2001 Ruling 2001-0077663 - RESEARCH CORPORATION

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 corporation qualifies under 149(1)(j)

Position: yes

Reasons: almost identical rulings provided before; see E 9600943; 932628;
Differs from E9600943 only in that 1) Corp may receive royalties, which Corp will spend on admin or R&D, and 2) 18(1) ruling requested re deduction of membership fees paid to XXXXXXXXXX

XXXXXXXXXX 2001-007766

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

RE: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling. We also acknowledge your subsequent correspondence and telephone calls.

To the best of your knowledge and that of the taxpayers involved in this ruling request, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) under objection by one or any of the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "CCRA" means the Canada Customs and Revenue Agency;

(c) "XXXXXXXXXX Agreement", ("XXXXXXXXXX") means the agreement described in paragraph 1 below;

(d) "Company Act" means the Canada Corporations Act, R.S.C. 1970, chapter C-32, as amended as at the date hereof;

(e) "Class A Member" of the Corporation means XXXXXXXXXX or other organization that provides support, in whole or in part, for one or more specific SR&ED projects pursuant to the XXXXXXXXXX, that signs a non-disclosure agreement, a XXXXXXXXXX Agreement and a XXXXXXXXXX Agreement (if necessary). Class A Members are permitted to attend the Corporation's Annual Scientific Conference and are exempt from registration fees and they receive updates on the Corporation's research; Class A Members have privileged access to Core Facilities;

(f) "Corporation" means XXXXXXXXXX a new corporation to be incorporated, and is described in paragraphs 2 to 9 below;

(g) "Directors" means directors of the Corporation; the first Directors of the Corporation will be those persons listed in paragraph 2 below;

(h) "Class B Member" of the Corporation means XXXXXXXXXX that has agreed to participate in the Corporation on an ongoing basis in a significant manner, that signs a Membership Agreement with the Corporation, that has been accepted for membership by the Chairman of the Board of Directors of the Corporation. Members contribute to the Corporation either through financial support, as defined in a XXXXXXXXXX Agreement, or through in-kind support to the Corporation's communication, promotional or scientific activity. Class B Members receive updates on the Corporation's research;

(i) "Class C Member" of the Corporation means any XXXXXXXXXX having a research mandate involved in the Corporation's research or other activity of the Corporation that is party to the XXXXXXXXXX; Only Class C Members are voting members of the Corporation. Class C Members are permitted to attend the Corporation's XXXXXXXXXX Conference and are exempt from registration fees and receive updates on the Corporation's research;

(j) "Medical Research" means research in the area of XXXXXXXXXX;

(k) "Member" means any or all of Class A Members, Class B Members, and Class C Members;

(l) "Participant" all or any Members and/or Researchers;

(m) "Regulations" means the Income Tax Regulations;

(n) "Research Committee" means the Corporation's XXXXXXXXXX;

(o) "Researchers" means a person employed by, given academic status by or otherwise affiliated with a Class C Member who is responsible for a specific aspect of research, who has been accepted as a Researcher by the Board of Directors of the Corporation, and who has signed the document, XXXXXXXXXX; and

(p) "Scientific Research and Experimental Development" ("SR&ED") has the meaning assigned by subsection 248(1) of the Act;

Our understanding of the relevant facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS

1. The XXXXXXXXXX was signed by a number of XXXXXXXXXX and is effective as of XXXXXXXXXX (the "XXXXXXXXXX Program") has selected the Corporation to receive funding under the XXXXXXXXXX Program, and has charged the XXXXXXXXXX with administrative responsibility for ensuring that the Corporation complies with the guidelines under the XXXXXXXXXX Program.

PROPOSED TRANSACTIONS

2. The Corporation will be incorporated without share capital under the provisions of Part II of the Company Act. Messrs. XXXXXXXXXX will be the first directors of the Corporation.

3. The head office of the Corporation will be situated at XXXXXXXXXX and the Corporation's activities may be carried on throughout Canada. Unless otherwise determined from time-to-time by resolution of the Board of Directors of the Corporation, the fiscal year end of the Corporation will be XXXXXXXXXX.

4. The Corporation will have Class C Members, Class B Members, and Class A Members. Class A Members shall pay membership fees or dues, which shall be determined by the voting membership at each annual general meeting of the Corporation. Such fees or dues will not be eligible for a deduction under clause 37(1)(a)(ii)(C) or subparagraph 37(1)(a)(iii) of the Act.

