11 December 1996 Internal T.I. 9638527 - Computer Software

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.

Principal Issues:

Whether the entire cost of software, acquired outright, should be treated as Class 12(o), or alternatively, whether the various components that are inherent with ownership should be broken down with the components valued separately and individually classified.

Position:

Treated as a depreciable property, rather than allocate to the component parts.

Reasons:

There is a property described in class 12 as software and if you acquire such a property it should be so classified.

		December 11, 1996

	Dave Holtz	Business & Publications
	Chief		  Division
	Partnership Section	A.M. Brake
(613) 957-2133
	Attention:  Allan Nelson
		963852

Ownership of Software, Class 12(o)

This is in reply to your memorandum of November 19, 1996, together with various discussions (Brake\Nelson), where the issue relating to applications software essentially is whether the entire cost of software, acquired outright, should be treated as Class 12(o), or alternatively, whether the various components that are inherent with ownership should be broken down with the components valued separately and individually classified.

Our Comments

The following comments have been extracted from our September 28, 1995 reply (#950984) to the Ottawa TSO relating to computer software and remain our view:

"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 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.

We agree that use 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 this regard it would be a question of fact as to whether the 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 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 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)."

In our view, where ownership of "computer software acquired after May 25, 1976 but not including systems software..." has been acquired outright and that software is a depreciable property rather than inventory, it is the property, itself, (computer software) that is classified rather than its individual components. The asset acquired is a property as a whole and not various properties in respect of its component parts.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch