31 March 1993 Income Tax Severed Letter 3M05210-47 - APFF 1992: Question 47—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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                     TRANSLATION FROM FRENCH

ASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE

                   REVENUE CANADA ROUND TABLE

1992 CONFERENCEASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE
                   REVENUE CANADA ROUND TABLE
                          October 1992

                  V.  MISCELLANEOUS

Question 47

Scientific research and experimental development

A partnership is created to market research results in the area of informatics, in particular in the area of expert systems. Those in charge of scientific research and experimental development projects (R & D) are developing, among other things, various programs involving member participation. These participation activities consist of answering questionnaires aimed at better defining user interfaces and validating the R & D work.

Instead of surveying and sampling the population in general, it is the members (who do not necessarily have experience in the area of R & D or informatics) who respond to these surveys. Moreover, the members meet from time to time with project representatives so that the latter can bring them up to date on the progress of the work and to approve decisions and budgets. While the R & D work was being carried out, regular reports were issued to the partners.

Does the Department of National Revenue think that the partners' activities were sufficiently developed for them not to be considered as specified members? Can the Department of National Revenue or the Department of Finance provide a definition of "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" by indicating the factors that should be evaluated (hours per year, number of meetings and so on)?

Department of National Revenue response

In order to determine whether the activities of members are sufficiently developed for them not to be considered as "specified members", the particular facts of a situation must be reviewed as a whole. In addition, the Department has not prepared exhaustive guidelines regarding the expression "actively engaged in the activities of the partnership business on a regular, continuous and substantial basis" for defining "specified member" in subsection 248(1) of the Act, since each case must be analyzed on its own facts.

However, the Department considers that a person is actively engaged in a business when that person is directly involved in the management and/or the daily activities of the business. As a general rule, the person devotes time, work and energy to the business. The quantity and quality of his efforts must also be taken into consideration in determining his share in the income of the business. Moreover, the participation of the member must be regular, continuous and substantial. This criteria would not be met, for example, if the member's activities and efforts were infrequent or were provided at irregular intervals.

While respecting the requirement of regular, continuous and substantial participation, the Department considers that the more a member is involved in the management and/or the current activities of the business, the less likely it is that the member would be considered a "specified member" in terms of subsection 248(1) of the act. On the facts described above, it seems to us that the members' activities do not meet the criteria mentioned earlier and accordingly they would be considered "specified members".

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