Page 1 of 5
Source:
CCH Tax/Federal Income Tax/News Tracker/Past News/Tax Window/Tax Window Files/2005-0163331I7
CCA OF PRINTERS (1) What is the proper CCA class for the small multi-functional printers described below?
(2) What is the proper CCA class for the large multi-functional printers described below?
LANGIND E
DOCNUM 2005-0163331I7
REFDATE 070510
SUBJECT CCA of printers
SECTION 20(1)(a)
SECTION Regulation 1104(2)
SECTION class 10
SECTION class 45
Please note that the following document, although believed to be
correct at the time of issue, may not represent the current position
of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas
représenter la position actuelle de l'ARC.
PRINCIPAL ISSUES: (1) What is the proper CCA class for the small
multi-functional printers described below? (2) What is the proper CCA
class for the large multi-functional printers described below?
POSITION: (1) Generally, class 45. (2) Generally class
REASONS: (1) Each small printer is likely "ancillary data
processing equipment". (2) Generally, large printers are not computers
but printers and/or special-purpose equipment.
XXXXXXXXXX
Large File Case Division
XXXXXXXXXX Tax Services TSO
Shelley Lewis
2005-016333
May 10, 2007
Dear XXXXXXXXXX :
Re: Technical Interpretation: Multi-Functional Printers
We are writing in response to your correspondence dated December 2,
2005, wherein you inquired in to which class various multi-functional
printers fall. This response also reflects our subsequent
conversations and those with the taxpayer's representative. We
apologize for the delay in responding.
Hereinafter all references to classes are references to Schedule II of
the Income Tax Regulations (the "Regulations").
Facts
A taxpayer is a lessor that leases multi-functional printers and
publishing equipment. The multi-functional printers have a range of
functions and are connected through a LAN or a modem system.
Originally these assets were treated by the taxpayer as class 8;
however, the taxpayer now wishes to reclassify the equipment as class
45. At issue is whether the printers fall into class 45 or class 8.
The smaller multi-functional printers cost about $3000- $10,000 and
are generally leased by small and medium businesses. These printers
http://www.cchonline.ca/printorsave/htmfetch.asp?d=rad2C2C0
13/07/2007
Page 2 of 5
are usually connected by the lessor's client through a LAN system.
Their capabilities include faxing, photocopying, scanning and
printing.
The medium multi-functional printers cost in excess of $10,000 and are
generally used in printing low volume presentation documents in
addition to being used as a photocopier, and as a fax machine. The
manufacturer provides a five-year warranty on both the medium
multi-functional printers and the larger units discussed below. The
larger units cost in excess of $100,000 and are generally used in
print shops and larger businesses. Each larger unit includes its own
CPU that controls the operation of the unit and is usually interfaced
through another computer through a LAN and/or modem system. One
example of such larger units is the XXXXXXXXXX .
XXXXXXXXXX
The Taxpayer's Position
The taxpayer submits that all the printers fall under class 45. In
particular, the small and medium printers are "ancillary data
processing equipment" (i.e., ancillary to general purpose electronic
data processing equipment) and the medium and large printers can be
classified as "general-purpose electronic data processing equipment,"
as defined in subsection 1104(2) of the Regulations. The taxpayer
relies on the definition of general-purpose electronic data processing
equipment and the Tax Court decision of Garon J. in Funtronix
Amusement Ltd. v. M.N.R. 89 DTC 545.
The Tax Services Office's Opinion
It is your opinion that the small printers are likely ancillary data
processing equipment because they are principally used as printers and
are usually connected to a computer through a LAN system. The medium
printers should be classified as ancillary data processing equipment
to the extent that they are used in a similar manner as the small
printers. To the extent that they are not so used, they will fall
into the same class as the larger printers discussed below.
It is your opinion that the larger printers should remain in class
8(i) as tangible capital property because they do not or will not be
used for a "general" purpose but are actually publishing equipment.
Although the larger units each include its own CPU that may interface
through another computer, they should not be included in class 45
because they are stand-alone, special-purpose equipment.
