2003 Ruling 2002-0159913 - cca-computer software

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Is the computer software "systems software" or "applications software" and therefore included in Class 8 or Class 12, respectively.

Position:

The software is systems software and therefore included in Class 8.

Reasons:

The software would be included in paragraphs (c) and (d) of the definition of "systems software" in subsection 1104(2) of the Regulations.

XXXXXXXXXX 2002-015991

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter, dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above named taxpayer. We acknowledge receipt of the additional information provided in the XXXXXXXXXX and XXXXXXXXXX facsimiles and the additional information provided in our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) XXXXXXXXXX;

(b) The "CBCA" is the Canada Business Corporations Act;

(c) "Related persons" has the meaning assigned by subsection 251(2) of the Act;

(d) "Company A" is XXXXXXXXXX;

(e) "Company B" is XXXXXXXXXX;

(f) "Newco" is a new corporation to be incorporated under the name "XXXXXXXXXX";

(g) The "Shareholders of Company A" are XXXXXXXXXX and XXXXXXXXXX;

(h) The "Shareholders of Company B" are XXXXXXXXXX and XXXXXXXXXX;

(i) The proposed "Shareholders of Newco" are XXXXXXXXXX, the Shareholders of Company B, XXXXXXXXXX and XXXXXXXXXX;

(j) The "Software" is the proprietary computer software known as XXXXXXXXXX;

(k) The "Agreement" is the agreement between Company A and Company B that was entered into on XXXXXXXXXX; and

(l) The "Minority Shareholder of Newco" is XXXXXXXXXX.

Facts

1. Company A was incorporated pursuant to the XXXXXXXXXX . Its business number is XXXXXXXXXX , its taxation center is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

2. The authorized share capital of Company A consists of XXXXXXXXXX Common shares without par value. Each Shareholder of Company A owns XXXXXXXXXX common shares.

3. Company A carries on the business of selling and distributing computer hardware and software products of other parties and includes the Software of Company B.

4. Company B was incorporated pursuant to the XXXXXXXXXX . Its business number is XXXXXXXXXX, its taxation center is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

5. The authorized share capital of Company B consists of XXXXXXXXXX Class "A" common voting shares without par value and XXXXXXXXXX Class "B" non-voting redeemable common shares without par value. Each Shareholder of Company B owns XXXXXXXXXX Class "A" common shares.

6. Company B has conceived and developed the Software. The Software XXXXXXXXXX. Company B is in the business of licensing the Software to end-users for use in their computers. Company A and Company B have a business relationship whereby Company A markets the Software to end-users.

7. None of the Shareholders of Company A is a related person with any of the Shareholders of Company B. None of the Shareholders of Newco will be related persons. Each of the Shareholders of Company A and each of the Shareholders of Company B is a resident of Canada.

8. The Agreement provides, among other things, for:

(i) the sale of the Software and certain other business assets of Company B to Newco for cash;

(ii) the sale of certain business assets, other than the Software and the assets described in (i), of Company B to Newco for consideration consisting of shares of Newco; and

(iii) the sale of certain business assets of Company A to Newco for consideration consisting of shares of Newco.

The Agreement provides that it is a condition to the closing of the transactions that a favorable advance income tax ruling be received by XXXXXXXXXX.

Proposed Transactions

9. Newco will be incorporated pursuant to the CBCA. The authorized share capital of Newco will consist of an unlimited number of common shares and an unlimited number of Class A Preference shares. Some of the Shareholders of Newco will also be the directors of Newco.

10. Except for the Minority Shareholder of Newco, who will subscribe for XXXXXXXXXX common shares, the Shareholders of Newco will each subscribe for XXXXXXXXXX common shares of Newco. Each of the Shareholders of Newco may hold their shares of Newco directly or indirectly through a holding company.

11. Newco will purchase the Software from Company B for a purchase price of $XXXXXXXXXX (the "Software Purchase Price") and will purchase certain other business assets for nominal consideration totaling $XXXXXXXXXX.

12. Company A will sell substantially all of its business assets to Newco for consideration consisting of Class A Preference shares. Company B will sell its remaining business assets to Newco for consideration consisting of Class A Preference shares.

13. Certain of the employees of Company A and Company B will become employees of Newco. The Shareholders of Newco will enter into a Unanimous Shareholders Agreement.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to enable Newco to purchase the assets necessary to carry on the business currently carried on by Company A and Company B, including the licensing and marketing of the Software to end-users.

Ruling

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the ruling requested,

our ruling is as follows:

A. The Software to be purchased by Newco from Company B is "systems software", within the meaning thereof in subsection 1104(2) of the Income Tax Regulations (the "Regulations"), and therefore excluded from Class 12 of Schedule II of the Regulations by virtue of paragraph (o). The systems software is not associated with "general-purpose electronic data processing equipment", as defined in subsection 1104(2) of the Regulations, and is therefore excluded from Class 10 of Schedule II of the Regulations by virtue of paragraph (f). The systems software will, therefore, be included in Class 8 of Schedule II of the Regulations by virtue of paragraph (i).

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency ("CCRA") on May 17, 2002, and is binding on the CCRA provided that the proposed transactions are implemented on or before XXXXXXXXXX.

Nothing in this ruling is to be construed as confirmation by the CCRA as to the fair market value of the Software, the business assets of Company A, the business assets of Company B or the Class A Preference shares of Newco.

This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch