17 July 1992 Income Tax Severed Letter 9217787 - Class 14 — Amounts Paid by 24(1)

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.

July 17, 1992

24(1) Business and
General
Division
L. Holloway
Attention: 24(1) (613) 957-2104
921778

24(1)

This is in reply to your memorandum dated June 8, 1992, concerning the amortization period of the "concession" granted to 24(1). Your request asked that we review the taxpayer's submission and indicate whether the Rulings Directorate, in this case, as opposed to the 24(1) case, "still feels that the amounts paid are class 14 assets with an amortization period of 97 years". Based on your understanding of the events, you believe that a proper amortization period would be ten years as this treatment is similar to that granted to others who became equity investors in the project.

Our Comments

We have reviewed the taxpayer's submission. The taxpayer feels that the amount paid is actually a Gift to Her Majesty and failing this argument, they believe the amount expended should be

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considered a current advertising or promotional expenditure. We are of the opinion that the taxpayer acquired rights, and that these expenditures are not current in nature. The enduring value of the rights purchased is even more evident today in view of the competition between 24(1) for market share.

We maintain that the companies concerned acquired assets from 24(1) that should be included in Class 14. While we agree with the taxpayer that the rights acquired do not fall within the ordinary meaning of the word "patent" we contend that these rights would be considered to be either licences, franchises or concessions or a combination of all these rights. More specifically a "concession" contemplates a right to use or occupy a property for a limited time as for example a right of way. What franchises, concessions and licenses have in common is that they all refer to a right, privilege or monopoly enabling the holder to carry on his business or facilitating the carrying on of his business.

24(1)

In M.N.R. vs Canadian Glassine Co. Ltd., [[1976] C.T.C. 141] 76 DTC 6083 (F.C.A.) Pratte, J. stated at page 6083 "That contention appears to me to rest on the false assumption that there is a franchise every time a person enjoys a right. This is not so. Whatever may be the precise meaning of the expression "franchise" in the Income Tax Regulations, that expression refers to a right, granted to a person, to carry on an activity which, otherwise, that person could not have carried on, at least in the same conditions."

In our response to the London District Office dated March 12, 1991, we stated that "Since these rights, concessions, and advantages have a limited lifetime value expiring on September 20, 2083, the total revised payment...should be classified as a class 14 expenditure and should be expended over the remaining life of the property on an equal per diem basis in accordance with paragraph 1100(1)(c) of the Income Tax Act." Your memorandum stated that you were of the opinion that the amortization period should be 10 years however no arguments were presented in support of either amortization period. Paragraph 1100(1)(c) of the Regulations provides that the cost of the class 14 property be amortized over the life of the property remaining at the time the cost was incurred. If the remaining life of the property acquired is in your opinion 10 years, then the cost of the property should be amortized over 10 years. In arriving at this determination paragraph 15 of IT-477 should be consulted in determining the life of the property where there are renewals or extensions following the original term. This paragraph continues

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to state that:

"Where such renewals or extensions are automatic or within the control of the taxpayer, that is they do not require any further negotiation with or the concurrence or consent of the grantor, the life of the property includes such additional periods.... On the other hand, where the concurrence of the franchisor is required, the life of the property does not include any renewal period. Where the taxpayer has an option to renew or extend the term only if certain conditions are met, for instance meeting certain performance or sales criteria, the circumstances of the particular case must be examined to determine whether or not, when he acquired the property, it was reasonably certain that these conditions would be met. If so, the additional periods are included in the life of the property."

Therefore, if the term involves an initial 10 year period, the conditions which must be met by 24(1) before the extension to a 99 year term is granted must be examined carefully in order to determine whether to amortize the cost of these rights over 10 or 99 years. E. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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