7 September 2000 External T.I. 1999-0009325 - Approved Research Institute

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The research institute, at the time it was granted "approved" status" under subsection 37(7) of the Act, had submitted that the potential receipt of royalties from patents, etc. would be minimal. However, based on commercial agreements entered into by it for the sale or license of certain rights, the institute will realize a greater amount of fees and royalties than previously anticipated.

The institute had also received status as a registered charity under paragraph 149(1)(f)..

The institute is concerned whether its non-research activities may be a "business", as defined under subsection 248(1) of the Act which it contends is not a requirement under the Act for the purpose of granting "approved status" to an entity, and whether the receipt of revenue from such activities could jeopardize its status as an "approved" research institute and also its status as a registered charity.

Position:

The conditions for granting "approved" status require that the entity be a non-profit organization and that its activities are unquestionably SR&ED. In accordance with the definition of "business" which includes "an undertaking of any kind whatever", any other non-SR&ED activity would technically be a business. Carrying out such other activity produces the risk that the institute's non-profit activities, for a particular period, becoming incidental to its revenue-earning activities which would result in the loss of its non-profit status and "approved" status.

Generally, a non-profit organization may earn income from income-generating activities and maintain its exempt status provided that the income-generating activity is not the principal activity and any resulting income therefrom is used to achieve the institute's declared exempt objectives.

Determination that a particular activity is an entity's principal activity and that it complies with the charitable purpose of a charitable organization are questions of fact which can only be determined retrospectively by the TSO and the Charities Division, respectively.

Reasons:

The requirements set by the Minister for granting "approved" status by virtue of subsection 37(7).

The technical definition of the term "business" under subsection 248(1) .

Our established position that in order for a non-profit organization to maintain its non-profit purpose, among other things, its income-earning activities cannot be the principal activities of the organization.

The determination of questions of fact based on a retrospective review of a taxpayer's operations is an audit function to be carried out by the responsible Tax Services Office or Division.

XXXXXXXXXX 								1999-000932
F. B. Fontaine, FCCA
Attention: XXXXXXXXXX 

September 7, 2000

Dear Sirs:

Re: XXXXXXXXXX (the "Institute")
Status as an Approved Research Institute_____

This is in reply to your letter dated November 24, 1999 concerning the Institute's status as an approved research institute and a registered charity under subparagraph 37(1)(a)(ii) and paragraph 149(1)(f) of the Income Tax Act (the "Act"), respectively.

The Institute had previously been granted "approved" status by the Minister on the basis of information submitted by it. The Institute had acknowledged then that it did not anticipate receiving any royalty revenue from the use of inventions in the foreseeable future and that any such royalty revenue that may be received would be minimal. The Institute enters into exclusive license agreements in respect of the Institute's patent rights with commercial entities which use and sell products and processes developed from the use of such patents and the Institute now expects to receive fees and royalties that are substantially greater than previously anticipated.

You indicated that the Institute was granted status as a registered charity under paragraph 149(1)(f) of the Act and that since a "charitable organization" may carry on a "related business" which, in certain circumstances, may also include an unrelated business, the registered charity status of the Institute should not be affected since, despite the royalty revenue, the Institute's objects and activities remain exclusively charitable.

You submitted that the prohibition in respect of "carrying on of a business" should not form part of the criteria for approval under clause 37(1)(a)(ii)(B) of the Act. You are of the opinion that such a position or the earning of royalty revenues should not cause a change in the "approved" or "charitable" status of the Institute.

Our Comments

As you are aware, an entity has to meet certain requirements in order to be "approved" by the Minister. While such requirements are not specifically described in the Act, they are conditions of the Minister, vested in him, for the purpose of granting "approved" status to an entity, by virtue of subsection 37(7) of the Act. These requirements include that the entity (i) must meet the criteria of a non-profit organization and (ii) must carry on only activities that are unquestionably scientific research and experimental development ("SR&ED"). Accordingly, based on the latter requirement, an approved entity that enters into commercial agreements on a regular or substantial basis for the sale or license of certain rights for a fee and/or royalty, not only would be engaged in a "business" as the term is defined in subsection 248(1) of the Act to include any "undertaking of any kind whatever", but may also risk its non-profit activities becoming, in a particular period, incidental to its revenue-earning activities which would result in the loss of its non-profit status as well as its "approved" status.

The instruments by which an entity was created, such as letters patent, articles of incorporation, etc., will normally determine the purpose for which the entity was organized. The Letters Patent dated August 1, 1996 incorporating the Institute as a corporation states that "the Corporation shall not carry on any business, as that term is defined in the Income Tax Act (Canada)". Accordingly, we would not expect an activity carried on by the Institute that meets the definition of "business" under subsection 248(1) to be part of its non-profit purpose. In the circumstances, it is our position that generally a non-profit organization created under paragraph 149(1)(l) of the Act may carry on income generating activities and earn income and still maintain its exempt status, provided that the income generating activity is not the principal activity of the entity, is carried on by the organization, and the resulting income is used by the organization to achieve its declared exempt objectives.

Whether an approved entity's non-SR&ED activity would be its principal activity and whether the receipt of revenues therefrom is incidental to its research activities are questions of fact which can only be determined retrospectively by the tax services office, based on a review of the entity's operations in the particular period concerned.

The significance of such revenues would need to be considered in conjunction with the objects and purpose of the entity and the degree of time and attention that is actually devoted to their realization.

In accordance with the Special Release to IT-496 dated June 16, 1989, a non-profit organization that is recognized as a registered charity under the Act, would be a tax-exempt entity only for the purposes of paragraph 149(1)(f) rather than under paragraph 149(1)(l) of the Act. This is based on the words "was not a charity...." in paragraph 149(1)(l) of the Act. Further, an entity that is a corporation (whether or not it is tax-exempt) would be required to file an annual income tax return.

This Directorate is not aware of the specific status of the Institute as a "registered charity", as the term is defined under subsection 248(1) of the Act for the purposes of paragraph 149(1)(f) of the Act. The Charities Division of the Canada Customs and Revenue Agency (CCRA) is responsible for all program activities that pertain to the registration and monitoring of charities and the review of the purpose and objects of a registered charity to determine whether the activities carried on by it comply with its purpose and objects. However, it would appear that a charitable organization may carry on a "related business" which, in certain circumstances, may include an unrelated business and not be subject to revocation of its registration under subsection 149.1(2) of the Act. Information Circular 80-10R provides further comments concerning charities. Whether an activity carried on by the Institute can be considered to comply with the Institute's charitable purposes or be a related business are questions of fact that should be determined by the Charities Division.

We trust the above opinions which are our best interpretation of the law as it applies generally will be helpful to you. As stated in paragraph 22 of Information Circular 70-6R3, written opinions are not advance income tax rulings and, accordingly, are not binding on the CCRA.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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