21 October 1982 Income Tax Severed Letter

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.

Revenue Canada Revenu Canada Taxation Impôt

Head Office Bureau principal

Your file Votre reference Our file Notre reference

J.F. Oulton (613) 995-1787

Ms. Robin Jackson Canadian Film & Videotape Certification Office Cultural Industries Directorate Department of Communications 16th Floor, Journal Tower South 365 Laurier Avenue, West Ottawa, Ontario K1A 0C8

Dear Robin:

This is further to your letter of August 12, 1982 in connection with 
a proposal you have received from    XXXX    concerning
XXXX    While   XXXX   description concerning his proposals 
provide an illustrious description of his ideas and concepts, we are 
unable to draw definite conclusions as to whether or not any of the 
actual costs incurred will qualify as "computer software" within the 
meaning of paragraph (o) of class 12 of Schedule II to the Income Tax
Regulations. You were also asking about XXXX qualifying as 
either a certified feature or short production.

In connection with the foregoing, we offer the following comments:

1. Computer software refers to specific programs which bear accounting significance or operational significance, (Systems software, specifically excluded from being a class 12(o) asset, refers to the general operating systems which control the computer language compilers etc.).

        XXXX                  does not refer to any 
   items which, in our view, would constitute computer software 
   bearing operational significance (accounting significance would 
   of course have no relevance) with the possible exceptions of 
   items 3 and 6 on page 2 of his June 21, 1982 letter. A detailed 
   description of the cost structure and exactly what is involved in 
   developing these items would be required in order to make a 
   definitive determination.

As we discussed, the Budgets submitted are also filled with un- certainties. For example, in the XXXX it is impossible to ascertain the exact nature of items 3 and 10 whereas it is clear that items 2, and 4 to 9 would not be computer software. However, such costs would undoubtedly be costs of the period to which they relate i.e. charged to cost of sales in the period when any resultant product is sold.

In addition, it has been our experience that most taxpayers do not own the computer software but rather acquire by lease, the right to use it from the actual owner. In such cases, of course, the amount paid may not be treated as a class 12 asset for capital cost allowance purposes. If that is the case, the payments are treated as eligible capital expenditures under paragraph 14(5)(b) of the Act (a deduction of 10% per annum on a declining balance basis is then permitted). The only exception would be where a licence is acquired for a limited period in respect of the soft- ware in which case the amount would be treated as a class 14 asset and written off over the period of the licence on a straight line basis.

2. Finally, we see no reason why item 1 on page 2 of XXXX letter of June 21, 1982 could not be developed to quality as a certified feature production or a series of shorts. If all the requirements of a certified production are met, then we see item number 1 in both the budgets for XXXX and the XXXX as the amount which would be included in class 12(n).

We trust that our comments will be of some assistance. Until the proposed XXXX project develops more beyond the conceptual stage, we regret that we are unable to make more explicit comments, especially with regards to computer software.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR D.B. MORPHY

for Director Corporate Rulings Division Legislation Branch