5. The principal provisions of the proposed letters patent and the by-laws of the Corporation will be as follows:

(a) The Corporation will be constituted exclusively for the purpose of carrying on or promoting SR&ED in Canada;

(b) The Corporation will not acquire control (as defined in subsection 149(8) of the Act) of any other corporation;

(c) The Corporation will not carry on any "business", as that term is defined in subsection 248(1) of the Act;

(d) The Corporation will carry on its operations without the purpose of gain for its Members and Participants and any profits or other accretions to the Corporation will be used in promoting its objectives;

(e) No part of the income of the Corporation will be payable to, or otherwise available for, the personal benefit of any member or participant of the Corporation or to persons who will contribute financially to the Corporation;

(f) the Directors, Members and Participants and those Directors, Members and Participants who also serve as officers shall serve as such without remuneration, and no Director, Member, officer or Participant who is a Director or Member shall directly or indirectly receive any profit from his position as a Director, Member, officer, or Participant except that a Director or officer or Participant may be paid for reasonable expenses incurred by him in the performance of his duties. However, a Director, Member, officer or Participant may serve the Corporation in another capacity and receive compensation therefor;

(g) In the event of dissolution or winding-up of the Corporation, after payment of all debts and liabilities outstanding at the time of such wind-up, its remaining property will be distributed or disposed of to one or more Canadian entities referred to in clauses 37(1)(a)(ii)(A), (B), (C) or (E) of the Act; and
(h) The Corporation, in carrying on or promoting SR&ED for a specific period, will expend amounts in Canada on SR&ED totalling not less than 90% of its gross revenue (as defined in subsection 149(9) of the Act) for the period, minus the total, if any, of all amounts paid in the period because of subsection 149(7.1) of the Act and calculated with reference to subsections 149(8) and (9) of the Act, on expenditures described in clauses 149(1)(j)(ii)(A) and (B) of the Act.

6. The Corporation does not intend to undertake research projects directly. Instead, it will make payments to institutions described in clause 149(1)(j)(ii)(B) of the Act to be used by such institutions for SR&ED that is Medical Research.

7. In addition to the solicitation of funding from XXXXXXXXXX, the Corporation will also solicit funding from individual members of the Canadian public, Canadian corporations as well as from non-profit organizations.

8. An agreement will be entered into between the Corporation and a particular Participant whereby that Participant agrees to financially support specific SR&ED carried on in Canada that is related to the business of the Participant and whereby it is agreed that the Participant is entitled to exploit the results of the particular research project being funded by that Participant.

9. Alternatively, a Participant that is a corporation may provide funds to the Corporation to be used to support basic research or applied research

(a) the primary purpose of such payment is the use of the results therefrom by that Participant in conjunction with other SR&ED activities in the area of the Medical Research undertaken or to be undertaken by or on behalf of that Participant that relate to its business, and

(b)that has the technological potential for application to other businesses of a type unrelated to that carried on by that Participant.

10. Class C Members and the Corporation anticipate earning royalty income resulting from research funded by the Corporation. Any such royalty income, if earned by the Corporation, would be insignificant in relation to its income from other sources and would be used to pay its general administrative expenses and more particularly expended on funding SR&ED. The Corporation does not anticipate regularly accumulating any income in excess of its expenditures and an accumulated excess, if any, will not be excessive.

11. Researchers seeking funding from the Corporation will be required to submit a research proposal to the Research Committee for approval. Each application will be reviewed by the Research Committee to ensure that it adheres to XXXXXXXXXX Programs and XXXXXXXXXX rules and regulations. In determining whether to approve a particular project for funding, the Research Committee might consider the following factors:

(a) the scientific merit of the project;

(b) the relevance of the given project for the Participants of the Corporation;

(c) how the project fits with other research being funded by the Corporation;

(d) whether or not the Corporation will be able to solicit funding for the project; and

(e) whether or not the project respects the Corporation's XXXXXXXXXX Programs and XXXXXXXXXX rules and regulations.

Research grants awarded by the Corporation will not be provided directly to the individual applicant, but will be given to and administered by Class C Members who employ the individual Researcher.

