R. B. Day (613) 995-1723
April 18, 1985
XXX
We are writing in reply to your letter of March 13, 1985 wherein you requested our views as to whether interest earned by a corporation on funds not immediately needed for research would taint its status as a pure R & D corporation. In the event that interest was a significant source of the corporation's income for the year "all or substantially all of its revenue" may not be considered to be derived "from the prosecution of scientific research or the sale of rights in or arriving out of scientific research", so that its general and administrative expenditures would be prescribed expenditures under section 2902 of the Income Tax Regulations (the "Regulations").
At the 1984 Annual Conference of the Canadian Tax Foundation the Department stated that, in establishing whether or not all or substantially all the revenue of a taxpayer is from the prosecution of scientific research or the sale of rights in or arising out of scientific research carried on by him, it will consider not only the particular taxation year but the pattern established over a number of taxation years. In addition, for a start-up company, the Department will take into account the manner in which the taxpayer is proposing to derive his revenue. As a consequence, it is our opinion that the receipt of interest derived from the temporary investment of funds which are to be used in research will not necessarily result in general and administration expenditures being considered prescribed expenditures under section 2902 of the Regulations.
Where such interest represents a significant portion (over 10%) of the revenues earned over a period of, say 3 to 4 years, this factor may affect the corporation's status. However, it is our view that provided the investment of funds earmarked for scientific research is merely incidental to the overall objective of carrying out scientific research, and provided the funds are held as liquid assets and expended on qualifying scientific research within a reasonable time, the interest income will generally not affect the status of otherwise pure R & D corporations.
Yours truly,
for Director Corporate Rulings Division Legislation Branch