11 September 2001 External T.I. 2001-0078855 - SR&ED - CONTRACT PAYMENT

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 certain payments are "contract payments:, "government assistance", or "non-government assistance" for purposes of 127(18).

Position: Appears not, but question of fact.

Reasons: There is no "taxable supplier" (contract payment); appears to be ordinary business transaction (government assistance); otherwise included in income (non-government assistance).

					2001-007885
XXXXXXXXXX 				B.G. Dodd
(613) 957-8953
September 11, 2001

Dear XXXXXXXXXX:

Re: Foreign Funded SR&ED Activities

We are writing in reply to your letter dated April 5, 2001.

You describe a situation in which a taxable Canadian corporation ("Canco"), as defined in subsection 89(1) of the Income Tax Act (the "Act"), which is controlled by a foreign public corporation, has entered into contracts with foreign corporations and governments to deliver various products. In order to fulfill its obligations under these contracts, Canco incurs scientific research and experimental development ("SR&ED") expenditures to design and develop the products. The SR&ED expenditures are eligible for purposes of the investment tax credit ("ITC") provided in subsection 127(5) of the Act. None of the foreign entities involved carry on business in Canada, nor do they have permanent establishments in Canada and do not qualify for an ITC under the Act. More particularly, none of the foreign entities is a "taxable supplier" as that term is defined in subsection 127(9) of the Act. The income earned under these contracts is included in Canco's net revenue pursuant to generally accepted accounting principles and has been included in its income for tax purposes under section 9 of the Act. Your concern is whether the payments made by the foreign entities to Canco pursuant to these contracts would constitute any of a "contract payment", "government assistance" or "non-government assistance" as these terms are defined in subsection 127(9) of the Act. If so, this would result in a reduction in the amount of the SR&ED expenditures eligible for the ITC pursuant to subsection 127(18) of the Act.

Contract Payment

Subsection 127(9) of the Act defines "contract payment" and in the case of an amount described in paragraph (a) thereof, it is defined with reference to an amount paid or payable to a taxpayer by a taxable supplier in respect of the amount for SR&ED. Given that none of the foreign entities in this type of situation is a taxable supplier, it is our view that the amounts paid by these entities to Canco under the contracts would not be contract payments for purposes of the Act. (It is noted that paragraph (b) of the definition of contract payment is not applicable in this case.)

Government Assistance

"Government assistance" is defined in subsection 127(9) of the Act as assistance from a government, municipality or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance or as any other form of assistance other than as a deduction under subsections 127(5) or (6). It is our general view that an amount paid by a public body to a taxpayer in an ordinary business transaction would not constitute government assistance. While the factors described above would suggest that the amounts paid to Canco by the foreign governments under the contracts are pursuant to ordinary business transactions, this would have to be determined with reference to the specific facts of any particular arrangement, including the terms of reference or mandate of the contracting branch, department, etc. of the foreign government in entering such contracts.

Non-government Assistance

Subsection 127(9) of the Act defines "non-government assistance" as an amount that would be included in the taxpayer's income under paragraph 12(1)(x) (read without reference to subparagraphs (vi) and (vii) thereof) and essentially means an amount that can reasonably be considered to have been received as an inducement or as a reimbursement, contribution, allowance or as assistance for the cost of property or for an outlay or expense. Non-government assistance may be in the form of a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement or assistance. Such an amount will constitute non-government assistance to the extent it was not otherwise included in calculating the taxpayer's income or deducted in calculating any balance of undeducted outlays, expenses or other amounts for the year or a preceding taxation year. Based on the factors described above, noting particularly that the amounts received by Canco are otherwise included in its income, it would be our general view that such amounts would not be non-government assistance.

We hope this will be of assistance. Please note that these comments represent our general views with respect to the subject matter and as indicated in paragraph 22 of Information Circular 70-6R4, do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate