Principal Issues: 1) Would the CRA accept including income under subsection 12(1)a) with a reserve under 20(1)m) based on the average usage of the application by the user of the In-App? 2) Should there be a distinction between permanent and consumable In-App? 3) Should there be a distinction between an application that requires a connection to the internet and an application that does not?
Position: 1) Question of facts but likely not 2) No 3) No
Reasons: The income should be included in the year under 9(1) or 12(1)a). Since the sale transaction is completed, there is no provision
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
APFF - CONGRESS 2014
Question 14
In-app purchases
The technological development of mobile devices and the arrival of the various online shopping platforms of the "App Store" type has brought a new form of electronic commerce. Indeed, mobile device owners can access a multitude of free applications that in many cases come with in-app purchases.
These in-app purchases take the form of extra life or experience in video games that allow the user to move faster in the game. The price of these life or experience points varies depending on the amount of points purchased. For example for 100 points, the application may charge $0.99 and ask for $4.99 for 1000 points. These extra life or experience points are normally consumable by the user in the game and the user can further purchase as seen fit according to a set price list. There are also in-app purchases that are permanent, for example, the purchase of special characters in a video game.
Applications in the form of games may require the user to be connected to the internet to be able to play or can be played without being connected to the internet. In the event that an application is removed from the market, the application that can be played without being connected to the Internet will continue to be usable but will not be updated anymore while the other type may become unusable.
Depending on the type of application, it is normally possible for the company that put the application online to compile statistics on the average duration of use of the life or experience points purchased by the users of the application.
There are various acceptable accounting policies for accounting for in-app purchases. In short, it is possible from an accounting point of view to include income from in-app purchases over the expected life of the video game, on the basis of the expected average usage of points or on the basis of the intended use of the application by the user.
Questions to the CRA
a) Would the CRA accept a methodology where there would be an inclusion in income under paragraph 12(1)(a) with a deduction under paragraph 20(1)(m) which would be claimed based on the average usage of the application by the user in the case of in-app purchases?
b) Should a distinction be made between consumable in-app purchases and permanent ones?
c) Should a distinction be made between an application where the user must be connected to the internet to be able to use it and another that can be used without being connected to the internet?
CRA Response
First, income from in-app revenues will be included in computing income in the year they are received regardless of whether they are subject to subsection 9(1) or paragraph 12(1)(a). The question of whether the taxpayer can make a provision for part of the amounts received in the year is one of fact.
Generally, an amount received by a taxpayer has the "quality of income" where the taxpayer has an absolute right to the amount and there are no restrictions, contractual or otherwise, related to its disposition and enjoyment. According to our understanding of in-app purchases, the taxpayer would cash the amount immediately and the client would receive the supplementary life or experience points from the time the payment was made. The taxpayer would have no further obligation respecting this sale. Having said that, it could be that the client does not use the points immediately or that they are utilized over the course of the current game. However, that does not cause the product not to have been delivered or the service not to have been rendered. Therefore, the CRA is of the view that if there is need to determine a reserve for the amounts received - it would be nil.
The CRA is also of the view that it is not necessary to distinguish between consumable or permanent in-app purchases or to distinguish between a downloaded or saved application since, one way or another, the sales transaction is completed. The seller is not subject to tax on the basis of the use of the property by the buyer, but on the profit it derives for that year.
Isabelle Brulotte
2014-053813