23 October 2002 External T.I. 2002-0152995 - APPROVED ORGANIZATION-SR&ED

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: Whether a corporation affiliated and owned by a University and carrying on activities that include SR&ED qualifies as an approved association

Position: Unable to confirm. General comments provided with respect to criteria and information required.

Reasons: Insufficient information provided by client.

Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2002-015299
October 23, 2002

Dear XXXXXXXXXX:

Re: Approved Organization Status - SR&ED

This is in response to your letter of July 22, 2002 wherein you requested our comments as to whether your organization qualifies as an "approved organization" for the purpose of clause 37(1)(a)(ii)(B) of the Income Tax Act (the "Act").

The letter describes your organization as a non-profit corporation affiliated and owned by the XXXXXXXXXX (the "University"). Membership in the corporation is restricted to members of the University's Board of Governors. Moreover, the letter describes the activities of the corporation to include research and development, technology transfer and education (all of which are related to XXXXXXXXXX production technology), plus those necessary business activities associated with the accomplishment of the corporation's objectives.

Our Comments

Subparagraph 37(1)(a)(ii) of the Act provides that certain payments to "approved" organizations will qualify (subject to certain conditions) as scientific research and experimental development ("SR&ED") expenditures. These organizations are described as follows:

(A) an approved association that undertakes SR&ED;

(B) an approved university, college, research institute or other similar institution;

(C) a corporation resident in Canada and exempt from tax under paragraph 149(1)(j); and

(D) an approved organization that makes payments to an association, institution or corporation described in (A) to (C).

For the purpose of clause 37(1)(a)(ii)(B) of the Act, all Canadian universities and affiliated colleges are considered to be approved. However, a corporation will not qualify as an "approved association" for the purpose of clause 37(1)(a)(ii)(B) of the Act solely on the basis that the corporation is owned by a university or that membership in the corporation is restricted to members of a university's board of governors.

Although your corporation does not currently enjoy approved status, we would be pleased to consider an application from you. In this respect, we are providing you with the following general information regarding approved associations and the requirements for attaining that status, as well as information with respect to paragraph 149(1)(j) corporations (as described in clause 37(1)(a)(ii)(C)).

Application for "approved association"

An association or organization, both of which may include a corporation (and collectively referred to below as an "entity") may obtain "approved" status. The requirements in respect of the application for, and the granting of, such approved status are as follows:

1. An entity must receive written approval from the Minister.

2. An entity must meet the criteria of a non-profit organization and be able to demonstrate that it is able to carry out SR&ED in Canada on an ongoing basis. More specifically, the entity must also meet all the following requirements:

(a) it must have the facilities and personnel capable of carrying out SR&ED as defined in the Act;

(b) it must carry on only activities that are unquestionably SR&ED;

(c) there must be no personal benefit to members, no control of other associations, and satisfactory provisions for the distribution of assets upon dissolution, etc.;

(d) the general public must be a beneficiary of the results of any successful research; and

(e) the funding of the entity must be sufficient to ensure ongoing SR&ED.

3. Copies of the following documentation relating to the entity and its activities must be provided to the CCRA:

(a) identification of the legislation under which the entity was created;

(b) copies of the entity's charter, code of ethics and by-laws which should indicate:

(i) that the entity satisfies all the requirements described in clause 37(1)(a)(ii)(A) or (B) of the Act and the post-amble thereto; and

(ii) how its property will be distributed in the event of a wind-up;
(c) a detailed description of the entity's arrangements for obtaining funds;

(d) a detailed description of the entity's arrangements for disbursing funds;

(e) financial statements for prior years; and

(f) details of the research activities to be carried out by the entity in the future and evidence that it has the staff and facilities to carry out such activities.

Corporation exempt from tax under paragraph 149(1)(j) of the Act

Apart from the approved entities described in (A), (B) and (D) above, a Canadian resident corporation exempt from tax under paragraph 149(1)(j) of the Act may also receive payments that are deductible to the payer under subsection 37(1) of the Act. In general terms, paragraph 149(1)(j) of the Act exempts from tax a corporation that was constituted exclusively for the purpose of carrying on or promoting SR&ED provided it meets certain specified conditions, including all of the following:

1. The corporation's activities must be carried on without the purpose of gain for its members and any profits or other accretions shall be used in promoting its objects.

2. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof.

3. The directors and members including any director or member who also serves as an officer, shall serve in that capacity without remuneration. No director, member or officer shall directly or indirectly receive any profit from his/her position as director, member or officer, however a director or officer may be reimbursed for reasonable expenses incurred by him/her in the performance of his/her duties.

4. The corporation must not acquire control of any other corporation nor will it carry on any business as that term is used in the Act.

5. The objects of the corporation must be to exclusively carry on and/or promote SR&ED. The SR&ED activity may be directly undertaken by or on behalf of the corporation or by an approved association, university, college, or research institute or other similar institution as described in clauses 37(1)(a)(ii)(A) or (B) of the Act.

6. The amounts to be expended in Canada on SR&ED must not be less than 90% of the corporation's gross revenue for the period minus any penalties and interest payable for failing to file an information return as required by subsection 149(7.1) of the Act.

The determination of whether a corporation will qualify under paragraph 149(1)(j) of the Act is a question of fact which can only be made once the corporation's income tax return for a particular fiscal period is filed and the activities of the corporation are reviewed by the tax services office. There is no requirement that a 149(1)(j) corporation be approved by the CCRA. However, a corporation may be simultaneously a 149(1)(j) corporation and an approved association or research institute under clauses 37(1)(a)(ii)(A) and (B) of the Act.

This Directorate does not provide any specific comments concerning the tax status of an existing corporation, however, a request for an advance income tax ruling will be considered, if the request is submitted in the manner set out in Information Circular 70-6R5, on whether a particular corporation to be incorporated will be "constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development" for purposes of the preamble to paragraph 149(1)(j) of the Act.

We trust that the above comments will be helpful to you. Should you require any additional information, please do not hesitate to contact us.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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