18 July 2001 External T.I. 2001-0069675 - SR & ED ENTITLED TO EXPLOIT

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: Whether Canadian subsidiary T/P must retain some rights to exploit the results arising from SR&ED to claim ITC's (assuming requirements of subparagraph 37(1)(a)(i) are met)

Position: no - the fact that the subsidiary does not have the right to exploit the results of SR&ED that it carries out does not, in and by itself, affect its ability to deduct SR&ED expenditures incurred by it and claim the related ITC in computing income

Reasons: ITA 37(1) and 127(9) (ITC definition),

XXXXXXXXXX 	2001-006967
		Shaun Harkin, CMA
July 18, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Scientific Research
and Experimental Development (SR&ED) and
Investment Tax Credits (ITC)

This is in reply to your facsimile of February 10, 2001 wherein you requested our views as to whether a Canadian taxpayer can claim ITC when the following conditions exist:

(i) the requirements of subparagraph 37(1)(a)(i) of the Income Tax Act (the "Act') are met;

(ii) the Canadian taxpayer provides contract SR&ED services to its foreign parent;

(iii) the Canadian taxpayer does not act as agent for its foreign parent in the course of carrying on the SR&ED activities;

(iv) the Canadian taxpayer is remunerated on appropriate cost plus basis by its foreign parent;

(v) the foreign parent retains all ownership rights arising from the SR&ED activities (the Canadian taxpayer does not retain any rights to exploit the results arising from SR&ED activities);

(vi) the foreign parent does not carry on business through a permanent establishment in Canada and does not attempt to secure access to ITC's relating to the SR&ED activities undertaken by it Canadian subsidiary.

Our Comments

In order that a SR&ED expenditure is eligible for the ITC, the expenditure must be a "qualified expenditure" as defined in subsection 127(9) of the Act. That is, among other things, the expenditure must be an expenditure described under paragraph 37(1)(a) or subparagraph 37(1)(b)(i) of the Act and must not be a "prescribed expenditure" as that term is defined under section 2902 of the Income Tax Regulations (the "Regulations").

The phrase "entitled to exploit the results" appears in subparagraphs 37(1)(a)(i.1) and 37(1)(a)(ii) of the Act but not in subparagraph 37(1)(a)(i). In the example you described, the requirements of subparagraph 37(1)(a)(i) of the Act are met, therefore, the fact that the Canadian subsidiary does not have the right to exploit the results of SR&ED that it carries out would not, in and by itself, affect its ability to deduct the SR&ED expenditures incurred by it and claim the related ITC. To the extent that a reimbursement made in respect of the SR&ED can be considered to be "non-government assistance" or a "contract payment", as defined under subsection 127(9) of the Act, such reimbursement would affect a claim made by the Canadian taxpayer for the SR&ED and the ITC.

However, where, under a contractual arrangement, a non-resident does not carry on any business in Canada and reimburses a Canadian taxpayer in respect of SR&ED expenditures incurred in Canada and the Canadian taxpayer includes the amount of the reimbursement in computing the taxpayer's income from a business carried on in Canada pursuant to subsection 9(1) of the Act, it is our position that the reimbursement would not be considered to be non-government assistance or a contract payment for the purposes of paragraph 127(18) of the Act. Accordingly, the reimbursement would not reduce a qualified expenditure incurred by the taxpayer for ITC purposes pursuant to paragraph 127(18) of the Act. Also, by virtue that the reimbursement would not be deductible by the non-resident person in computing Part I tax, the amount would not be a prescribed expenditure for the purpose of subparagraph 2902(e)(ii) of the Regulations. It is our view that these conclusions would not be affected whether the non-resident taxpayer owns all the rights arising under the contract and grants the taxpayer a right or license to exploit or use the results of the SR&ED. However, it would be a question of fact whether, in any particular case, an expenditure on SR&ED would be a qualified expenditure.

In the situation described, you state that the Canadian taxpayer does not act as agent for its foreign parent. In any given situation, it is a question of fact whether SR&ED carried out by a taxpayer on behalf of another person is performed by the taxpayer as agent for the other person, the determination of which would depend on the terms of the particular arrangement. Consideration of such terms would not be limited to the right to exploit the results of the SR&ED or to be reimbursed for the SR&ED expenditure. Where a subsidiary is acting as agent for its parent, the parent would have ownership rights to the SR&ED and would be considered to have incurred the SR&ED expenditure made by the subsidiary.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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