Our Comments
We agree with your opinion and for similar reasons that the small
printers would fall into class 45. These printers are attached to and
used as part of a LAN and so they are considered ancillary to
general-purpose electronic data processing equipment. The medium
sized printers would fall into class 45 as ancillary data processing
equipment to the extent that they are used in a similar fashion as the
small printers. To the extent that the medium sized printers are not
ancillary data processing equipment it is our view that they would not
qualify as general-purposes electronic data processing equipment for
reasons not dissimilar to those for large printers, as discussed
below.
Although the issue is not free from doubt, and there are arguments on
both sides, we share your view that the better interpretation is that
large printers should be included in class 8.
http://www.cchonline.ca/printorsave/htmfetch.asp?d=rad2C2C0
13/07/2007
Page 3 of 5
Legislation
Schedule II of the Regulations provides the various classes for
depreciable capital property and the applicable rates of capital cost
allowance ("CCA"). In particular, paragraph (i) in class 8 includes
all tangible capital property that is not found in any other class.
Class 45 includes general-purpose electronic data processing
equipment, systems software for that equipment, and ancillary data
processing equipment.
The definition of general-purpose electronic data processing equipment
that is found in subsection 1104(2) of the Regulations states:
"general-purpose electronic data processing equipment" means
electronic equipment that, in its operation, requires an internally
stored computer program that
(a) is executed by the equipment,
(b) can be altered by the user of the equipment,
(c) instructs the equipment to read and select, alter or store
data from an external medium such as a card, disk or tape, and
(d) depends upon the characteristics of the data being processed
to determine the sequence of its execution.
Neither the phrase ancillary data processing equipment nor the word
"ancillary" is defined in the Income Tax Act. Black's Law Dictionary
defines ancillary as "aiding, attendant upon, auxiliary or
subordinate". In previous interpretations equipment has been said to
be ancillary when it is necessarily auxiliary or subordinate to
general-purpose electronic data processing equipment. 1
Whether or not the multi-functional printer is ancillary data
processing equipment, if the printer falls into an exception in
paragraph (a) - (d) of class 45 it will be excluded from the
definition of general-purpose electronic data processing equipment and
thus be classified as class 8 depreciable property. However, it is
our view that based on the capabilities and intended use of the
printers they will generally not fall into any of the above-mentioned
exclusions.
Jurisprudence
As noted by the taxpayer, the application of this definition of
general-purpose electronic data processing equipment, has been subject
to judicial interpretation in the Tax Court of Canada decision of
Funtronix Amusement Ltd. v. M.N.R. 89 DTC 545. In Funtronix Justice
Garon held that a coin-operated electronic video game machine had all
the qualities found in the definition of general-purpose electronic
data processing equipment and should be included in class 10.
When Justice Garon determined that the internally stored computer
program could be altered by the user of the equipment, he noted that
the ability to alter the computer was an important use of the
equipment by its user (owner) and was directly related to the user's
ability to earn revenue from the equipment.
Analysis
In The Queen v. Canada Trustco Mortgage Company, [2005] 2 S.C.R. 601,
the Supreme Court of Canada reviewed the principles of statutory
interpretation. In doing so, the Court reiterated, "all statutes,
including the Act, must be interpreted in a textual, contextual and
http://www.cchonline.ca/printorsave/htmfetch.asp?d=rad2C2C0
13/07/2007
Page 4 of 5
purposive way." In determining which is the proper class for a
particular type of equipment, it is appropriate and necessary to look
at the context and purpose of the CCA provisions as a whole as well as
the context and purpose of the specific provision. The Context and
Purpose of the CCA provisions
The purpose of the CCA provisions was described by Justice Bowie in
the following manner:
The purpose of capital cost allowance is to reflect in the computation
of profit the diminution in value from year to year of the capital
assets used in the business. The rates of capital cost allowance which
may be charged are fixed by Regulation, and they appropriate the rates
at which various capital assets are consumed. 2
The Department of Finance has recognized that computers, and equipment
that is ancillary to computers, rapidly depreciate and has placed such
equipment in a class that reflects that rapid depreciation. Class 45
currently allows for 45% write-off per year, while the proposed
amendments call for a 55% write-off per year. 3 With this proposed
amendment approximately 85% of the value of the asset will be
written-off within three years. 4 Such equipment's value is usually
largely related to its computerized components, as was the case with
the electronic video game machine in Funtronix.
Equipment that contains a computer or computer chip, but the bulk of
the value is in the physical machinery as opposed to the electronics,
is generally expected to last longer and retain its value longer than
computers, and in our view should not fall within class 45. It
appears to be illogical to classify equipment solely based on the
existence of a small computer or computer chip that has little or no
relation to the value or life of the asset. Moreover, it would be
contrary to the intent of the CCA provisions as a whole to allow a
taxpayer to write-off substantially all of the cost of the asset
long-before the asset is consumed and, as in the case of the
XXXXXXXXXX , while the manufacturer's warranty is still in effect.
The better approach in classifying equipment is to look at where the
value of the equipment lies. This is reflected in an analysis of what
the equipment does as well as its component parts.
In the analysis of the context of the CCA provisions, it should be
noted that the Department of Finance has considered the fact that
certain class 8 assets may depreciate faster than the rate ascribed to
that class and have allowed for increased write-offs. In subsection
1101(5p) of the Regulations there is the opt-out provision for certain
quickly-depreciating class 8 assets. The inclusion of this provision
further reflects the intent that legislature attempts to match the
life of the asset with the rate at which it can be depreciated and
indicates that class 8 treatment of equipment, such as the large
multi-functional printers, is not obviously unintended.
The Context and Purpose of the Definition of general-purpose
electronic processing equipment
Under a contextual, textual and purposive interpretation it is
necessary to look not only at the words of the definition of
general-purpose electronic processing equipment but also at the
context and intent of the definition. The word "general-purpose"
reflects both the context and intent of the definition and must be
considered when determining whether a certain type of equipment falls
within the definition of general-purpose electronic data processing
equipment. As such, despite the fact that some equipment might have
the characteristics of a computer, if the particular equipment is
special-purpose equipment, (as opposed to general-purpose equipment)
it would fall outside the definition. This position and method of
analysis is consistent with Rulings' previous interpretation of a
http://www.cchonline.ca/printorsave/htmfetch.asp?d=rad2C2C0
13/07/2007
Page 5 of 5
similar type of equipment in Rulings' document 912310. Further, in our
informal discussions with the Department of Finance, it was determined
that this position, regarding the classification of printers, is not
inconsistent with tax policy.
Although our classification of these large multi-functional printers
takes into account a contextual, textual and purposive interpretation,
it is also not wholly inconsistent from Justice Garon's decision in
Funtronix; for the decision is clearly distinguishable from the
present scenario. In Funtronix the value of the video game was linked
to, and dependent upon, the electronics within the video game. The end
product of the machine was the electronic signals and pictures and
sounds that they created. As noted by Justice Garon, in order to
maintain consistent revenue from the machine it was necessary to alter
the programs from time to time. This is in stark contrast with the
printers at issue. For the value of the printer is not primarily in
its electronics but in its mechanical assets - namely the components
that allow the machine to produce a large number of identical copies
of inked paper. In addition, the revenue stream of the taxpayer, and
the use of the asset by the taxpayer is not wholly dependant or even
significantly dependant on the alteration of any program within the
equipment. The program, or computer is essentially ancillary to the
printer.
We trust these comments are of assistance.
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 For example, in document 2005-0112331, a printer that was connected
to a computer was determined to qualify as ancillary data processing
equipment and in document 9713677 tape drives and disc drives were
also held to qualify as ancillary data processing equipment.
2 In Duncan v. Canada, [2001] TCJ No. 8, Bowie J's analysis is
supported by various Budget speeches, including 1964 and 2007.
3 Budget Plan, Annex 5 (Budget 2007).
4 This includes the application of the half-year rule in subsection
1100(2) of the Regulations.
http://www.cchonline.ca/printorsave/htmfetch.asp?d=rad2C2C0
13/07/2007