Current vs. Capital, Tangible vs. Intangible; Revisited and Retooled

Transcription

1 _1NATDOCS Current vs. Capital, Tangible vs. Intangible; Revisited and Retooled Jehad Haymour S. Sebastian Elawny June 10,

2 Starting Point for Discussion CRA has asserted positions against some in industry that: Current expenses should be capitalized due to: a)their relationship to a capital item, and/or b)such current expenses being capitalized for accounting purposes Given that such expenses are capital and not part of tangible property, then such expenses are eligible capital expenditures (ECE) 09 June

3 Revisiting and Rethinking Core Concepts The questions arising are: Are expenditures on income account vs. capital account? What is tangible property? Intangible property? We ask this group to revisit and rethink core concepts 09 June

4 Expenses on Income vs. Capital Account in many cases it is almost true to say that the spin of a coin would decide the [income vs. capital debate] almost as satisfactorily as an attempt to find reasons. (British Salmson Aero Engines ) Base Principles Courts have mandated a common sense approach aimed at providing accurate picture of profits Earlier cases aimed to reach this point by consideration given to: the result of the expenditure, the recurring nature of the expenditure, and the enduring nature of the thing acquired (see B.P. Australia, Johns-Manville) Keep in mind that these considerations will rarely point in the same direction New directive? 09 June

5 The Three Considerations 1. Result of the Expenditure Is the expenditure's purpose to deal with a wide class of things such that it would be considered part of circulating capital (working capital) or related to a specific thing and part of fixed capital? 09 June

6 The Three Considerations (cont.) 2. Recurring Nature of Expense Is the expense made once and for all? 3. Enduring Nature of Expense Is the expense made with the view to bring into existence of an advance or enduring nature? 09 June

7 Income vs. Capital The New(er) Common Sense Approach? Revisiting Canderel The Canderel v. R., [1998] 2 C.T.C. 35 (S.C.C.) general principles are: The goal is to capture an accurate picture of profit for the year A taxpayer is free to adopt any method of calculating its income for tax purposes as long as such method provides an accurate picture of income for the year and is consistent with the Income Tax Act (Canada), case law and well-accepted business principles Accurate picture for tax purposes may be different than for accounting purposes Well-accepted business principles, such as GAAP, do not define the tax treatment to be afforded the expenditure as such business principles are merely interpretive aids Where the taxpayer employs a method that meets the above criteria, has the onus of proving that a different approach provides a more accurate picture 09 June

8 Income vs. Capital The Role of Accounting in the New Approach For accounting purposes, the matching principle may apply cost not linked to revenues may generally be added to the capital cost of the asset and depreciated over the life of the asset full cost accounting for oil and gas enterprises may require certain costs to be capitalized, including G&A costs For tax purposes, cost not linked to revenues can still be current expenses. Costs not directly linked to future revenues will be currently deducted if this provides a truer picture CRA accepts that running expenses are an exception to the matching principle and may be deducted in the year they are incurred (IT-417R2, para. 4) 09 June

9 Rethinking Income vs. Capital Conclusion Income vs. Capital Only one principle applies now: What reflects the accurate picture of profits in the taxpayer s view applying the Act, case law and choice of well-accepted business principles? Common sense must prevail over any one factor Taxpayer s choice of alternate well-accepted business practice methods should be respected, unless CRA can prove a more accurate picture of profits 09 June

10 Tangible vs. Intangible CCA vs. ECE Refresher ECE is defined in subsection 14(5) of the Income Tax Act (Canada) to include capital expenditures that do not fall into one of the exceptions One of the principal exceptions is the tangible property exception, which provides that an expenditure that forms part of the cost to tangible property can never be ECE What is a tangible property and what is intangible property? 09 June

11 Tangible vs. Intangible Paper Map? 09 June

12 Tangible vs. Intangible A DVD containing the map 09 June

13 Tangible vs. Intangible Electronic Form Map? 09 June

14 Tangible vs. Intangible CRA s View CRA has historically taken the position (in a GST context) that suggests that medium of delivery of electronic data is determinative as to whether the property delivered is tangible or intangible Technical Bulletin B- 037R, B GST/HST and Electronic Commerce, and P Tax Treatment of Imported Computer Software. 09 June

15 Tangible vs. Intangible Time for a Policy Update Committee Reports , it is time (or was time in 1998) for the CRA and the Department of Finance to examine the appropriateness of various sections of the Act so that payments for the use of electronic subscriptions, and similar transactions do not receive different tax treatment where those transactions are treated as the equivalent to the purchase of tangible goods. 09 June

16 Tangible vs. Intangible The Tax Profession s View Comments from the Profession in P-150 Client s approach and GAAP OECD Discussion on Intangibles July 30, June

17 Tangible vs. Intangible Helpful Definitions Tangible property defined (Schacter): property having a physical existence The Dictionary of Canadian Law, Fourth Edition property that has physical form and characteristics Black s Law Dictionary, Ninth Edition Perceptible to the senses; corporeal, as tangible property; opposed to incorporeal property such as franchises Funk & Wagnall s New Standard Dictionary of English Language (1961) Intangible property defined: property that lacks a physical existence. Examples include stock options and business goodwill Black s Law Dictionary, Ninth Edition 09 June

18 Tangible vs. Intangible Helpful Definitions Other helpful terms: tangible assets - All assets except the intangible assets such as goodwill, patents, copyrights, trademarks. Accounting Terminology, published in 1957 by the Canadian Institute of Chartered Accountants tangible personal property corporeal property of any kind; personal property that can be seen, weighed, measured, felt, or touched, or is in any other way perceptible to the senses, such as furniture, cooking utensils and books. Black s Law Dictionary, Ninth Edition 09 June

19 Tangible vs. Intangible Helpful Definitions Other helpful terms (continued): corporeal property - Such as affects the senses, and may be seen and handled by the body, as opposed to incorporeal property, which cannot be seen or handled, and exists only in contemplation. Thus a house is corporeal, but the annual rent payable for its occupation is incorporeal. Corporeal property is, if movable, capable of manual transfer; if immovable, possession of it may be delivered up. But incorporeal property cannot be so transferred, but some other means must be adopted for its transfer, of which the most usual is an instrument in writing. Black s Law Dictionary, Online Legal Dictionary 2 nd Ed. 09 June

20 Tangible vs. Intangible Definitions Summarized Tangible/Corporeal perceptible to the senses Intangible/Incorporeal legal fictions 09 June

21 Tangible vs. Intangible Source Code? 09 June

22 Tangible vs. Intangible Support from Copyright Law The principle of technological neutrality. In Re Public Performance of Musical Works, 2012 SCC 34, the Supreme Court explained the irrelevance of the medium of communication, stating at paragraphs 4 and 5 that: 4 a download is merely an additional, more efficient way to delivery copies of the games to customers. The downloaded copy is identical to copies purchased in stores or shipped to customers by mail 5 a separate, communication tariff applied to downloads of musical works violates the principle of technological neutrality, which requires that the Copyright Act apply equally between traditional and more technologically advanced forms of the same media; In our view, there is no practical difference between buying a durable copy of the work in a store, receiving a copy in the mail, or downloading an identical copy using the Internet. The Internet is simply a technological taxi that delivers a durable copy of the same work to the end user. 09 June

23 Tangible vs. Intangible Support from Copyright Law The Copyright Act (Canada) Meaning of the term copyright Requirements to be copyrightable: (1) original, (2) fixed, and (3) appropriately connected to Canada. The work must be fixed in a material form 09 June

24 Tangible vs. Intangible Support from Copyright Law What is copyrightable? Songs Novels Plays Magazine Articles Computer Programs What isn t copyrightable? The title for a song The idea for a plot A method of staging a play Facts in an article The name of a computer program 09 June

25 Current vs. Capital, Tangible vs. Intangible; Revisited and Retooled Conclusion 09 June

26 Questions or Comments Jehad Haymour S. Sebastian Elawny June