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:

1. Deductibility of repayments of government assistance previously brought into income under 12(1)(x).

2. Will paragraphs 18(1)(a) & 18(1)(m) apply to prohibit deductions of repayments?

Position:

1. Repayments are deductible.

2. No.

Reasons:

1. subsection 20(1)(hh) is applicable.

2. amounts will be clearly laid out to earn income (18(1)(a)); also as amounts are not royalties 18(1)(m) has no application

XXXXXXXXXX 2003-000955

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge the receipt of additional information sent by you on XXXXXXXXXX.

You advise that to the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date hereof and, unless otherwise stated, every reference in this letter to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Agreement" means the agreement that will be entered into among Parentco, Yco, TPC and Xco;

(c) "Contributions" means, at any particular time, all of the payments made by TPC under the Agreement up to that time, and "Contribution" means any such payment;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) "Minister" means the Minister of Industry Canada;

(g) "Parentco" means XXXXXXXXXX;

(h) "Principal Payments" means all or any portion of Repayment-B payments that is the repayment of Contributions by Xco to TPC and "Principal Payment" means any such payment;

(i) "Project" means the project to be undertaken by Xco XXXXXXXXXX;

(j) "public corporation" has the meaning assigned by subsection 89(1);

(k) "Repayment-A" means a payment by Xco to TPC under the Agreement if a decision is made not to proceed with the XXXXXXXXXX, as more particularly described in paragraph 14(a);

(l) "Repayment-B" means a payment by Xco to TPC under the Agreement if XXXXXXXXXX has been built which XXXXXXXXXX in a fiscal year, as more particularly described in paragraph 14(b);

(m) "Supplemental Amounts" means Repayment-B payments that are not Principal Payments and "Supplemental Amount" means any such payment;

(n) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(o) "TPC" means Technology Partnerships Canada, an agency of Industry Canada;

(p) "Xco" means XXXXXXXXXX; and

(q) "Yco" means XXXXXXXXXX.

STATEMENT OF FACTS AND BACKGROUND

1. Xco is a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX. Xco's business number is XXXXXXXXXX. Xco has a taxation year-end of XXXXXXXXXX and it files its income tax returns with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

2. XXXXXXXXXX. All of Xco's shares are currently owned directly or indirectly by Parentco. Parentco directly owns XXXXXXXXXX% of Xco's common shares and all of Xco's preferred shares. The remaining XXXXXXXXXX% of Xco's common shares are held by XXXXXXXXXX wholly-owned subsidiaries of Parentco.

3. Parentco is a public corporation and a taxable Canadian corporation incorporated under the laws of Canada. It has a taxation year-end of XXXXXXXXXX.

4. XXXXXXXXXX.

5. Yco is a taxable Canadian corporation incorporated under the laws of Canada. Yco is a wholly-owned subsidiary of Parentco and is engaged in the business of XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. It is anticipated that Xco will commence XXXXXXXXXX this year. According to current forecasts, the XXXXXXXXXX will XXXXXXXXXX at that time. XXXXXXXXXX.

9. XXXXXXXXXX.

10. TPC is an agency of Industry Canada. TPC administers a federal government program and is described in its Investment Application Guide as follows:

TPC is a technology investment fund established to contribute to the achievement of Canada's objectives of increasing economic growth, creating jobs and wealth, and supporting sustainable development. TPC advances and supports government initiatives by investing strategically in research, development and innovation in order to encourage private sector investment, thereby maintaining and growing the technology base and technological capabilities of Canadian industry.

11. Xco, Parentco, Yco and TPC have finalized an agreement to implement the funding by TPC of a portion of Parentco's XXXXXXXXXX research activities on

XXXXXXXXXX.

PROPOSED TRANSACTIONS

12. Under the Agreement, TPC will make certain payments (each of which will be a Contribution) to Xco not exceeding $XXXXXXXXXX in the aggregate in accordance with the schedule in section XXXXXXXXXX of the Agreement.

13. The amount of each Contribution under the Agreement will be computed by reference to XXXXXXXXXX% of the total amount of certain costs incurred each year, to a maximum amount in respect of each year, with the last Contribution expected to be made on XXXXXXXXXX. For the purpose of computing investment tax credits under subsection 127(5) of the Act, the qualified expenditures incurred under the Agreement will be reduced by the amount of Contributions. If, as described below, certain events occur, TPC will cease to make Contributions to Xco. In general, the costs used to compute the amount of each Contribution will be those relating to the development of the XXXXXXXXXX.

14. The Agreement provides for two possible types of payments (each a "Repayment") by Xco to TPC:

(a) If XXXXXXXXXX has been completed by XXXXXXXXXX (or a subsequent date agreed to by the Minister) and a decision has been made by Xco (or Parentco or Yco ) by XXXXXXXXXX (or a subsequent date agreed to by the Minister) not to proceed XXXXXXXXXX and this decision has been accepted by the XXXXXXXXXX, TPC will cease making Contributions and Xco will repay XXXXXXXXXX of the Contributions received to that date in XXXXXXXXXX equal annual instalments commencing in Xco's XXXXXXXXXX fiscal year (or a subsequent fiscal year agreed to by the Minister). Each such Repayment is referred to herein as "Repayment-A". Each Repayment A will be due on or before XXXXXXXXXX of the year following the year to which the particular Repayment relates; and
(b) If by XXXXXXXXXX (or a subsequent date agreed to by the Minister), a XXXXXXXXXX facility XXXXXXXXXX using any or all of the intellectual property developed XXXXXXXXXX, then: (i) for the XXXXXXXXXX consecutive years following the year in which the XXXXXXXXXX is completed (the "ramp-up period"), Xco will be required to make annual payments to TPC in the amount of $XXXXXXXXXX in respect of each particular year;¹ and (ii) for the XXXXXXXXXX consecutive years after the ramp-up period, Xco will be required to make annual payments to TPC in the amount of $XXXXXXXXXX in respect of each particular year.² Each of these Repayments is referred to herein as "Repayment-B". Each Repayment-B will be due on or before XXXXXXXXXX of the year following the year to which the particular repayment relates. If no amount is payable for a particular year, the amount calculated for that year in the above formula will not have to be paid in a subsequent period. Xco's obligation to make Repayment-B payments to TPC ceases once the aggregate amount of such Repayments totals $XXXXXXXXXX or if the Agreement terminates.³ The Agreement does not expressly deal with the order in which payments by Xco are to be allocated between Contributions and Supplemental Amounts. However, Xco will take steps to ensure that the Contributions are repaid before any amount is made on account of the Supplemental Amounts.

15. Xco, Parentco and Yco will be jointly and severally liable to perform Xco's obligations under the Agreement.

16. Except on the occurrence of certain events of default, TPC will not receive any right to any of the intellectual property (or any other property) that results from the XXXXXXXXXX research carried out in accordance with the Agreement. TPC will not acquire rights in or with respect to any entity as a consequence of the Agreement. TPC's right to Repayment-A or Repayment-B, as the case may be, arises solely as a consequence of the Agreement.

PURPOSE OF THE PROPOSED TRANSACTIONS

The proposed transactions are being undertaken by Xco, Parentco, Yco and TPC for the purpose of developing the Project, XXXXXXXXXX and obtaining funding as permitted under the programs administered by TPC.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes thereof and provided the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The amount of each Contribution received by Xco will be included in Xco's income pursuant to paragraph 12(1)(x) in the taxation year in which the Contribution is received.

B. Xco will be entitled to deduct each Repayment-A payment pursuant to paragraph 20(1)(hh) in computing its income for the taxation year in which such payment is made.

C. Xco will be entitled to deduct each Principal Payment pursuant to paragraph 20(1)(hh) in computing its income for the taxation year in which such payment is made.

D. Paragraph 18(1)(a) will not apply to the Repayment-A or Repayment-B payments made by Xco.

E. Paragraph 18(1)(m) will not apply to the Repayment-A or Repayment-B payments.

F. Subsection 245(2) will not apply as a result of the Proposed Transactions to redetermine the tax consequences confirmed by the rulings given above.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency ("CCRA") provided the first Contribution by TPC is received by XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto.

OPINION

In the event that the proposed amendment to paragraph 18(1)(m) is enacted in the form of the Legislative Proposal announced by the Department of Finance on December 20, 2002, it is our opinion that paragraph 18(1)(m), as amended, will not apply to the Repayment-A or Repayment-B payments.

The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R5, is not binding on the CCRA.

CAVEAT

Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:

(a) the reasonableness of any expenditure referred to in this letter;

(b) the determination of cost, fair market value, adjusted cost base, cumulative eligible capital or undepreciated capital cost of any property referred to in this letter;

(c) whether or not any persons referred to in these rulings are related or otherwise deal with each other at arm's length;

(d) the GST implications of any of the proposed transactions; or

(e) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein and, specifically, we have not agreed to or accepted that a Supplemental Amount would not be an outlay or payment described in paragraph 18(1)(b) and, if not described in paragraph 18(1)(b), that such amount would be deductible in computing the income of Xco.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

ENDNOTES

¹ No such Repayment will be required for a particular year if the XXXXXXXXXX has operated at below an average annual rate of XXXXXXXXXX .

² No such Repayment will be required for a particular year if the XXXXXXXXXX has operated at below an average annual rate of XXXXXXXXXX .

³ The Agreement will terminate no later than XXXXXXXXXX; thus, the last possible Repayment-B would be in respect of Xco's XXXXXXXXXX fiscal year.

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