| 5-922672 | |
| 24(1) | R. Albert |
| (613) 957-2140 |
Attention: 19(1)
December 30, 1992
Dear Sirs:
Re: Treatment for Tax Purposes of Gain on Sale
We are writing in reply to your letter of August 31, 1992 wherein you requested our views on the treatment for tax purposes of the gains on the sale of software programs in various scenarios.
In particular, you have requested whether the gains on the sale of computer software in the following scenarios would be considered gains on account of capital or income.
Scenario 1
1. The taxpayer develops a software program and sells the program to a new entity that will commercially exploit the product.
2. The entity may be arm's length, or not.
Scenario 2
1. The taxpayer
- develops a software program
- starts to generate income from selling services using the program, or
- starts to generate income from selling licences for use of the program.
2. The taxpayer sells the program to a new entity that will commercially exploit the program.
3. The new entity may be arm's length, or not.
Scenario 3
1. The taxpayer generates operating income from the sales of licences and or services relating to computer programming,
2. The taxpayer develops a new software program.
3. The taxpayer sells the program to a new entity that will commercially exploit the product.
4. The new entity may be arm's length, or not.
Scenario 4
1. The taxpayer generates operating income from the sales of licences and or services relating to computer programming.
2. The taxpayer
- develops a software program
- starts to generate income from selling services using the program, or
- starts to generate income from selling licences for using the program.
3. The taxpayer sells the program to a new entity that will commercially exploit the product.
4. The entity may be arm's length, or not.
You have also requested our comments as to whether paragraph 12(1)(g) would apply to any of the above scenarios to change our views on the reporting of the sale where part of the consideration on the sale is in the form of vendor-take back debt ("VTB"). The timing of the VTB is a function of revenue produced from the exploitation of the product.
Our Comments
With respect to each of the above scenarios, we would tend to view the sale proceeds as income. However, as you noted, whether the proceeds were on account of income or capital would be a question of fact dependent on all the circumstances of a particular case.
With respect to the application of paragraph 12(1)(g), paragraph 1 of IT-462, Payments Based on Production or Use, indicates that: "This bulletin outlines the Department's interpretation of paragraph 12(1)(g) in circumstances where a taxpayer has sold property and the selling price is based on the production or use of the property." From paragraph 2: "Subject to the remarks in 8 and 9 below, paragraph 12(1)(g) applies to any amount received that is dependent on the production from or use of property, whether or not the amount is an instalment of the sale price of the property." And from paragraph 8: "Where a contract calls for a fixed price which cannot be varied in any event, but the timing of instalments of that fixed price is to vary depending of production or use, paragraph 12(1)(g) does not apply since it is only the timing of payments which is dependent on production or use and not the price itself." In our view, the comments in paragraph 8 of IT-462 would apply to a VTB as described above because only the timing of payments of that VTB is dependent upon the use of the property and not the actual selling price itself. Accordingly, in a case where we had viewed any of the above scenarios as resulting in capital proceeds, paragraph 12(1)(g) would not have applied to alter our views as a result of the addition of the VTB as described.
We trust that these comments will be of assistance.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch