Principal Issues: Deductibility of an expense incurred to purchase a license to use stock trading software for a period of 36 months.
Position: Included in Class 12.
Reasons: The right or license is for the use of computer software that is not systems software and is for a period greater than a year.
XXXXXXXXXX 2004-007156
Randy Hewlett, B. Comm.
June 23, 2004
Dear XXXXXXXXXX:
Re: Deductibility of Computer Software
We are writing in response to your letter of March 31, 2004, wherein you requested our opinion on the deductibility of an expense incurred to purchase a license to use stock trading software for a period of 36 months.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.
Pursuant to subsection 1104(2) of the Income Tax Regulations (the "Regulations"), "computer software includes systems software and a right or licence to use computer software." In determining whether the acquisition cost should be written off in the year incurred or, because the computer software is of an enduring nature, capitalized, the nature, purpose and anticipated life of the computer software must be considered. Computer software is generally considered to have an "enduring nature" where its useful life is anticipated to last beyond one year.
Computer software that is "systems software" is generally included in Class 8, 10, 29, 39 or 40 of Schedule II of the Regulations. Systems software is defined in subsection 1104(2) of the Regulations, and generally refers to the general operating system of a computer that directs and coordinates the different operations of the computer and enables application programs to run.
Computer software that is not systems software, often referred to as "applications software", is included in Class 12 of Schedule II of the Regulations pursuant to paragraph (o) of that class. This would include the right or licence to use applications software for a period greater than one year. Pursuant to subparagraph 1100(1)(a)(xii) of the Regulations, Class 12 assets can be depreciated at a rate of 100%. Under subsection 1100(2) of the Regulations, however, certain Class 12 assets are subject to the "half-year rule". Computer software described in paragraph (o) of Class 12 is subject to the half-year rule, which means that in the year of acquisition it can only be depreciated at a rate of 50%.
We trust our comments are of assistance.
Yours truly,
Randy Hewlett, B.Comm.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch