Question 35
What is the meaning of the phrase "related to the business" as used in section 37? Does section 37 permit the "flow through" of deductions for expenditures on scientific research and experimental development to limited partners in a partnership which carries on a research business?
Department's Position
The comments in paragraph 5 of Interpretation Bulletin IT-l51R3, other than those in the fifth and sixth sentences which apply to wording in paragraph 37(7)(d) of the Act as it formerly read, still represent the Department's position on the meaning of the phrase "related to the business. In addition, notwithstanding paragraph 37(7)(e) of the Act, subsection 37(1.1) of the Act provides an exception for scientific research and experimental development ("SR & ED") performed by a related corporation. The determination of a taxpayer's business is crucial in the determination of the deductibility of SR & ED expenditures and the comments in paragraph 4 of IT-151R3 are still applicable in this regard.
The second question was answered in the Revenue Canada Round Table Q. 38 on page 45:22 in the 1989 Conference Report of the Canadian Tax Foundation as follows:
No.
Expenditures on scientific research and experimental development incurred by a partnership must be claimed by the partnership, as noted in paragraph 96(1)(e.1). One should also note that paragraph 96(1)(g) excludes the partnership's section 37 deductions from the amount of loss allocated to the limited partners.
Canadian Tax Foundation - B.C. ConferenceSeptember 1991C. BowenSection 22CCM # 912406