Principal Issues: [TaxInterpretations translation] Are administrative support expenditures incurred by a parent corporation that relate to the SR&ED activities of the subsidiary an expenditure described in paragraph 37(1)(a) of the Act of the parent corporation?
Position: The expenditures are not related to the parent's SR&ED, if such SR&ED exists. Subsection 37(13) does not apply to the situation, so the administrative support tasks are not deemed to be SR&ED of the parent.
Reasons: The administrative support work related to the subsidiary's activities is not SR&ED as defined in subsection 248(1) to either the parent or the subsidiary. Consequently, the condition in paragraph 37(13)(b) is not satisfied.
XXXXXXXXXX 2004-006381
Sylvie Labarre, CA
July 30, 2004
Dear Sir,
Subject: Scientific research and experimental development
This is in response to your letter of February 13, 2004, requesting our opinion on the qualification of certain expenditures as scientific research and experimental development (SR&ED). We apologize for the delay in responding to this request.
A subsidiary carries out SR&ED work on its own behalf and on behalf of its parent. For the purpose of calculating its qualified SR&ED expenditures for investment tax credit purposes, the subsidiary uses the proxy method under clause 37(8)(a)(ii)(B) of the Income Tax Act (the "Act"). Employees of the parent company perform administrative support tasks that are directly related to the SR&ED performed by the subsidiary.
You wish to know if the parent corporation can deduct, pursuant to paragraph 37(1)(a), the administrative support expenditures it incurred in respect of the subsidiary's SR&ED using the traditional method provided under clause 37(8)(a)(ii)(A).
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
You indicated that the subsidiary performs SR&ED on its own behalf and on behalf of its parent. You seem to be indicating that the parent company incurs administrative support expenditures in relation to the subsidiary's SR&ED work that is separate from the parent corporation's own SR&ED work (if any).
Paragraph 37(1)(a) provides a deduction in computing a taxpayer's income in respect of expenditures of a current nature made by the taxpayer for, inter alia, SR&ED undertaken directly in Canada by the taxpayer or directly on the taxpayer's behalf that is related to a business carried on in Canada by the taxpayer.
Administrative support functions performed by a taxpayer are not, in and of themselves, an activity listed in the definition of "scientific research and experimental development" in subsection 248(1). In order to deduct expenditures for those tasks pursuant to subsection 37(1), a taxpayer must first determine whether the taxpayer is engaged in SR&ED as defined in subsection 248(1) and whether the SR&ED is related to the taxpayer's business. If this is the case, it is necessary to determine whether the expenditures incurred by the taxpayer in respect of the SR&ED are expenditures on or in respect of SR&ED as defined in paragraph 37(8)(a).
For purposes of determining whether an expenditure is an expenditure on or in respect of SR&ED under paragraph 37(8)(a), a taxpayer may use the traditional method under clause 37(8)(a)(ii)(A) or elect to use the proxy method under clause 37(8)(a)(ii)(B). The choice of the proxy method has an impact, inter alia, on the calculation of qualified expenditures for the purposes of the investment tax credit. In our view, a taxpayer may use the traditional method provided for in clause 37(8)(a)(ii)(A) even if another taxpayer, related to the taxpayer, elects to use the alternative method provided for in clause 37(8)(a)(ii)(B). It should be noted that expenses related to administrative support are generally not included in the expenses described in clause 37(8)(a)(ii)(B) of the Act (proxy method), whereas they could possibly be included, depending on the facts of a particular situation, in those described in clause 37(8)(a)(ii)(A) (traditional method).
On the other hand, even if tasks are not SR&ED of a taxpayer, they may qualify as SR&ED of the taxpayer pursuant to subsection 37(13) if the taxpayer performs those tasks for a person or partnership, at a time when they are not dealing with each other at arm's length, as long as those tasks would be SR&ED if they were performed by the person or partnership. For example, administrative support tasks in respect of the activities of a subsidiary of a taxpayer would not be considered to be SR&ED of the taxpayer because the condition in paragraph 37(13)(b) is not satisfied since the administrative support tasks would not be SR&ED of the subsidiary (as defined in subsection 248(1)) if they were performed by the subsidiary.
In the situation presented, the administrative support expenditures related to the subsidiary's operations would not be SR&ED expenditures under subsection 37(1) of the parent. With respect to the administrative support expenditures related to the parent's own operations, we do not have sufficient facts to determine whether these expenditures would be deductible pursuant to paragraph 37(1)(a).
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch