7 December 1999 External T.I. 1999-0012085 - SR&ED

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: SR&ED joint projects involving Canadian and foreign participants - will ITC be available to the Canadian T/P for its SR&ED activities carried on in Canada even though the joint project was primarily directed from outside Canada, or majority of project's expenditure incurred outside Canada.

Position: Yes.

Reasons: Expenditures are qualified expenditures made by Canadian T/P on SR&ED carried on in Canada.

Tax Executives Institute
Income Tax Questions
December 7, 1999

Question VII

SR&ED - Joint Projects with a Foreign Participant

SR&ED projects are often conducted jointly by a Canadian taxpayer and a participant in a foreign jurisdiction. Assuming the Canadian taxpayer carries out qualifying SR&ED activities, incurs the costs related to those activities in Canada, has an unfettered right to any benefit arising from the project, and ultimately does benefit from the results of the joint SR&ED project, will the CCRA confirm that the Canadian taxpayer may claim the ITC's related to the eligible SR&ED expenditures incurred in Canada even though:

(a) the joint project was directed primarily from the foreign jurisdiction, or

(b) the majority of the project's expenditures were incurred in the foreign jurisdiction?

Answer

The categorization of expenditures on SR&ED carried on in Canada or outside Canada is a factual determination. Expenditures incurred for SR&ED activities undertaken outside Canada are not deductible under subsection 37(1) and consequently would not be eligible for ITC.

It is our understanding that the pertinent provisions of the Act in this situation would primarily be the following: subparagraphs (a)(ii) and (iii) of the definition of "qualified expenditure" in subsection 127(9) and subparagraphs 37(1)(a)(i) and 37(1)(b)(i). The effect of these is that an investment tax credit is available in respect of expenditures made by the taxpayer on SR&ED carried on in Canada, directly undertaken by or on behalf of the taxpayer, and that is related to the business of the taxpayer. Provided the expenditures incurred by the Canadian taxpayer in the above scenario are such expenditures and are thus otherwise eligible for ITC's, we are of the view that the Canadian taxpayer would not be precluded from the ITC's solely because of the fact that the joint project was directed primarily from the foreign jurisdiction, or that the majority of the project's expenditures were incurred in the foreign jurisdiction.

B.G. Dodd
November 23, 1999
992956