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 there need to be a link or interconnection between the SR&ED expenditures and the taxpayer's business in order to meet the term "SR&ED related to a business"?
Position: yes
Reasons: 37(1)(a)(i) states, "related to the business of the taxpayer" - this link can be met if there is an interconnection between the SR&ED and the type of business of the t/p so that, if the results of the SR&ED lead to commercial exploitation, the direct use of these results will benefit or enhance the taxpayer's business, such that the requirement in paragraph 37(8)(b) of the Act could be met.
XXXXXXXXXX 2002-012571
Shaun Harkin, CMA
June 4, 2002
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Scientific Research and Experimental Development ('SR&ED")
This is in reply to your letter of February 18, 2002 wherein you ask for our comments in respect of the following hypothetical situation:
Hypothetical Situation
(i) A Canadian incorporated private company functions as a Contract Research Organization ("CRO") and under the terms of its agreement with arm's length third parties it provides a variety of services, only some of which qualify under the definition of SR&ED in subsection 248(1) of the Income Tax Act (the "Act"). Under typical contracts with arm's length Canadian and non-Canadian companies, the CRO is paid a fee for services but is not entitled to exploit, own, disclose or use in any fashion the information that results from its services under these contracts. The third party contracting these services owns all of this information. The CRO carries on only one business, that being the provision of contract services.
(ii) Because of the nature of the services provided by the CRO, all or substantially all of the taxpayer's revenue is not from the prosecution of SR&ED (i.e. the 90% test is not met because of the mix of services provided by the taxpayer).
In particular you asked:
1) In general (i.e. unrelated to the hypothetical situation) would there need to be a link or interconnection between the SR&ED expenditures and the taxpayer's business in order to meet the term "SR&ED related to a business"? Would this link normally be met if the results of SR&ED expenditures, if successful, have a direct and beneficial application in the taxpayer's business?
2) Based on the situation described, because the CRO cannot meet the "all or substantially all" test in paragraph 37(8)(c) of the Act, would the taxpayer fail to meet the requirement of subparagraph 37(1)(a)(i) of the Act because the SR&ED is not related to the business of the taxpayer?
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
1) Subparagraph 37(1)(a)(i) of the Act requires, inter alia, that SR&ED undertaken by a taxpayer must be related to a business of the taxpayer. Whether an expenditure on SR&ED incurred by a taxpayer's business is related to the taxpayer's business is a question of fact. Paragraph 37(8)(b) of the Act provides, for greater certainty, that references to SR&ED related to a business include any SR&ED that may lead to, or facilitate, an extension of that business. It is our view that for SR&ED to be related to a business carried on by a taxpayer it is necessary to have some interconnection or link between the taxpayer's business and the SR&ED expenditures. This requirement will generally be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business that is carried on by the taxpayer in the year.
2) Paragraph 37(8)(c) of the Act provides that the prosecution of SR&ED, in and by itself, is only considered a business of the taxpayer to which the SR&ED relates if the taxpayer derives all or substantially all of its revenue from the prosecution of SR&ED. For this purpose, a taxpayer deriving 90% or more of its revenue from the prosecution of SR&ED is considered to derive all or substantially all of its revenue from the prosecution of SR&ED.
In the situation described the "all or substantially all" requirement in paragraph 37(8)(c) of the Act is not satisfied. Therefore, unless the CRO has a business, such that the requirement in paragraph 37(8)(b) of the Act could be met, the CRO would be precluded from claiming a deduction under subparagraph 37(1)(a)(i) of the Act.
In order for the requirement in paragraph 37(8)(b) of the Act to be met, there has to be an interconnection between the SR&ED and the type of business of the CRO so that, if the results of the SR&ED lead to commercial exploitation, the direct use of these results will benefit or enhance the CRO's business.
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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