5-8632
J.D. Brooks
(613) 957-2097Dear Sirs:
This is a further reply to your letter of August 24, 1989 in which you requested the Department's opinions concerning various issues. This reply incorporates our response to your questions 4 to 6, and the paragraph numbers correspond to the question numbers in your letter.
4. You stated that in many real estate limited partnerships, each limited partner has the right to exchange his limited partnership interest for a specific condominium unit. Where a partner provides his partnership interest as security, you questioned whether this right to exchange would affect the partner's at-risk amount.
Our Response
The at-risk amount of a limited partner will not be reduced solely as a result of the limited partner providing his partnership interest as security to a financial institution for the funds borrowed and used to purchase his partnership interest. However, the at-risk amount of the limited partner will be reduced in accordance with paragraph 96(2.2)(d) of the Act where the partner has the right, either absolutely or contingently, to acquire a condominium unit in exchange for all or any part of the partnership interest, unless subparagraph 96(2.2)(d)(iv) of the Act applies to the facts of a particular situation.
5. You asked us to identify those circumstances in which land rental costs would be subject to the restriction of subsection 18(3.1).
Our Response
A taxpayer renting land will generally always be subject to a restriction of the rental costs incurred during the construction period. Paragraph 18(3.1)(a) of the Act provides that notwithstanding any other provision of the Act, in computing a taxpayer's income for a taxation year, no deduction shall be made in respect of any outlay or expense made or incurred by the taxpayer, other than an amount deductible by reason of paragraph 20(1)(a) or (aa), that may reasonably be regarded as a cost attributable to the period of construction, renovation or alteration of a building. Paragraph 18(3.l)(b) of the Act provides that the amount of such outlay or expense shall be included in computing the cost or capital cost, as the case may be, of the building to the taxpayer.
In our opinion, as neither paragraph 20(1)(a) or (aa) of the Act applies to rental costs, and as rental costs can reasonably be regarded as costs attributable to the period of construction, paragraph 18(3.1) (a) of the Act would apply to deny a deduction of the rental costs. Paragraph 18(3.1)(b) of the Act would also apply to include the rental costs in the cost or capital cost of the building.
6. You provided a hypothetical situation in which a corporation generates no revenue during a period of research and development, then derives royalty income from the results of the research. You queried whether the Department would view the corporation's activities as being an active business.
Our Response
Where the royalty income arises as a result of the research effort, it is likely that the royalty income would be viewed as income from an active business rather than as income from property. However, the facts of each case must be examined in order to determine if and when a business was commenced. We refer you to Interpretation Bulletin IT-364 , in which the Department has expressed some views on this topic. Depending on the circumstances of any particular case, it might be concluded that there was no reasonable expectation of profit and hence no business.
6a. You presented a hypothetical example involving a joint venture wherein it is agreed that one joint venturer (the "Research Funder") will fund all of the scientific research, and all of the joint venturers will share the costs of subsequent efforts. You queried whether all qualifying scientific research expenditures should be allocated to the Research Funder.
Our Response
In an arrangement that is indeed a joint venture and not a partnership, we would expect each joint venturer to make expenditures according to the joint venture agreement. In a joint venture agreement such as the one you mentioned, the Research Funder would seem to be the only party required to fund the scientific research and thus it should be entitled to claim scientific research expenditures. In order to be able to answer your question more precisely, it would be necessary to review all of the facts of a particular case and determine whether the Research Funder actually undertakes scientific research and whether the scientific research is related to the Research Funder's business. One other problem that would have to be overcome is that of tracing the funds. It is not sufficient to merely allocate all of the scientific research costs to the Research Funder; one must be able to trace the funds in order-to demonstrate that the Research Funder did in fact pay for the scientific research. If all of the non-scientific research expenditures were incurred in a subsequent fiscal period, it seems that the tracing of the scientific research funding would not present a problem.
Yours truly,
R.E. Thompson for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch