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.
Principal Issues: 1) Whether the cost of purchasing previously used equipment qualifies as a scientific research and experimental development ("SR&ED") capital expenditure under subparagraph 37(1)(b)(i) of the Act. 2) Whether discarded switches that have no useful life are current or capital expenditures for SR&ED.
Position: 1) Yes. 2) Question of fact.
Reasons: 1) There is no requirement in paragraph 37(1)(b) that the capital expenditure be in relation to new property. 2) See paragraph 9 of IT-151R5.
2006-021104
XXXXXXXXXX Charles Rafuse
(613) 957-8967
January 30, 2007
Dear XXXXXXXXXX:
Re: Scientific Research and Experimental Development
This is in reply to email of October 19, 2006 and is further to our telephone conversation (Rafuse/XXXXXXXXXX), concerning scientific research and experimental development ("SR&ED").
You asked whether the cost of purchasing previously used equipment may qualify for a deduction in computing income as an SR&ED capital expenditure under subparagraph 37(1)(b)(i) of the Income Tax Act ("Act").
You also described a situation where a taxpayer undertakes an SR&ED activity in Canada in the area of voice over internet protocol ("VOIP"). The taxpayer acquires for use in the SR&ED activity in Canada various switches, and has to discard some switches because they are obsolete and are unacceptable in terms of technical performance. You asked whether the discarded obsolete switches that have no useful life are current or capital expenditures for purposes of a deduction under subsection 37(1) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.
Your questions presume that the project activities where the used equipment and switches are used meet the criteria in the definition of "scientific research and experimental development" in subsection 248(1) of the Act. Whether a particular project's activities qualify as SR&ED is a question of fact. More information on what constitutes SR&ED can be found in Information Circular 86-4R3, Scientific Research and Experimental Development.
To qualify under paragraph 37(1)(b), a capital expenditure must be (using the wording of the paragraph) "an expenditure of a capital nature made by the taxpayer (...other than land or a leasehold interest in land) in the year or a preceding year...on scientific research and experimental development carried on in Canada, directly undertaken by or on behalf of the taxpayer, and related to a business of the taxpayer". There is no requirement in the wording of this paragraph that the capital expenditure be in relation to new property. Accordingly, it is our opinion that a capital expenditure to purchase previously used equipment can qualify as a capital expenditure in respect of SR&ED that is deductible in computing income under paragraph 37(1)(b) of the Act, provided the other requirements applicable for a deduction of SR&ED expenditures are otherwise met.
A taxpayer may be entitled to claim an investment tax credit ("ITC") in respect of the taxpayer's "SR&ED qualified expenditure pool", as this expression is defined in subsection 127(9) of the Act. Generally, the SR&ED qualified expenditure pool consists of certain amounts transferred by agreement between non-arm's length persons and amounts that meet the definition of "qualified expenditure" in subsection 127(9) of the Act. The definition of qualified expenditure includes, among other things, an expenditure that is an expenditure described in paragraph 37(1)(a) or subparagraph 37(1)(b)(i) of the Act and that is not a "prescribed expenditure" as that term is defined in section 2902 of the Income Tax Regulations (the "Regulations"). Under subparagraph 2902(b)(iii) of the Regulations, an expenditure of a capital nature in respect of the acquisition of property that has been used or acquired for use of lease, for any purpose whatever before it was acquired by the taxpayer, is a prescribed expenditure. Accordingly, while a capital expenditure in respect of used equipment may qualify as an SR&ED expenditure deductible in computing income under paragraph 37(1)(b) of the Act (provided the other requirements for such deduction are otherwise met), it will not be eligible for an ITC claim under the definition of qualified expenditure in subsection 127(9) of the Act.
Whether expenditures for switches acquired by a taxpayer for an SR&ED project would be of a current or capital nature is a question of fact that can be resolved only by an audit. However, we would note that paragraph 9 of Interpretation Bulletin IT-151R5, Scientific Research and Experimental Development Expenditures (Consolidated), provides the following comments regarding classification of expenditures:
Classification of expenditures
9. While all expenditures on SR&ED may be considered expenditures of a capital nature, for the purposes of section 37, expenditures of a current nature on SR&ED are considered to be those expenditures that do not result in the acquisition of land, a leasehold interest in land, or property that would otherwise be depreciable property to the taxpayer. Under paragraph 37(1)(b), expenditures of a capital nature are only those expenditures that result in the acquisition of property that would be the taxpayer's depreciable property (other than property referred to in ¶12) if section 37 did not apply. The comments in the current version of IT-128, Capital Cost Allowance - Depreciable Property, may be of assistance in determining whether a particular property is depreciable property.
If you have any other question regarding the treatment of used or obsolete items, you may wish to contact the local tax services office for an opinion after providing to such office complete details of the situation you are dealing with.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content