| 19(1) | File No. 5-8719 |
| D. Turner | |
| 613-957-2094 |
February 5, 1990
Dear Sirs:
Re: Application of paragraphs 12(1)(x) and 37(1)(d) of the Income Tax Act (the "Act")
We are writing in reply to your letter of September 13, 1989 concerning the interpretation of paragraphs 12(1)(x) and 37(1)(d) of the Act as they relate to non-government assistance. In addition, you requested our comments related to the timing of the inclusion of an amount under paragraph 37(1)(d) of the Act.
In your letter you present the following hypothetical situations:
1) A Canadian corporation ("Parent Co.") makes a payment of $50,000 to its wholly-owned subsidiary corporation ("Subco") which is resident in Canada. Parent Co. directs Subco to use the funds to make an expenditure of a capital nature on scientific research and experimental development ("SR & ED") carried on in Canada, directly undertaken by or on behalf of Subco, and related to a business of Subco so that all the requirements of subparagraph 37(1)(b)(i) of the Act are met. No other pertinent transactions occur. The payment is treated and recorded as a contribution of capital on the balance sheet of Subco. The funds are used by Subco for their intended purpose in the year of receipt.
2) A corporate taxpayer that has a taxation year ending on December 31, 1988 and files its income tax return by June 30, 1989, receives assistance on June 1, 1989 for expenditures described in paragraphs 37(1)(a) and (b) of the Act that have been or will be made in 1989.
You have expressed the following concerns related to the above hypothetical situations:
1) In situation (1) you express concern that the amount received from Parent Co. will be treated as "non-government assistance" and thus paragraph 37(1)(d) of the Act will cause Subco's SR & ED expenditures to be reduced by the amount of the payment. In addition, as the amount appears to meet the criteria in subparagraphs 12(1)(X)(I) and (iv) of the Act but not the exemptions in subparagraphs 12(1)(x)(v) to (viii) of the Act, the amount will also be included in Subco's income.
2) In situation (2) you express concern that a narrow interpretation of paragraph 37(1)(d) of the Act would require the assistance related to the 1989 expenditures to be included in income for 1988 due to the funds being received before the 1988 return is filed.
Our Comments
We offer the following comments concerning the above situations:
1) In our opinion, a technical argument exists that a reduction of an expenditure pool is not the equivalent of an expense reduction and that both paragraph 12(1)(x) and 37(1)(d) of the Act could operate to require an income inclusion and an expenditure pool reduction. However, given the unfavourable consequences of such an interpretation, the Department's policy is to interpret the provisions so that paragraphs 37(1)(c) and (d) of the Act will apply to the exclusion of subparagraphs 12(1)(x)(iii) and (iv) of the Act.
2) Paragraph 37(1)(d) of the Act makes reference to "non-government assistance ... in respect of an expenditure described in paragraph (a) or (b)", in both paragraph 37(1)(a) and (b) of the Act the expenditure must be one that is "made by the taxpayer in the year or in a preceding taxation year". As such, assistance received for expenditures to be made subsequent to the taxpayer's December 31, 1988 fiscal year-end would not be required to be added to the taxpayer's income for the 1988 year even if received prior to the June 30, 1989 filing deadline for the 1988 return of income.
We trust that our comments will be of assistance.
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch