30 November 1992 Income Tax Severed Letter 922720 - Computer Sofware - Right or Licence to Use

922720
                                           W.P. Guglich
        24(1)                             (613) 957-2102

Attention: 19(1)

November 30, 1992

Dear Sirs:

Re: Computer Software - Your file no.19(1)

This is in reply to your letters of September 16, October 13 and November 19, 1992 requesting clarification of the meaning of the term "a right or licence to use computer software" for purposes of Regulation 1104(2).

You specifically request our opinion whether the licensee would be considered to have acquired a right or licence to use computer software for internal use in a situation where a licensee uses the computer software or data to create an end product or end program which can be sold, sublet or otherwise marketed to any third party. You define end product and end program to mean:

(a) "end product" means a data package formatted in an arithmetic structure compatible with existing software on the market and saleable as a stand alone product;

(b) "end program" means a package consisting of the data package produced by the class 12 software with the addition of existing programs as a total sales package.

In any specific case the determination as to whether the licensee has acquired a right or licence to use computer software would be dependent on the contractual arrangement between the licensor and the licensee. The fact that the new product will in law, be the property of the licensee and the licensor will have no rights in the end product would be a factor to consider. The circumstance that no royalties were payable to the licensor of the original software as a consequence of sales of the end product would perhaps be an indication that any payments with respect to the original software were for the right to use that software and not for the right to resell, to sublet or to otherwise market the original software. As noted in our letter of September 7, 1992 it is our view that the right to market software would belong in class 14, or would be an eligible capital property, depending on whether or not it was for a fixed period of time. However, we cannot confirm that payment of a lump sum, whether or not payable in instalments would necessarily indicate that no portion of the lump sum payment was payable for the right to market the original software. This would depend on the contract.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2, are not binding on the Department. If you wish to obtain a binding commitment with respect to an actual case an advance income tax ruling application should be submitted.

We trust our comments will be of assistance to you.

Yours truly,

E. Wheeler

for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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