by continuing to apportion the capital cost of each agreement over the life of the agreement remaining at the time the cost was incurred); and the UCC. A terminal loss is available under subsection 20(16) only when the taxpayer no longer holds any Class 14 property.

Reasons: Regulation 1100(1)(c).

XXXXXXXXXX
									2010-038258
									Kathryn McCarthy, CA
									(613) 828-9377
October 22, 2010

Dear XXXXXXXXXX :

Re: Capital Cost Allowance for Class 14 Franchise Fees

This is in response to your e-mail of October 4, 2010, concerning capital cost allowance ("CCA") for Class 14 depreciable property under paragraph 20(1)(a) of the Income Tax Act ("the Act").

You described a situation where your client entered into one franchise agreement, and subsequently, another franchise agreement. Other than the geographical area they cover, each agreement is identical. The terms of the agreements are 5 years plus a 5 year renewal option. In your opinion due to the limited period of the agreements, they are Class 14 property as described in Schedule II of the Income Tax Regulations ("the Regulations"), rather than eligible capital expenditures.

You described CCA that is, therefore, claimed on a straight line basis over the 10 year term of each agreement (prorated based on the number of days in the year that the agreement covers) pursuant to paragraph (c) of Regulation 1100(1). Assuming no disposition of the agreements and no other Class 14 property, the CCA will be the lesser of 10% (subject to proration) and the undepreciated capital cost ("UCC") in Class 14 at the end of the taxation year, until the terms expire and the UCC balance is nil.

However, you described a situation where one agreement is terminated prior to the end of the 10th year (and no proceeds of disposition are received). In such a case it is your opinion that since Class 14 property is pooled pursuant to paragraph (c) of Regulation 1100(1), there is no terminal loss available under subsection 20(16) of the Act because the taxpayer still holds Class 14 property. You enquired whether CCA would continue at the lesser of 10% and UCC such that the terminated agreement would effectively be amortized over the years remaining in the initial 10 year term under paragraph 20(1)(a) of the Income Tax Act ("the Act"), even though your client is no longer a party to the terminated agreement.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve a specific taxpayer and a transaction that has already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following comments, which may be of assistance.

Pursuant to paragraph 1100(1)(c) of the Regulations, the maximum CCA available to a taxpayer in any year in respect of class 14 property is the lesser of:

(a) the aggregate of the amounts obtained by apportioning the capital cost to the taxpayer of each property over the life of the property remaining at the time the cost was incurred, or

(b) the UCC of the taxpayer as of the end of the taxation year (before making any deduction for CCA for the taxation year) of property of the class.

In the situation you describe if at the end of a particular taxation year the UCC is greater than the aggregate of the CCA that may otherwise be claimed for each property of the class for that year (i.e. 10% for each of the agreements), the taxpayer would be entitled to a maximum CCA claim of 10% for each of the class 14 properties up to the tenth year (subject to proration). Despite the fact that the taxpayer remains a party to only one franchise agreement, the taxpayer would continue to apportion the capital cost of the two agreements over the life of the agreements remaining at the time the costs were incurred. Further, we are in agreement that a terminal loss can only be deducted under subsection 20(16) of the Act at the end of a taxation year when the taxpayer no longer holds any Class 14 property.

We trust the foregoing comments are of assistance.

Yours truly,

S. Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch