Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
February 17, 1994
Audit Programs Division Rulings Directorate J. P. Lavigne, Director Benoit Mandeville 957-8953 Attention: Mara Praulins Acting Chief Specialized Audit Programs
7-940274
Mississauga RCT/Tax Practitioners Group Meeting
This is in reply to your memorandum dated February 2, 1994, in which you asked us to answer questions #5 and #8 with respect to the above-noted meeting. You also asked for our opinion with respect to the answers you are proposing to give to question #9 and #13.
You will find enclosed, our answers to both questions #5 and #8.
We are in agreement with the wording of your proposed response to question #9.
As for your response to question #13, we are in agreement with your answer. However, you may wish to consider adding to your answer the two following comments:
1)That interest expenses are considered by the Department to be current expenses for the purpose of section 37 and subsections 127(5) and 127(9) of the Act (see paragraph 15 of IT-151R4) although interest expenses may be considered, under other provisions of the Act, to be on account of capital;
2)That the interest expenses deductible by a taxpayer under subsection 37(1) of the Act would give rise to an ITC only if the taxpayer is a corporation that derives all or substantially all of its revenue from the prosecution of scientific research or the sale of rights in or arising out of scientific research carried on by it. If the taxpayer is not such a corporation, the interest expenses would be "prescribed expenditures", and therefore would not be considered as "qualified expenditures" for the purpose of the ITC, by virtue of paragraph 2902(a) of the Regulations.
Acting Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
Enclosure
MISSISSAUGA RCT/TAX
PRACTITIONERS GROUP MEETING
QUESTION 5
Several technical interpretations have been reproduced or paraphrased in tax research services such as "Access to Canadian Income Tax" by Butterworths. In discussions, particularly with respect to contract payments between a foreign company and a related Canadian company, reference has been made to a Canadian company acting as an "agent" for the foreign company being a factor in the eligibility of research expenditures for Canadian tax incentives. In one such technical interpretation, the following statement was cited: "The Division also agreed that, where a Canadian taxpayer incurs a SR&ED expenditure merely as an agent on behalf of a non-resident person, no deduction would be available to the taxpayer under subsection 37(1) and he would not be entitled to any ITC in respect of it".
The term "agent" is not used in IT-151R4. Would the Department expand upon what they mean by this phraseology in this context?
Department's answer
Where a taxpayer is acting as agent for another person with respect to the prosecution of SR&ED, that other person would have ownership rights to the SR&ED and would be considered to have incurred the SR&ED expenditure made by the taxpayer. As stated in the Department's answer to Round Table question #2 of the Canadian Tax Foundation's 1993 Annual Tax Conference, in any given situation, it is a question of fact whether SR&ED carried out by a taxpayer on behalf of another person is performed by the taxpayer as agent for the other person, the determination of which would depend on the terms of the particular arrangement.
QUESTION 8
In some cases, multinational groups conduct their SR&ED programs on an international basis such that each particular corporation in the group is responsible for performing that part of the SR&ED for which they have expertise. SR&ED may also be shared across borders to meet international testing standards.
Where a corporation resident in Canada participates in an international SR&ED program and the activities otherwise qualify as SR&ED qualifying activities, what is Revenue Canada's position with respect to entitlement to Canadian investment tax credits?
Department's answer
Provided the expenditures of the Canadian corporation are "qualified expenditures", as defined in subsection 127(9) of the Act, the cost sharing arrangement is a bona fide arrangement and the Canadian corporation is not acting as agent for another person, the Canadian corporation will be entitled to an Investment Tax Credit (ITC) with respect to the expenditures. However, a "contract payment" or a "non-government assistance", as defined in subsection 127(9), that the Canadian corporation has received, is entitled to receive or can reasonably be expected to receive with respect to the expenditures would reduce its entitlement to an ITC by virtue of paragraph 127(11.1)(c).
Contract payment
For the purpose of the ITC, payments made by a non-resident who is not carrying on a business in Canada would not be "contract payments" to the Canadian corporation. However, a "contract payment" would include an amount payable by a non-resident person if that person is entitled to deduct that amount under clause 37(1)(a)(ii)(D) in computing Part I tax.
Non-government assistance
Whether an amount would be considered a "non-government assistance" for the Canadian corporation would depend on whether the amount must be included in its income by virtue of paragraph 12(1)(x) if that paragraph were read without reference to subparagraphs (vi) and (vii) thereof.
A payment made by a person to the Canadian corporation as reimbursement of the expenditures or part thereof, would not be considered a "non-government assistance" by the Department if the Canadian corporation includes the amount received as income under subsection 9(1) in computing its income from a business carried on in Canada and it is in conformity with generally accepted accounting principles. Subparagraph 12(1)(x)(v) provides that paragraph 12(1)(x) will not apply to an amount that was otherwise included in computing a taxpayer's income for the year or a preceding taxation year under some other provision, such as subsection 9(1).
However, if the amount paid must be included in the Canadian corporation's income by virtue of paragraph 12(1)(x), if that paragraph were read without reference to subparagraphs (vi) and (vii) thereof, the payment would be a "non-government assistance" and would reduce the basis on which the Canadian corporation is entitled to claim an ITC.