4 December 1998 External T.I. 9830375 - YEAR 2000 COMPUTER COMPLIANT

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.

XXXXXXXXXX 							F.B. Fontaine
								983037
Attention: XXXXXXXXXX 

December 4, 1998

Dear Sirs:

Re: Tax Relief for Year 2000 Computer Hardware and Software

This is in reply to your facsimile transmission dated August 20, 1998 concerning the above-captioned subject. You asked whether certain equipment acquired by your customers would qualify for inclusion in paragraph (f) of class 10 of Schedule II of the Income Tax Regulations.

The particular equipment you described are data communications equipment used for communication over wide areas and data and mail servers which include routers and Compaq or IBM servers.

The Backgrounder to Release No. 98-057 (the “Release”) dated June 11, 1998 and issued by the Minister of Finance in respect of the tax relief, states:

(i) that eligible computer hardware and systems software will be included in paragraph (f) of class 10 which will provide an accelerated capital cost allowance (“CCA”) deduction of 85% of cost; and

(ii) that eligible application software will be included in paragraph (o) of class 12 providing an accelerated CCA deduction of 50% of cost.

Because of the general nature of the term “data communications equipment,” it is difficult to be precise as to whether a particular piece of equipment would be classified as computer hardware or computer software, without specific knowledge of the detailed characteristics and functions of the equipment.

The Release mentions desktop computers, networks and microprocessor chips that control certain systems and equipment as computer hardware that may be subject to the tax relief. On this basis, it would appear that data communications equipment used in wide area networks may qualify, if it is described as computer hardware or systems software.

We are uncertain what CSU/DSU’s are. However, our understanding is that Compaq or IBM servers and routers would, generally, be considered as computer hardware.

We would caution that the tax relief announced in the Release is for small and medium-sized businesses on the capital cost of computer hardware and software acquired between January 1, 1998 and June 30, 1999 to replace equipment that is not year 2000 compliant. Accordingly, first-time acquisitions of equipment that are already year 2000 compliant would not qualify for the relief.

Also, an expenditure incurred in respect of computer hardware or software, including costs for the year 2000 compliance, for the maintenance or repair of the property rather than the enhancement or betterment thereof would be a current expenditure and, accordingly, would not qualify. We enclose a copy of the Department’s Technical News No. 12 which, for the purposes of the year 2000 compliance issue, discusses when an expenditure may be considered to be current or capital.

We hope that the above information will be helpful to you.

Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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