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: Whether the shareholder of the majority partner would be specified employee for SRED tax incentives if employed by the partnership.
Position: May be.
Reasons: Question of fact and law
XXXXXXXXXX
2012-043978
Lata Agarwal
613-957-8968
April 19, 2012Dear XXXXXXXXXX :
Re: “Specified employee” of a partnership
This is in response to your email dated March 12, 2012, concerning your request for our views on the meaning of the term “specified employee” in subsection 248(1) of the Income Tax Act (“Act”) as it relates to expenditures in respect of Scientific Research & Experimental Development (“SR&ED”) under the Act.
In your hypothetical scenario, a partnership has two partners: Corporation A (60%) and Corporation B (40%). The partnership is conducting a project that qualifies as SR&ED and has employed Corporation A’s sole shareholder, Mr. A, to perform the SR&ED. You would like to know whether under these circumstances, Mr. A would be a “specified employee” of the partnership.
Our Comments
The SR&ED provisions of the Act limit and restrict the SR&ED incentives where the expenditures relate to the remuneration of a specified employee of the claimant. For additional comments in this regard, please refer to paragraphs 11, 58 and 59 of the Interpretation Bulletin IT-151R5, Scientific Research and Experimental Development Expenditures.
The determination as to whether a particular person will be considered a specified employee of a partnership will require consideration of the relevant legislation as well as of all the underlying facts and circumstances. Resultantly, while we are unable to express any definitive views as to your particular situation, we are prepared to provide the following general comments which may be of assistance.
Subsection 248(1) of the Act provides that a “specified employee” is “an employee of the person who is a specified shareholder of the person or who does not deal at arm’s length with the person”. Subsection 248(1) of the Act generally provides that a “specified shareholder” of a corporation in a taxation year is “a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation”. In this particular situation, while Mr. A would be a specified shareholder of Corporation A, Mr. A would not be a specified shareholder of the partnership nor would Mr. A be considered as being related to the partnership. However, Mr. A may nevertheless be a “specified employee” of the partnership if he does not factually deal at arm’s length with the partnership.
Paragraph 251(1)(c) provides that it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm’s length. In this regard, as mentioned in paragraph 23 of Interpretation Bulletin IT-419R2, Meaning of arm’s length, the following criteria have generally been used by the courts in determining whether parties to a transaction are not dealing at arm’s length:
- was there a common mind which directs the bargaining for both parties to a transaction;
- were the parties to a transaction acting in concert without separate interests; and
- was there a “de facto” control?
Also, paragraphs 27 and 28 of IT-419R2 indicate that when a partner is not in a position to control a partnership in which the partner has an interest, and that partner has little or no say in directing the operations of the partnership, it is generally recognized that the partner is dealing at arm’s length with the partnership. As a general rule, it is presumed that partners, who are not related persons, deal with each other on an arm’s-length basis in transactions outside of their partnership activity, although their partnership in business would be a factor to be considered in any other transaction between them.
Based on the limited information, and while a question of fact, absent any contradicting and mitigating factors, it might be argued that Mr. A does not deal at arm’s length with the partnership due to the fact that he is the sole shareholder of Corporation A and Corporation A appears to be the “majority interest partner” of the partnership as that term is defined in 248(1) of the Act.
We trust that these comments will be of assistance.
Yours truly,
Michael Cooke
Manager
Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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