11 January 1990 External T.I. 58460 F - Non-profit Corporation for Scientific Research and Experimental Development

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.

Dear Sirs:

This is in reply to your letter of July 28, 1989 concerning paragraph l49(1)(j) of the Income Tax Act (the "Act").  We apologize for the delay in replying.

24(1)

You now request our views in respect of paragraph l49(l)(j), if the Association incorporates a subsidiary non-profit corporation for scientific research and experimental development as described in that paragraph.

Our Comments

As we pointed out in our reply to your letter of May 15, 1989, it would appear that a proposed transaction by a particular taxpayer is involved.  Thus this matter would appear to be more appropriately the subject of an Advance Income Tax Ruling. However we are prepared to provide some general comments respecting your concerns.

(1)     The fact that for any given project the subsidiary corporation may get a return greater than 100% of the cost contributed to the research company (the return is capped at 3:1 of costs), may adversely affect its status under paragraph 149(1)(j) of the Act.  The corporation seeking exemption pursuant to subparagraph 149(1)(j)(ii) must expend at least 90% of its income on scientific research and development and pursuant to subparagraph 149(1)(j)(i) can not carry on any business.  The earning of a return in excess of the costs may constitute the carrying on of a business.  The significance of the revenues earned would need to be considered in conjunction with the objects of the corporation and the time and attention that is actually devoted to realizing such revenues.  However in general, the higher the level of revenues the more probable it is that a concerted effort would be present to maximize this source of funding leading to the conclusion that a business was being carried on.

(2)     To qualify for exempt status under paragraph 149(1)(l) the Association may carry on its not for profits activities itself or it may pay or provide funds to another organization to carry on those activities.  However, in your situation if the subsidiary corporation can not qualify for exempt status it is doubtful that the Association would qualify.  Generally an investment in a taxable subsidiary would not be considered to be for a purpose other than profit.

(3)&(4) In determining for purposes of paragraph 149(1)(l) of the Act whether the Association was operated for a purpose other than profit all the facts and details of its operations and activities must be considered.  The accounting treatment (loans vs. expenditures) and the source of the funds (bank borrowing vs. excess membership contributions) would be factors considered within the larger concept of whether the use of the funds was consistent with the exempt objects of the Association. 

     As to the deductibility of the membership dues by the members, the onus would be on the members to establish their entitlement to a deduction under the Act.

We trust this will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch