5 March 2009 Roundtable, 2008-0300591C6 - Investment tax credit - 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.

Principal Issues: 1.Whether the provincial/territorial ITC for R&D that is not renounced by the filing-due date is considered government assistance that reduces the federal ITC under ITA 127(18). 2. Whether there has been a change in the CRA interpretation of ITA 127(18)

Position: 1. Yes 2. No

Reasons: 1. The law 2. See response

2008 TEI - Question 7

Question 7

CRA recently adopted an administrative process to automatically reduce a company's SR&ED investment tax credit (ITC) pool by the amount of provincial ITCs for which the taxpayer is deemed to qualify. Unless the taxpayer signs a letter to the CRA SR&ED financial reviewer certifying that no application will be made for the provincial ITCs (e.g., the Ontario Innovation Tax Credit), the Federal ITC pool is reduced. CRA's administrative practice seemingly contradicts the principle of "constructive receipt" as well as the jurisprudence interpreting paragraph 12(1)(x) of the Act. What is the legislative basis and rationale for CRA's position and practice? Would CRA consider revising its position and eliminating the practice?

CRA Response 7

Government assistance includes a provincial or territorial tax credit. Pursuant to subsection 127(18) of the Income Tax Act, government assistance that on or before the filing-due date for a taxation year, a taxpayer has received, is entitled to receive or can reasonably be expected to receive is to be applied to reduce the taxpayer's federal qualified expenditures. The CRA's interpretation of the expressions "received", "entitled to receive" and "reasonably be expected to receive" found in subsection 127(18) is set out in Application Policy SR&ED 2005-02. In contrast to these expressions used in subsection 127(18), paragraph 12(1)(x) brings into income, subject to certain exceptions, an inducement or assistance that is "received" by the taxpayer. In view of the different wording employed, subsection 127(18) is considered to have a broader application than is paragraph 12(1)(x).

If during a year a taxpayer incurs expenditures and earns a provincial or territorial R&D tax credit, the amount of the tax credit would be applied, pursuant to subsection 127(18), to reduce the taxpayer's federal qualified expenditures, unless the tax credit is officially renounced by the filing-due date. That is, unless it is renounced, the tax credit would be considered to be government assistance that the taxpayer is entitled to receive or can reasonably be expected to receive and accordingly would reduce the federal qualified expenditures under subsection 127(18).

There has been no change in the CRA's interpretation of subsection 127(18) in the case of provincial or territorial R&D tax credits. However, earlier in 2008, the taxation centres assumed greater responsibility for the initial review of SR&ED claims, undertaking certain review steps that before were generally performed at the tax services offices. This has resulted in subsection 127(18) being applied on a more consistent basis across Canada. If a taxpayer has not renounced the provincial or territorial R&D tax credits earned, the taxation centres will apply the provisions of subsection 127(18) to reduce the federal qualified expenditures.

C Rafuse

Tel. (613)948-2226

File No. 2008-030059