By: Anne L. Coulombe &
Lynn Reston
August, 1998

The sense or urgency in dealing with the Y2K problem (Year 2000 computer compliance) will effect most of us to some extent. What would you do if the local electrical substation shut down? What if your greenhouse boilers suddenly think they haven’t been maintained in 99 years? What if your phones stop working? What if the aging of your accounts receivable suddenly adds 100 years? What if your cash register no longer opens? What if we are worrying for no reason?

As a reminder, the Y2K issue is based on the use of only two digits to represent the year in computer systems, hence the year 1900 and the year 2000 may appear as the same date, as well as any mathematical formulas based on date may not work any longer. Embedded systems are everywhere from the digital alarm-clock to automated controls, from your bread-maker to the computer chip in your car!

Should you worry?

We believe you should worry as non-compliant businesses or service partners may directly affect your ability to carry on business. We also believe you should worry, as many of the Y2K problems will arise in areas of your life that most of us have not even thought of yet. On the other hand, the personal computer and other embedded systems non-compliance issues can be handled at many levels, including upgrading your computer hardware!

As an example, most 486 PC’s and early Pentium PC’s are not hardware compliant. PC BIOS upgrades are available, however you may choose to simply purchase a new Pentium class PC that is compliant. The first truly compliant operation systems for the PC are Windows NT v5.0 and Windows ’98 that unfortunately is still undergoing a stabilization period in the market (it is being debugged, which means there will be a maintenance release soon). UNIX version 7.0 for those who are interested, is considered Y2K compliant.

What to do?

For computer hardware and software, there are many shareware utilities available via the Internet that can test your PC and print a report on Y2K compliancy. Many industry professionals offer Y2K assessments as well. We would also suggest that you list all the systems that may effect your business and ask the vendors about their compliancy. This list should extend to all systems in your business that may contain a computer chip.

Once you discover non-compliant systems in your business, you may chose to purchase new equipment. The Federal Government is providing tax breaks for small to medium sized businesses per the following description.

In a previous article we indicated that the government had announced a tax break for small to medium-sized business to help them address the Y2K computer compliance problem. The following provides more detail as to the extra write-offs available:

1. Current Expenditures

Expenditures on computer chips and "firmware" (software that is imbedded in a computer chip) that are made only to ensure functionality in the year 2000 are fully deductible in the year incurred.

3. Capital Expenditures

In order to address the concern that some businesses may not be able to fix any year 2000 problems on a timely basis because of financial constraints, the government proposes to provide immediate tax relief by providing a write off of 100 % of the cost of computer hardware and software acquired to address the year 2000 problem. The write-off will be in the form of an accelerated capital cost allowance deduction (depreciation for tax purposes) that will be claimable in the year of acquisition.

For eligible computer hardware and systems software (Class 10 (f) assets for tax purposes) the accelerated deduction will be 85% of costs, which added to the normal 15% first year deduction, will result in a 100% write-off.

For eligible application software (Class 12 (o) assets for tax purposes) the accelerated deduction will be 50 % of cost which again, combined with the normal 50% first year deduction, will result in a 100% write-off.

In order to qualify for the accelerated write-off the computer hardware must be Y2K compliant and be purchased to replace non-compliant hardware or software that was purchased before 1998. In addition, the replacement equipment must be purchased between January 1, 1998 and June 30, 1999.

Class 10 (f) assets include general purpose electronic data processing equipment and systems software while Class 12 (o) assets include computer software other than systems software. Fax machines and other office equipment or machinery are not included in either of these paragraphs and are therefore not eligible for the accelerated allowance. Betterments to existing property included in either of those CCA classes are eligible for the accelerated allowance as long as the expenditure was made during the appropriate period to replace property with a material risk of malfunctioning in the year 2000.

An election is required to be filed in the "prescribed manner" in order to take the write off. Revenue Canada will accept an election supported by a letter which should be filed with the business tax return, which details the property being acquired, it’s cost and date of acquisition and a description of the property being replaced. The taxpayer must be able to substantiate the basis for the material risk of malfunctioning because of the change to the calendar year 2000.

The maximum additional deduction eligible is limited to $50,000 per corporation or partnership, and the $50,000 limit must be shared between members of an associated group. In addition, only unincorporated businesses and corporations with taxable capital of less than $10 million are eligible.