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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
952778
XXXXXXXXXX A.M. Brake
Attention: XXXXXXXXXX
December 11, 1995
Dear Sirs:
Re: Computer Software
This is in reply to your letter of October 13, 1995, wherein you requested a preliminary ruling relative to an upcoming purchase of computer software. The fact situation which you set out is quite specific and relates to definite contemplated transactions. Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. If you wish to obtain any binding commitment with respect to an actual case, an advance income tax ruling request should be submitted. We do however provide the following comments for your information.
Class 12, in part, reads,
"Computer software acquired after May 25, 1976 but not including systems software..."
Regulation 1104(2), in part reads,
"Computer software includes systems software and a right or licence to use computer software"
"Systems software means ... and includes a right or licence to use systems software"
Hence, computer software in Class 12 would consist of computer software, not including systems software, the ownership of which was actually acquired outright and the cost of acquiring a right or licence to use computer software but would not include systems software or the right or licence to use systems software.
Property not included as depreciable property is dealt with in Regulation 1102 which reads, in part,
"(1) The classes of property described in this part and in Schedule II shall be deemed not to include property
(a)the cost of which is deductible in computing the taxpayer's income;"
It would be a question of fact as to whether a taxpayer has i) acquired outright ownership of the software, ii) the right to use computer software or, iii) a right to sell or market computer software which depending on the life of the right to sell or market would either be Class 14 asset or is eligible capital property. The right to market would not qualify as use for purposes of Class 12. Computer software in i) and ii) that is not systems software would be Class 12. In our view, use, within the meaning of software contained in Regulation 1104(2), would be restricted to the taxpayer using the software in his own computer(s) to execute the actual functions it was developed to perform.
In connection with acquiring ownership to computer software, in our view, software is owned by the creator of the software or by a person who acquires the software in an outright sale. An outright sale of computer software can only occur, in our view, where there has been an absolute transfer of all intellectual property interests in the software and where the transferee obtains an unrestricted right to sell or lease the software. An outright sale does not arise where the transferor or any party other than the transferee maintains priority rights, or, where the transferee has committed itself to restrictions not normally associated with ownership such as restrictions regarding secrecy.
In cases where the transferee has acquired something less than outright ownership of computer software, it will be a question of fact whether the transferee has acquired a right to use the computer software (Class 12) or a right to sell or market computer software (Class 14 or eligible capital).
The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Enclosed are copies of Interpretation Bulletins, IT-143R2 and It-283R2 for your information.
We trust our comments will be of assistance to you.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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