12. A project that receives funding approval will be allocated a set budget, typically for one year. In addition to the reporting requirements noted above, recipients of grants exceeding one year in duration will be required to provide the Corporation with annual progress reports and a final report at the completion of the research project. The follow-up procedure is to ensure that projects being funded through the Corporation are being used for SR&ED, and particularly for Medical Research, and will include a written report provided, upon request, to the participant confirming the amount of SR&ED, carried out and the expenditures incurred on specific research projects by the Corporation.

13. The Board of Directors of the Corporation will be the final executive authority of the Corporation and will have overall responsibility for the management and financial accountability of the Corporation in accordance with XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the proposed formation and operation of the Corporation is to create a corporation that qualifies under paragraph 149(1)(j) of the Act and to facilitate the funding of SR&ED in Canada in the field of Medical Research.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below:

A. At the time of its incorporation, the Corporation will be a corporation that is constituted exclusively for the purpose of carrying on or promoting SR&ED for the purpose of paragraph 149(1)(j) of the Act.

B. Provided that the Corporation qualifies under paragraph 149(l)(j) of the Act and is resident in Canada, and the Participant carries on a business in Canada in a taxation year, the Participant's payments to the Corporation as described in paragraph 8 above will qualify as payments described in subparagraph 37(1)(a)(ii) of the Act. Accordingly, provided that the Participant files with its income tax return for the year a prescribed form (T661) containing prescribed information, such payments may, subject to subsection 18(9) of the Act and to the extent that they exceed the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the participant in computing the Participant's income from the business for the year.

C. Provided that a payment referred to in paragraph B above qualifies under subparagraph 37(1)(a)(ii) of the Act and is not an expenditure prescribed for purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a "qualified expenditure" within the meaning of

subsection 127(9) of the Act for purposes of calculating the Participant's investment tax credit, as defined in subsection 127(9) of the Act, if the Participant files with its income tax return for the year a prescribed form (T2038) containing prescribed information.

D. Where a Participant is a corporation and carries on a business in Canada in a taxation year, the Participant's payment to the Corporation in that year will qualify as a payment described in subparagraph 37(1)(a)(iii) of the Act, provided that:

i) the payment is made for "basic research" or "applied research", as defined in paragraphs (a) and (b) of the definition of SR&ED in subsection 248(1) of the Act, carried on in Canada,

ii) the primary purpose of the basis or applied research is for the Participant to use the results from the basic or applied research in conjunction with other SR&ED activities directly undertaken by or on behalf of the Participant that relate to the Participant's business;

iii) the basic or applied research has technological potential for application in other businesses of a type unrelated to the business carried on by the Participant; and

iv) the Corporation was at the time of the payment a corporation that is constituted exclusively for the purpose of carrying on or promoting SR&ED for the purpose of paragraph 149(1)(j) of the Act.

Accordingly, provided that the Participant files with its income tax return for the year a prescribed form (T661) containing prescribed information, such payments described immediately above may, subject to subsection 18(9) of the Act and to the extent that they exceed the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the Participant in computing its income from the business for the year.

E. Provided that a payment referred to in paragraph D above qualifies under subparagraph 37(1)(a)(iii) of the Act and is not an expenditure prescribed for purpose of the definition of "qualified expenditure" in subsection 127(9) of the Act or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a "qualified expenditure" within the meaning of subsection 127(9) of the Act for purposes of calculating the Participant's investment tax credit, as defined in subsection 127(9) of the ITA, if the Participant files with its income tax return for the year a prescribed form (T2038) containing prescribed information.

F. A Class A Member will be entitled to claim a deduction in computing its income from its business under subsection 9(1) of the Act within the limitations imposed by paragraph 18(1)(a) and section 67 of the Act in respect of membership fees or dues payable by the Class A Member to the Corporation.

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 issued by the CCRA on January 29, 2001, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that CCRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions; and

(ii) any other tax consequences arising from the facts or proposed transactions described herein, other than those specifically confirmed in the rulings given.

OPINION

The determination of whether the Corporation qualifies under paragraph 149(1)(j) is a question of fact which can only be made following a review of the Corporation's activities for the particular taxation year in respect of which it is seeking exemption. Such a determination is a matter for which the local Tax Services Office is responsible. It is nevertheless our opinion that a corporation operating in the manner described above would generally qualify for tax exempt status pursuant to paragraph 149(1)(j) of the Act.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch