Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether the preparation of clinical trials material in the context of a global SR&ED project is deductible under subsections 37(1) or (2).
Position: No.
Reasons: Since CTM preparation has been determined not to be SR&ED, expenditures in respect thereof cannot qualify for a deduction under subsections 37(1) and (2) of the Act. In this regard, it is our view that neither paragraph 37(8)(a) of the Act nor subsection 2900(2) of the Income Tax Regulations can be used to convert such expenditures into amounts deductible under subsections 37(1) or (2).
October 29, 2002
Mel Machado HEADQUARTERS Financial Legislative Application Section James Gibbons SR&ED Directorate 957-2135
2002-015534
Clinical Trials Material (CTM)
We are replying to your memorandum dated August 1, 2002 (and our discussions on September 25), concerning the deductibility of expenditures incurred for the preparation of CTM under subsection 37(1) or (2) of the Income Tax Act (the "Act"). As we understand them, the salient facts are as follows:
A Canadian corporation (Canco) is part of a multinational SR&ED effort to develop new drugs. Drug development includes:
(i) pharmaceutical research and development ("PRD") - the development of experimental formulations and related processes to a final dosage form, i.e., tablet, capsule, etc.;
(ii) CTM preparation - experimental dosage forms that are prepared have their packaging developed, and are packaged and labeled for study in clinical trials; and
(iii) Clinical trials - an in vivo study in humans of a treatment, such as the active pharmaceutical ingredient in dosage form.
While the PRD may be done inside or outside Canada, the preparation of CTM is done entirely in Canada by Canco and the clinical trials are undertaken outside of Canada by another corporation ("Foreignco"). Although part of Canco's work may be considered SR&ED, the CTM preparation has been determined not to be SR&ED under the definition of this term in subsection 248(1) of the Act. However, you have asked us to assume that feedback from clinical trials is integral to Canco's SR&ED work. (We note that, initially, we were asked to assume that CTM preparation was SR&ED under paragraph (c) of the definition of this term.) Further, you have asked us to assume that the clinical trials undertaken outside Canada is SR&ED under paragraph (b) of the definition of SR&ED (i.e., applied research). In this regard, it was also stated that the clinical trials are not testing within the meaning of paragraph (d) of the definition of SR&ED.
Our Views
Since CTM preparation has been determined not to be SR&ED, expenditures in respect thereof cannot qualify for a deduction under subsections 37(1) and (2) of the Act. In this regard, it is our view that neither paragraph 37(8)(a) of the Act nor subsection 2900(2) of the Income Tax Regulations can be used to convert such expenditures into amounts deductible under subsections 37(1) or (2). In our view, these latter provisions provide a framework for demarcating SR&ED expenditures from ordinary expenditures when resources are being shared between an SR&ED activity and an ordinary business activity. If the expenditures related to CTM preparation are not in respect of SR&ED, there is no need to analyze the expenditures further - they simply do not qualify for a deduction under subsection 37(1) or (2). We do not accept the argument that, because the preparation of CTM is part of a global multinational SR&ED project, the expenditures related thereto qualify under these provisions.
We trust that our comments are of some assistance. If you have any further questions or concerns, please do not hesitate to contact us.
Daryl Boychuk
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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