If there was ever a best-seller list of tax books (as if!), surely the Income Tax Act would occupy the top spot, what with thousands of tax practitioners forking over nearly $100 semi-annually to ensure they have the latest edition of this constantly evolving 2,500-plus page tome.
However, the Act was of little use to the Canada Revenue Agency when it was asked this past spring to consider a seemingly simple question: When is a book a book?
This question was posed to the CRA by a taxpayer who operated an audio-book rental business. Under the Tax Act, each business asset typically falls into a class known as a "capital cost allowance," which determines the rate of depreciation at which the asset may be expensed each year against the business's income. The longer the useful life of an asset, the lower the rate of depreciation and vice versa.
The taxpayer wanted to know if the value of the stock of audio books he purchased could be included as a capital cost allowance. Class 12 of the allowance list includes "a book that is part of a lending library" and permits a 100% tax write-off in the year of acquisition.
But is an audio book actually a book?
There being no formal definition of a book in the Tax Act, the CRA turned to several dictionary definitions.
The New Webster Encyclopedic Dictionary of the English Language (1980) defines a book as "a number of sheets of paper or other material folded, stitched and bound together on edge, blank, written, or printed."
The Canadian Oxford Dictionary (2004) defines an audio book as "the reading or recording of a book on cassette tape or CD." Using this and other definitions, the CRA concluded that an audio book on CD was not a book and therefore fell into the general Class 8 asset pool, which only permits a 20% annual depreciation.
This seems like a harsh result, especially considering the state that an audio book is in after being loaned out for long periods of time to multiple users.
The owner stated that customers often kept the audio book for approximately one month. Perhaps the rental duration may also have been a source of concern to the CRA, as Class 12 (the 100% write-off class) does include library books and video cassettes or DVDs purchased for renting out to customers -- if they are "not expected to be rented to any one person for more than seven days in a 30-day period."