25 October 2001 Internal T.I. 2001-0097897 - NF SR&ED TAX CREDIT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does SR&ED performed in the Newfoundland Offshore area qualify for the Newfoundland SR&ED tax credit?

Position: ordinarily no, but the Canada-Newfoundland Atlantic Accord Implementation Act (CNAAIA) deems any reference to province in the NF ITA to include the offshore area therefore to those whom the CNAAIA applies the answer would be yes

Reasons: N/A

		October 25, 2001

	Financial Legislative 	HEADQUARTERS
	   Application Section	Shaun Harkin, CMA
	Mel Machado	2001-009789
	Clarica Bldg., 50 O'Connor St. 7th floor
		2001-009789

Technical Interpretation Request: Calculating the Newfoundland ("NF")
Scientific Research and Experimental Development ("SR&ED") Tax Credit

This is in reply to your memorandum of August 22, 2001 wherein you requested our opinion with respect to the NF SR&ED tax credit.

You are of the opinion that SR&ED carried on in the waters outside a twelve nautical mile limit from the NF shoreline is not eligible for the NF SR&ED tax credit because this area is not "in the province" as required by paragraph 40(2)(a) of the NF Income Tax Act ("NF ITA"). You also state that the expression "in the province" is not defined for the purposes of section 42 of the NF ITA.

Our Comments

We agree that the NF ITA does not, in and by itself, extend the definition of Newfoundland for the purposes of the NF ITA. Therefore, the expression "in the province" must be read in its ordinary and grammatical sense. The Oceans Act defines the "Territorial Sea of Canada" as follows:

"The territorial sea of Canada consists of a belt of sea that has as its inner limit the baselines described in section 5 and as its outer limit

(a) subject to paragraph (b), the line every point of which is at a distance of 12 nautical miles from the nearest point of the baselines; or

(b) in respect of the portions of the territorial sea of Canada for which geographical coordinates of points have been prescribed pursuant to subparagraph 25(a)(ii), lines determined from the geographical coordinates of points so prescribed."

Since the definition of "province" in subsection 35(1) of the Interpretation Act defines "province" to mean a province of Canada, we would not normally consider the area outside the territorial sea of Canada to be in a province unless provided for in another Act. Therefore, we agree that ordinarily SR&ED performed outside the territorial sea of Canada would not be considered performed in a province and it would be ineligible for the NF SR&ED tax credit.

However, the Canada-Newfoundland Atlantic Accord Implementation Act ("CNAAIA") does provide an extended definition of "in the province" to the extent required for imposing corporate income taxes. The purpose of the "CNAAIA" was to implement an agreement between the Government of Canada and the Government of Newfoundland and Labrador on offshore petroleum resource management and revenue sharing and to make related and consequential amendments. The CNAAIA provides information on the imposition of corporate income tax in the NF offshore area for the purposes of the NF ITA.

The CNAAIA defines the "offshore area" of the province of NF to be:

"those submarine areas lying seaward of the low water mark of the Province and extending, at any location, as far as

(a) any prescribed line, or

(b) where no line is prescribed at that location, the outer edge of the continental margin or a distance of two hundred nautical miles from the baselines from which the breadth of the territorial sea of Canada is measured, whichever is the greater;"

Subsection 211(1) of the CNAAIA states:

"211.(1) There shall be imposed, levied and collected under this Part in respect of the taxable income of a corporation earned in a taxation year in the offshore area, in accordance with subsection (3), the taxes, interest and penalties that would be imposed, levied and collected under the Newfoundland Income Tax Act in respect of that taxable income if the offshore area were in the Province."

Paragraph 211(3)(b) of the CNAAIA states:

"211.(3) Subject to this Act and the regulations made thereunder, the Newfoundland Income Tax Act and any regulations made thereunder apply, with such modifications as the circumstances require, for the purposes of this Part and, without limiting the generality of the foregoing,

(b) a reference in that Act to the Province of Newfoundland or the province shall be deemed to be a reference to the offshore area;"

The NF SR&ED tax credit is available to a corporation that incurs "eligible expenditures" in respect of SR&ED. Paragraph 42(a) of the NF ITA describes an eligible "expenditure" to be:

"an expenditure made after 1995, by a taxpayer with a permanent establishment in the province in respect of scientific research to be carried out in the province that is a qualified expenditure under subsection 127(9) of the federal Act, without reference to paragraph (h) of that subsection;"

Since the CNAAIA deems the province of NF to include the offshore area for the purpose of the NF ITA, it is our opinion that when a corporation, to whom the CNAAIA applies, performs SR&ED in the NF offshore area, that location would be considered in the province for the purposes of the NF ITA. Therefore, that location, in and by itself, would not exclude a corporation from claiming the NF SR&ED tax credit.

The CNAAIA is applicable to the corporate oil and gas industry; therefore, our comments extending the definition of NF to include the NF offshore area are only to be considered applicable to that industry.

We trust the above comments are of assistance.

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

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