25 July 2011 External T.I. 2010-0389611E5 - SR&ED - partnerships

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.

Principal Issues: 1. Where subsections 37(11) and (12) apply to expenditures, whether the expenditures that would otherwise be deductible under subsection 37(1) may instead be deducted under subsection 9(1) such that paragraph 96(1)(e.1) and subparagraph 96(1)(g)(ii) would then not be applicable in respect of losses attributable to such expenditures. 2. Whether there is an option for expenditures made on SR&ED carried on outside Canada that would be deductible under subsection 37(2) to be instead deducted under subsection 9(1) such that paragraph 96(1)(e.1) and subparagraph 96(1)(g)(ii) would not apply in respect of losses attributable to such expenditures.

Position: See comments

Reasons: See comments

XXXXXXXXXX 							2010-038961
								Tim Fitzgerald, CGA
July 25, 2011

Dear XXXXXXXXXX :

We are responding to your correspondence of September 7 and 8, 2010 and March 15, 2011, concerning the interaction of the application of paragraph 96(1)(e.1) and subparagraph 96(1)(g)(ii) of the Income Tax Act ("Act") with the application of subsections 37(1), (2), (11) and (12) of the Act. We apologize for the delay in responding.

You asked two questions. Firstly, in a situation where a limited partnership does not make the required filings pursuant to subsection 37(11) of the Act, so that expenditures cannot be deducted in computing income under subsection 37(1) and are deemed not to be in respect of scientific research and experimental development (SR&ED) for purposes of the Act, you would like to know whether current SR&ED expenditures on SR&ED carried on in Canada, such as engineering salary and wages, may be deducted in computing income under subsection 9(1), and whether the rules in paragraph 96(1)(e.1) and subparagraph 96(1)(g)(ii) relating to deductions under section 37 would not apply because the amounts are not deducted under section 37.

Secondly, with regard to current expenditures made by the limited partnership in the year on SR&ED carried on outside Canada and otherwise deductible under subsection 37(2), you would like to know whether there is the option of deducting such expenditures under subsection 9(1) such that subparagraph 96(1)(g)(ii) would not apply to such expenditures.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, subject to certain exceptions mentioned in the Circular (e.g., the major issue is whether a transaction should be viewed as being of an income nature or a capital nature). Where the situation involves specific taxpayers and completed transactions, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. However, we offer the following general comments, which may be of some assistance.

The expression SR&ED is defined in subsection 248(1) for purposes of the Act and is discussed in Interpretation Bulletin IT-151R5 (Consolidated), Scientific Research and Experimental Development Expenditures, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it151r5-consolid/README.html.

Subsection 37(1) of the Act provides for the calculation of a taxpayer's pool of deductible expenditures for SR&ED carried on in Canada. Generally, subject to certain conditions, expenditures of a current nature and a capital nature on SR&ED carried on in Canada are included in a pool of deductible SR&ED expenditures and may be deducted in the year the expenditures are incurred or in a subsequent year under subsection 37(1).

Generally, in calculating a partner's share of income or loss of a partnership for a taxation year, paragraph 96(1)(e.1) requires that the partnership's income or loss for the year, as the case may be, be calculated as if the net amount of its SR&ED expenditures incurred in the year (i.e., the total of the amounts under paragraphs 37(1)(a) to (c.1) less the total of the amounts under paragraphs 37(1)(d) to (g)) were deducted by the partnership. For this reason, partnerships are unable to carry forward SR&ED expenditures for deduction in a subsequent year.

In addition, in computing the share of a partnership loss to be allocated to a specified member (as defined in subsection 248(1), if that definition were read without paragraph (b) thereof), subparagraph 96(1)(g)(ii) reduces the partnership loss for a taxation year by the amount of SR&ED deductions claimed under section 37 by the partnership.

Subsection 37(11) generally provides that, subject to subsection 37(12), no amount may be deducted by a taxpayer under subsection 37(1) for an expenditure incurred in a taxation year (if the Act were read without reference to subsection 78(4)) unless the taxpayer files a prescribed form (Form T661, Claim for Scientific Research and Experimental Development (SR&ED) in Canada, or Form T665, Simplified Claim for Scientific Research and Experimental Development (SR&ED) in Canada) containing prescribed information in respect of the expenditure on or before the day that is 12 months after the filing-due date for the year. Subsection 37(12) deems an expenditure in respect of which a taxpayer has not met the filing requirement in subsection 37(11) not to be an expenditure on or in respect of SR&ED for purposes of the Act.

In circumstances where subsection 37(12) applies to deem, for purposes of the Act, that an expenditure is not an expenditure on or in respect of SR&ED, the tax treatment of the expenditure will be governed by the ordinary rules in the Act without reference to the provisions relating to SR&ED. Further, since the expenditure cannot be deducted under section 37, paragraph 96(1)(e.1) and subparagraph 96(1)(g)(ii) would not apply to the mentioned expenditures.

It would appear that the effect of subsections 37(11) and (12) of the Act is to deny the tax credit in cases where the prescribed form is not filed in a timely manner. Since expenditures for SR&ED conducted outside of Canada are not eligible for the tax credit, subsections 37(11) and (12) of the Act do not apply to expenditures described in subsection 37(2) of the Act. In the absence of a provision that would deem expenditures made on SR&ED carried on outside Canada not to be in respect of SR&ED, such expenditures would be deducted by virtue of subsection 37(2) of the Act and would be subject to the restrictions in subparagraph 96(1)(g)(ii) of the Act. In our view, a legislative amendment would be required to permit a taxpayer to treat expenditures made on SR&ED carried on outside Canada other than in accordance with section 37. The Department of Finance was made aware of this.

Paragraph 9 of Interpretation Bulletin, IT-151R5, comments on the classification of SR&ED expenditures as follows:

" 9. While all expenditures on SR&ED may be considered expenditures of a capital nature, for the purposes of section 37, expenditures of a current nature on SR&ED are considered to be those expenditures that do not result in the acquisition of land, a leasehold interest in land, or property that would otherwise be depreciable property to the taxpayer. Under paragraph 37(1)(b), expenditures of a capital nature are only those expenditures that result in the acquisition of property that would be the taxpayer's depreciable property (other than property referred to in ¶ 12) if section 37 did not apply. The comments in the current version of IT-128, Capital Cost Allowance - Depreciable Property, may be of assistance in determining whether a particular property is depreciable property."

We trust our comments are of assistance.

Yours truly,

Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch