| 920619 | |
| 24(1) | Marc Vanasse |
| (613) 957-8953 |
Attention: 19(1)
July 22, 1992
Dear Sirs:
Re: Scientific Research and Experimental Development ("SR & ED") Non-Government Assistance and Contract Payments
This is reply to your letter dated February 25, 1992 wherein you requested our opinion as to whether reimbursements made by a particular foreign entity in respect of SR & ED expenditures incurred by a Canadian corporation ("Canco") would be considered as non-government assistance or a contract payment for purposes of computing Canco's investment tax credit pursuant to paragraph 127(11.1) of the Income Tax Act (the "Act").
The particular circumstances outlined in your letter on which you have asked our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. We are therefore not in a position to give you a definitive response as to the nature of the particular reimbursement described in your letter. However, we can offer you the following general comments which may be of assistance.
CONTRACT PAYMENT
It is our opinion that if the foreign entity is not carrying on business in Canada, it is not entitled to a deduction under clause 37(1)(a)(ii)(D) of the Act in respect of the amounts paid to Canco. As such, the amount received by Canco from the foreign entity would not constitute a "contract payment" as this term is defined in subsection 127(9) of the Act.
NON-GOVERNMENT ASSISTANCE
Whether an amount would be considered as non-government assistance, as this term is defined in subsection 127(9) of the Act, would depend on whether the amount would be included in income by virtue of paragraph 12(1)(x) of the Act if that paragraph were read without reference to subparagraphs (vi) and (vii) thereof.
However, subparagraph 12(1)(x)(v) of the Act 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 of the Act, such as subsection 9(1) of the Act. Accordingly, where amounts are included in income by virtue of subsection 9(1) of the Act, pursuant to generally accepted accounting principles, they would not constitute "non-government assistance". Whether amounts paid by the foreign entity are, in fact, amounts which are otherwise required to be included in Canco's income is a question of fact and would depend on the actual structure of the arrangement.
To the extent, however, that the amounts are included in Canco's income by virtue of paragraph 12(1)(x) of the Act, as read without reference to subparagraphs (vi) and (vii) thereof, it is our view that such amounts would be non-government assistance as defined in subsection 127(9) of the Act.
The above comments are an expression of an opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for Acting Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch