27 June 1989 Internal T.I. 57919 F - Corporation Qualifying as "Non-profit Corporation" for 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.

June 27, 1989

19(1)

Clause 37(1)(a)(ii)(E) of the Income Tax Act (the "Act")

We are writing in response to your letter of April 14, 1989, regarding your request for information on the procedures to be followed and documentation needed by the Department in order to consider approving an organization as an approved organization for the purpose of clause 37(1)(a)(ii)(E) of the Act.

24(1)

Our Comments

We regret that we are unable to comply with your request that the 19(1) be recognized as an approved organization described in clause 37(1)(a)(ii)(E) of the Act.  Approval under this clause is intended to be restricted to the three granting councils which were specifically mentioned in the February 26, 1986 Budget Papers, i.e. the Natural Sciences and Engineering Research Council, the Medical Research Council and the Social Sciences and Humanities Research Council, as these three councils are directly funded by the federal government.

However, for your information, payments made to an organization or association that does not conduct its own research or have research conducted on its behalf may be eligible for the scientific research and experimental development ("SR & ED") deduction, if, among other things, the organization or association qualifies under clause 37(1)(a)(ii)(C) of the Act as a corporation resident in Canada which is a "non-profit corporation for scientific research and experimental development" within the meaning of paragraph 149(1)(j) 0of the Act.  The major provisions encompassed in paragraph 149(1)(j) of the Act are as follows:

(i)     no part of the non-profit corporation's income can be payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder;

(ii)      the corporation cannot acquire control of any other corporation;

(iii)      the corporation cannot carry on any business;

(iv)     the corporation must expend amounts in Canada either on SR & ED directly undertaken by or on behalf of itself, or by payments to an organization described in clause 37(1)(a)(ii)(A) or (B) of the Act, and such expenditures cannot be less than 90%  of its income for the period; and

(v)     the corporation must be constituted exclusively for the purpose of carrying on or promoting SR & ED.

The concept of control and income are provided for in subsection 149(8) of the Act and are indicated below.

a)     A corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights under all circumstances) belongs to

i)     the other corporation, or

ii)     the other corporation and persons with whom the other corporation does not deal at arm's length,

     but a corporation shall be deemed not to have acquired control of a corporation if it has not purchased (or otherwise acquired for a consideration) any of the shares in the capital stock of that corporation.

b)     There shall be included in computing a corporation's income all gifts received by the corporation and all amounts contributed to the corporation to be used for scientific research and experimental development.

Prior to the incorporation of a non-profit corporation for scientific research and experimental development, the Department is prepared to rule on whether or not the corporation when incorporated will be "constituted exclusively for the purpose of carrying on or promoting "SR & ED" for the purpose of paragraph 149(1)(j).  A ruling is binding on the Department and can only be given in respect of a proposed transaction and in accordance with the policy outlined in the enclosed Information Circular 70-6R. As the determination of whether or not a corporation meets all of the criteria outlined in paragraph 149(1)(j) of the Act is a question of fact which can only be made following a review of its operations for the fiscal period in which the tax exempt status is sought and is dependent upon the corporation satisfying all the conditions of paragraph 149(1)(j) and subsections 149(8) and (9) of the Act, no prior approval can be obtained by the corporation from the Department.  However, the Department can provide an opinion, which is not binding on the Department, as to whether, based on the assumption that the corporation does qualify under paragraph 149(1)(j) of the Act, the payments made to the corporation by contributors will be deductible under subsection 37(1) of the Act if the taxpayer carries on a business in Canada, the payments are to be used for SR & ED carried on in Canada which is related to a business of the taxpayer, and the taxpayer is entitled to exploit the results of such SR & ED.

In order to consider a request for an advance income tax ruling and an opinion as discussed above, we would require the following information:

a)     identification of the legislation under which the corporation is to be incorporated.

b)     a description of the objects of the corporation and the principal provisions of the proposed Articles of Incorporation and company by-laws.  The description should contain statements which clearly demonstrate that the corporation will satisfy all requirements of the various provisions of the Act and should describe how property will be distributed in the event of windup.  Supporting documents such as the proposed Articles of Incorporation and company by-laws should be submitted.

(c)     a description of the corporation's arrangements for obtaining funding.

(d)     a description of the corporation's arrangements for disbursing the funds received.

(e)     a description of the corporation's planned activities.

We trust that these comments will be of assistance.

Yours truly,

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch