1992 Corporate Management Tax Conference
INTEREST EXPENSE AS QUALIFIED EXPENDITURE
Question 10
Has the Department changed its policy in allowing interest expense as a "qualified expenditure" pursuant to subsection 127(9) for investment tax credit ("ITC") purposes in those situations where money is borrowed to fund both scientific research and experimental development ("SR&ED") and other activities?
Department's Position
The Department has not changed its position in this matter. To be eligible for the ITC, a "qualified expenditure", as defined under subsection 127(9), must first satisfy all of the requirements for deductibility under subsection 37(1) and secondly, among other things, cannot be a prescribed expenditure.
For the purposes of the qualified expenditure definition, section 2902 of the Income Tax Regulations provides that interest is a prescribed expenditure. Accordingly, interest expense generally would not earn ITC.
The section provides an exception whereby interest expense incurred by a taxpayer that derives all or substantially all of its revenue from the prosecution of SR&ED or from the sale of rights in or arising out of SR&ED carried on by the taxpayer would not be a prescribed expenditure. This would have the effect of allowing interest expense incurred by such a taxpayer to earn ITC, but only to the extent that the borrowed funds were used to make SR&ED expenditures which are otherwise deductible under subsection 37(1).
Prepared by: Frank FontaineJune 11, 1992