23 February 1989 Income Tax Severed Letter 5-7409 -  

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 FEB 23 1989

Dear Sirs:

Re: Scientific Research and Experimental Development ("SR & ED") Non-Government Assistance and Contract Payments

We are responding to your November 30, 1988 request for an interpretation as to whether service fees payable by a foreign affiliate to a Canadian taxpayer would be considered as non-government assistance or a contract payment which would reduce the qualified expenditures made for purposes of calculating the investment tax credit ("I.T.C.") pursuant to paragraph 127(11.1)(c) of the Income Tax Act (the "Act").

Your request appears to relate to specific proposed transactions and the determination of the tax consequences of proposed transactions should be the subject of an advance income tax ruling request. Although we are unable to provide any opinion on the specific transactions described in your request, we are able to provide general comments based on the following hypothetical situation:

a) A Canadian corporate taxpayer (Canco) incurs qualified SR & ED expenditures in Canada and owns all rights arising therefrom.

b) A related non-resident corporation (NRCo) pays a fee to Canco for services rendered. The fee is determined by NRCo's share of the SR & ED expenditures incurred by Canco based on the ratio of NRCo's sales to worldwide related group sales, as in a typical cost-sharing arrangement.

c) Canco retains all Canadians rights. NRCo has the exclusive right to use the results of the SR & ED worldwide, with the exception of Canada, at no additional charge.

d) NRCo does not carry on business in Canada.

Contract Payments

Since NRCo is not resident and does not carry on business in Canada it is not entitled to a deduction under clause 37(1)(a)(ii)(D) of the Act in respect of the amounts paid to Canco. It follows that the amount received by Canco from NRCo, would not satisfy the definition of "contract payment" in subsection 127(9) of the Act.

Non-Government Assistance

Whether an amount would be considered as non-government assistance would depend on whether the amount must be included in income by virtue of paragraph 12(1)(x) of the Act if that paragraph were read without reference to subparagraphs (vi) and (vii) thereof.

However, subparagraph 12(1)(x)(v) provides that paragraph 12(1)(x) of the Act will not apply to an amount that was otherwise included in computing a taxpayer's income for the year or a preceding taxation year under some other provision of the Act, such as subsection 9(1) of the Act. Accordingly, where amounts are included in income by virtue of subsection 9(1) of the Act, pursuant to generally accepted accounting principles, they would not constitute "non-government assistance". Whether fees paid by NRCo to Canco are, in fact amounts which are otherwise required to be included in Canco's income is a question of fact which would depend on the actual structure of the arrangement.

To the extent, however, that the fees are included in Canco's income by virtue of paragraph 12(1)(x), as read without reference to subparagraph (vi) and (vii) thereof, it is our view that such amounts would be non-government assistance as defined in subsection 127(9) of the Act. In our opinion, based on the following comments in Nowegijick v. MNR 83 DTC 5041 at 5045:

"The words "in respect of" are, in my opinion words of the widest possible scope. They import such meanings as "in relation to", "with references to" or "in connection with" The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters".

the service fees paid by NRCO would be considered to be "in respect of" the SR & ED expenditures incurred by Canco.

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