B. Fields Tel: (613)957-2098
October 28, 1986
Dear XXXX
We are writing in response to your letter dated March 13, 1986, wherein you requested our opinion regarding the application of subsections 127(9) and (11.1) and paragraph 12(1)(x) of the Income Tax Act (the "Act") to two hypothetical fact situations. We apologize for the unavoidable delay in responding.
The facts in the first situation are as follows:
1. A taxable Canadian corporation ("Canco") incurs "qualified expenditures" as defined in subsection 127(9) of the Act.
2. Canco is fully reimbursed for all qualified expenditures it incurs by a related American corporation ("Amerco").
3. Amerco is not resident and does not carry on any business in Canada.
4. Both Amerco and Canco will benefit from any products developed as a result of Canco incurring the qualified expenditures. Canco will have the right to manufacture and distribute the product in Canada and Amerco will have the right to manufacture and distribute the product in the U.S.
The facts in the second situation are as follows:
1. Canco incurs qualified expenditures.
2. Amerco reimburses Canco for its applicable share of the qualified expenditures incurred by Canco. Amerco's applicable share will be determined on the basis of actual sales or reasonably estimated sales of any products developed as a result of Canco incurring the qualified expenditures.
3. Amerco is not resident and does not carry on any business in Canada.
4. Both Amerco and Canco will benefit from any products developed as a result of Canco incurring the qualified expenditures. Canco will have the right to manufacture and distribute the product in Canada and Amerco will have the right to manufacture and distribute the product in the U.S.
In your opinion, the amount Canco receives from Amerco, in both situations described above, will be neither a contract payment nor government assistance as Amerco is not a government, municipality or other public authority and, Amerco will not be entitled to a deduction under subparagraph 37(1)(a)(v) of the act in respect of the amount paid since Amerco is not resident and does not carry on a business in Canada.
You have also indicated that the amount Canco receives from Amerco, in both situations, would be included in Canco's income regardless of the existence of paragraph 12(1)(x) of the Act. Thus, in your view, the reinbursement in question is otherwise included in computing Canco's income, and is excluded from the ambit of paragraph 12(1)(x) by virtue of subparagraph 12(1)(x)(v) of the Act and is, therefore, excluded from the definition of non-government assistance.
We concur with your view that the reimbursement in question will be neither a contract payment nor government assistance. We are unable, however, to conclude, with certainty, that the reimbursements are otherwise included in Canco's income and that such reimbursements are, therefore, excluded from the definition of non-government assistance.
Non-government assistance is defined as an amount that would be included in income by virtue of paragraph 12(1)(x) of the Act if that paragraph were read without reference to subparagraphs (vi) and (vii) thereof. Paragraph 12(1)(x) when read without the aforementioned subparagraphs has the effect of including in income the reimbursements received by Canco during the year to the extent that the reimbursement in question was not otherwise included in computing Canco's income for the year or a preceding year.
While is has always been the Department's expectation that reimbursements of this type would be included in computing the recipient's income by virtue of subsection 9(1) and generally accepted accounting principles, this position is not free from doubt. As this question is analogous to the issue before the courts in the case of the Consumers Gas Company Ltd., the determination of whether or not such amounts are otherwise included in income and, therefore, excluded from paragraph 12(1)(x) and from the definition non-government assistance may ultimately depend on the decision on that case.
Should subsection 9(1) not operate to include such reimbursements in Canco's income the reimbursements would fall within the definition of non-governments assistance and paragraph 127(11.1)(c) of the Act would deem Canco's qualified expenditures to be reduced by the amount of the reimbursement that Canco has received, is entitled to receive or expected to receive.
We hope our comments will be of assistance.
Your truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
T. HARRIS
A/Director Small Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch