I’m trying to figure out the tax treatment of software and applications a business uses in its operations.
I have read the category on the T2125 is Office Stationery and Supplies (Line 8811) for programs such as Adobe, Google Workspace, Zoom, Hootsuite, Buffer, Later, or any other subscription-based software required by many businesses (monthly/yearly subscription).
Additionally, I have read to use Class 12 for Computer application software (not systems software), including end-user applications such as word processors, spreadsheets, etc. Examples include Microsoft Office and Adobe Photoshop. The half-year rule applies.
What I’m gathering is software that is on monthly or a yearly based subscription may be expensed in Office Stationery and Supplies whereas the more long term computer software such as Mircosoft office or software that provides a license allowing more than one year of use is capitalized in class 12 and the 1/2 rule applies.
May anyone provide their thoughts?
Licensing fees. Expensed annually or amortized for the duration of the subscription if the duration is beyond one year.
So on the T2125, you would enter the expense in Business taxes, licences and memberships line 8760?
Suggest, multi-year subscriptions paid at enrollment are not capitalized, but treated as a pre-paid expense. Expense the actual portion of the license consumed in that year or period and carry forward the balance to the future years until the pre-payment is exhausted.
Technically, you don’t have title to the asset, just renting it, so it is not capital in nature.
Class 12 definition only applies if you are purchasing a perpetual license that does not expiry. That was how many Microsoft products were previously sold until the move to subscription based engagements.
Gregory Marko PEng, MBA, CPA CMA
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I’ve been depreciating these types of software as Class 12 using AIIP, meaning no 1/2 year rule and the entire amounts gets claimed in the tax year.
I understand what you are suggesting, that we don’t own these assets, and it makes sense, so I’ll change this practice going forward. I appreciate your reply. Thank you.