19 June 1989 Administrative Letter 58216 F - Approval of Scientific Research Organizations

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 19, 1989

Dear Sirs:

Re:  24(1) Request for "Approval" Pursuant to Subsection 37(1) of the Income Tax Act

This is in reply to your recent enquiry in which you requested us to consider whether the 24(1) would qualify as an approved organization as described in clause 37(1)(a)(ii)(E) of the Income Tax Act (the "Act").  We acknowledge our meeting of May 29 in which 19(1) and you met with Robert Joyce and John Brooks of this office, to discuss this matter.

As we advised you on June 12, the Department of Finance stated in its February 26, 1986 Budget Papers that such approved organizations would include three councils (the Natural Sciences and Engineering Research Council, the Medical Research Council and the Social Sciences and Humanities Research Council), and it is not anticipated that other organizations will be approved. It will be of interest to you to note that a distinguishing characteristic of these councils is that they are all directly funded by the federal government.

As an alternative, you queried whether it would be possible to qualify as an approved association as described in clause 37(1)(a)(ii)(A) of the Act.  You will recall from our meeting of May 29 that in order to so qualify it would be necessary for 24(1) to undertake the research itself or arrange to have an agent do the research on behalf of and for the exclusive benefit of 24(1) .  Based on our current understanding of the facts 24(1) would not qualify under this provision.

We also discussed the possibility of qualifying as a non-  profit corporation resident in Canada constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development ("SRED"), as described in paragraph 149(1)(j) of the Act, and thereby qualifying under clause 37(1)(a)(ii)(C) of the Act.  The major provisions encompassed in paragraph 149(1)(j) are as follows:

a)     the corporation must have been constituted exclusively for the purpose of carrying on or promoting SRED.

b)     no part of the corporation's income can be payable to, or can otherwise be available for the personal benefit of, any proprietor, member or shareholder of the corporation.

c)     the corporation cannot acquire control of any other corporation.

d)     the corporation cannot carry on any business.

e)     the corporation must expend amounts in Canada either on SRED which is directly undertaken by or on behalf of the corporation, or by way of payments to a body described in clause 37(1)(a)(ii)(A) or (B) to be used for SRED, and the aggregate of such expenditures cannot be less than 90% of the corporation's income for the period.

As you requested, we have highlighted some relevant provisions in the Act:

a)     subsection 127(9) - qualified expenditure for purposes of the investment tax credit.

b)     subsection 37(1) as revised by Bill C-139 which received Royal Assent on September 13, 1988 - deduction for SRED expenditures.

c)     paragraph 149(1)(j) - description of a non-profit corporation for SRED.

d)     subsection 149(8) - the meaning of control and income.

e)     subsection 149(9) - rule for computing income for the purpose of determining whether a corporation is described in paragraph 149(1)(j) for any particular taxation year.

This list is not intended to be exhaustive but is presented as a reference with respect to conversations we have had with you.  We also would like to point out that payments to a body described in any of clauses 37(1)(a)(ii)(A) through (E) must satisfy the requirements stated in the postamble of subparagraph 37(1)(a)(ii)  That is, the payments must be used for SRED carried on in Canada, related to a business of the taxpayer, and the taxpayer must be entitled to exploit the results of such SRED.

In order to assist you in submitting an application to this Department for our opinion on this matter, we have described below the information which we would require in order to make a decision:

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 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 and should describe how property will be distributed in the event of windup.  Supporting documents such as the Articles of Incorporation and company by-laws should be submitted.

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

d)     a description of the corporation's arrangements for disbursing moneys.

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

We will be pleased to consider this matter further upon receiving from you a written request which describes the course of action you intend to pursue.

Yours truly,

B.W. Dath DirectorSmall Business and General Division Specialty Rulings Directorate Legislative and IntergovernmentalAffairs Branch