901298
C.R. Bowen
(613) 957-2096Dear Sirs: Re: Scientific Research and Exnerimental Development ("SR & ED")
We are writing in reply to your letter of June 15, 1990, wherein you requested our comments on I) the deductibility of SR & ED expenses under paragraph 18(1) (a) of the Income Tax Act (the "Act") and 2) the availability of investment tax credit ("ITC") to a company performing SR & ED activities on behalf of another taxpayer.
Your Questions
1. Where a limited partnership carries on SR & ED activities
and chooses to deduct the expenses under paragraph 18(1)(a)
of the Act, rather than subsection 37(1) of the Act,
will the restriction on the deductibility of SR & ED
expenses provided for in paragraph 96(1)(g) of the Act be
applicable?2. Where a limited partnership, which chooses to deduct its
SRD expenditures under paragraph 18(1)(a) of the Act,
has entered into an agreement with a company under which
the company will carry on SR & ED activities on behalf of
the partnership, will that company be entitled to ITC on
such SR & ED expenditures?Our Comments
While we are unable to provide confirmation of the income tax effects of the particular fact situations outlined in your letter, we can offer the following general comments related to the deductibility of SR & ED expenditures under paragraph 18(1) (a) of the Act and ITC available to the performer of SR & ED.
1. Although we recognize that in accordance with generally
accepted accounting principles certain amounts expended
en SR & ED activities will be permitted as a deduction in
the year incurred for accounting purposes, it is our
opinion that those SR & ED expenditures of a taxpayer which
are described and provided for in section 37 of the Act
must deducted for income tax purposes in accordance with
that section or not at all. Such amounts deducted under
section 37 of the Act by a partnership in calculating its
income will be subject to the restriction in paragraph
96(l)(g) of the Act. Should the amounts expended by a
taxpayer on research and development activities not be
described in section 37 of the Act, then those expenses
will be deductible for income tax purposes only to the
extent that they are permitted under section 9 of the Act
and are not contrary to other provisions of the Act, such
as paragraphs 18(l) (a) and (b) of the Act. Such
expenses allowed to be deducted by a partnership in
calculating its income would not be subject to the
restriction in paragraph 96(l)(g) of the Act.2. In order for a company performing SR & ED activities (the
"Performer") on behalf of another taxpayer to have a
"qualified expenditure" (as defined in subsection 127(9)
of the Act) eligible for ITC, the expenditure must be
"related to a business" of the taxpayer. In many cases,
this requirement would not be met unless the Performer
was a sole-purpose SR & ED company described in paragraph
37(7)(e) of the Act. Where an amount expended by a
Performer meets the definition of qualified expenditure,
paragraph 127(ll.l)(c) of the Act reduces such amount
eligible for ITC by, inter alia, the amount of any
contract payment which the Performer has received, is
entitled to receive or can reasonably be expected to
receive in respect of that expenditure made by the
Performer. Contract payments of the Performer will
include any amount payable by a person resident in Canada
for SR & ED related to the business of that person
regardless of whether the person has deducted the amount
of the expenditure under section 37 of the Act or has
chosen not to deduct the amount at all.These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
We trust these comments will be of assistance.
Yours truly,
for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch