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.
R. Albert (613) 957-2098
APR 14 1988
Dear Sirs:
Re: Regulation 2902 and Proposed Paragraph 37(7)(e)
We are writing in response to your January 22, 1988 request for an interpretation of the application of section 2902 of the Income Tax Regulations (the "Regulations") and paragraph 37(7)(e) of the December 16, 1987 draft legislation on research and development.
As you have indicated, the application of section 2902 and proposed paragraph 37(7)(e) are both dependent upon a determination as to whether a taxpayer derives all or substantially all of his revenue from the prosecution of scientific research and experimental development (including the sale of rights arising out of scientific research and experimental development carried on by it). Such determination can only be made by reference to the facts of a particular case. However, at the 1984 Annual Conference of the Canadian Tax Foundation, the Department stated that in establishing whether or not all or substantially all of the revenue of a taxpayer is derived from the prosecution of scientific research carried on by him, it will consider not only the particular taxation year but the pattern established by the taxpayer over a number of taxation years. In addition, for a start-up company, the Department will take into account the manner in which the taxpayer is proposing to derive his revenue. As a consequence, it is our opinion, that a corporation which carried on a manufacturing business for a number of years, then ceases to carry on that business, and commences to carry on a research and development business exclusively would not necessarily fail to meet the all or substantially all of 1988 revenue test simply because the past pattern was not that of the prosecution of scientific research. Assuming that the facts of the case substantiate this change in business activities, the Department would normally take into consideration the manner in which the corporation is proposing to derive its revenue. However, in view of the past manufacturing activities of the corporation, only the actual operating results would provide conclusive evidence as to the change in activities.
We trust that this letter will be sufficient for your purposes.
Yours truly,
Original Signed by Original signÉ par
T. HARRIS
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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