27 November 2002 Internal T.I. 2002-0158127 - SR&ED-JOINT VENTURE

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: If a taxpayer is a participant in a joint venture, should SR&ED eligibility be determined at the joint venture level?

Position: No.

Reasons: Although a joint venture contains similar characteristics of a partnership, it is not a partnership. Thus eligibility is determined at the participant level.

		November 27, 2002

	SR&ED Directorate	HEADQUARTERS
	Mel Machado, Manager	Bob Naufal, CMA
	Financial Legislative	(613) 957-2744
	   Application Section
	50 O'Connor Street, 7th Floor
	Attention:  Connie Ng
		2002-015812

Joint Development Research Projects

We are writing in response to your memorandum dated August 13, 2002 requesting our opinion as to whether or not participants in a joint venture are entitled to claim scientific research and experimental development ("SR&ED") expenditures and related investment tax credits with respect to support work as described in paragraph (d) of the definition of SR&ED in subsection 248(1) of the Income Tax Act (the "Act"). We acknowledge your reference to the decision of the Tax Court of Canada in Woodlin Developments Ltd. v MNR, 86 DTC 1116.

Our Comments

Section 37 of the Act provides that a taxpayer carrying on a business in Canada in a taxation year may deduct, in computing income from the business for the year, expenditures for SR&ED carried on in Canada that relate to a business of the taxpayer. A taxpayer who has made SR&ED expenditures in a year in respect of a particular business may, to the extent that those expenditures have not been deducted in the year, deduct those expenditures in any subsequent year in calculating income from that or any other business carried on by the taxpayer in the subsequent year.

A "partnership" is the relation that exists between persons carrying on a business in common with a view to profit. Special rules apply with respect to computing the income of a taxpayer who is a member of a partnership. For example, paragraph 96(1)(e.1) of the Act requires that the partnership income for the year be calculated as if the amounts available under subsection 37(1) of the Act were deducted by the partnership. Consequently, a partnership is unable to carry forward SR&ED expenditures to a subsequent taxation year.

A joint venture is generally regarded as a more informal and temporary relationship than a partnership and is usually confined to a single project or an undertaking of limited duration. The Seventh Edition of Black's Law Dictionary (1999) provides the following definition of "joint venture":

"A business undertaking by two or more persons engaged in a single defined project.

The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling he project."

Paragraph 5 of IT-90 states that in circumstances where persons associate and are only liable for their respective agreed portions of debt without each accepting total liability of the association's debts, such an arrangement is viewed as an indication that a partnership does not exist.

Although certain characteristics are similar in both a partnership and joint venture, the Tax Court in Woodlin, also listed the following requirements for a joint venture that are not necessary in a partnership:

"...There appear to be three distinctive requirements for the finding of a joint venture which are not also necessary requirements for the finding of a partnership:

(1) a joint property interest in the subject matter of the venture;

(2) a right of mutual control and management of the enterprise; and

(3) most usually, a limitation of the objective to a single undertaking or a limited number of undertakings (it is recognized that the question of what constitutes a single undertaking will be susceptible to widely differing interpretations).

Although it is suggested that those three requirements are distinct requirements necessary for the establishment of a joint venture which need not be necessary for the finding of a partnership, these elements may still exist in a partnership..."

Generally, in law, the partners are jointly and severally liable for any debts that arise while carrying out the business of the partnership. Similarly, each partner is authorized to act as agent for the other partners. By contrast, joint venture participants generally conduct their part of the underlying venture separately. The joint venture contract would merely co-ordinate the actions of each of the participants in the venture. Given that each participant in a joint venture carries on business separately, we are of the view that the determination of SR&ED eligibility for a joint venture remains at the participant level.

Should you wish to discuss this matter further, do not hesitate to contact us.

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

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