7958501 Canada - Quebec Court of Appeal finds that software that was not depreciable property to the transferor because it was written off as SR&ED was not subject to s. 13(7)(e) to the NAL transferee

A private company (“SherWeb”) transferred software, which it had developed and then used in its business, to a newly-formed sister company (“501”) at a gain (with such software licensed back to it for continued use in its software services business).

The Court found that although the acquired software was depreciable property to 501, it had not been depreciable property to SherWeb because SherWeb, rather than claiming capital cost allowance respecting the software, had treated its software development expenses as deductible SR&ED expenses, so that the software had been excluded from treatment in its hands as depreciable property pursuant to the Quebec equivalent of Reg. 1102(1)(d) (which so excludes any property that was acquired by expenditures in respect of which the taxpayer was allowed a deduction under s. 37). Accordingly, Taxation Act s. 99 (imposing the equivalent to the ½ step-up rule in ITA s. 13(7)(e) – with both provisions required that the property have been depreciable property to the transferor) did not apply to reduce the capital cost to 501 of the acquired software. The Court stated:

One cannot escape the fact that, to SherWeb, the Software has never been treated as a depreciable asset, and so continually until the time "immediately before the transfer" to the respondent.

The Court further rejected an ARQ submission that the Reg. 1102(1)(d) equivalent was intended only to preclude a double deduction (for SR&ED and CCA) and not to avoid the ½ step-up rule.

Neal Armstrong. Summaries of Agence du revenu du Québec v. 7958501 Canada Inc. 2022 QCCA 315 under s. 13(7)(e) and s. 13(21) – depreciable property.