11 January 1990 Income Tax Severed Letter AC58460 - Non-profit Corporation for Scientific Research and Experimental Development

5-8460
             19(1)                          U.P. Guglich
                                            (613) 957-2102
January 11, 1990

Dear Sirs:

This is in reply to your letter of July 28, 1989 concerning paragraph l49(l)(j) of the Income Tax Act (the "Act"). We apologize for the delay in replying.

                          24(1)

You now request our views in respect of paragraph l49(l)(j), if the Association incorporates a subsidiary non-profit corporation for scientific research and experimental development as described in that paragraph.

Our Comments

As we pointed out in our reply to your letter of May IS, 1989, it would appear that a proposed transaction by a particular taxpayer is involved. Thus this matter would appear to be more appropriately the subject of an Advance Income Tax Ruling. However we are prepared to provide some general comments respecting your concerns.

(1)       The fact that for any given project the subsidiary
          corporation may get a return greater than l00% of the
          cost contributed to the research company (the return is
          capped at 3:1 of costs), may adversely affect its
          status under paragraph I49(l)(j) of the Act.  The
          corporation seeking exemption pursuant to subparagraph
          l49(l)(j)(ii) must expend at least 90% of its income on
          scientific research and development and pursuant to
          subparagraph l49(I)(j)(i) can not carry on any
          business.  The earning of a return in excess of the
          costs may constitute the carrying on of a business. 
          The significance of the revenues earned would need to
          be considered in conjunction with the objects of the
          corporation and the time and attention that is actually
          devoted to realizing such revenues.  However in
          general, the higher the level of revenues the more
          probable it is that a concerted effort would be present
          to maximize this source of funding leading to the
          conclusion that a business was being carried on.

(2)       To qualify for exempt status under paragraph 149(1) (I)
          the Association may carry on its not for profits
          activities itself or it may pay or provide funds to
          another organization to carry on those activities. 
          However,' in your situation if the subsidiary
          corporation can not qualify for exempt status it is
          doubtful that the Association would qualify.  Generally
          an investment in a taxable subsidiary would not be
          considered to be for a purpose other than profit.

(3)&(4)   In determining for purposes of paragraph l49(l)(I) of
          the Act whether the Association was operated for a
          purpose other than profit all the facts and details of
          its operations and activities must be considered.  The
          accounting treatment (loans vs. expenditures) and the
          source of the funds (bank borrowing vs. excess
          membership contributions) would be factors considered
          within the larger concept of whether the use of the
          funds was consistent with the exempt objects of the
          Association.  As to the deductibility of the membership
          dues by the members, the onus would be on the members
          to establish their entitlement to a deduction under the
          Act.

We trust this will be of assistance to you.

Yours truly, for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch