16 July 1985 Income Tax Severed Letter 7-4043 - [Scientific Research Audit Paper Vancouver District Office]

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.

July 16, 1985

TO: Specialized Audit Division

FROM: Corporate Rulings Division R.H. Joyce 995-1178 ATTENTION: Walter Szyc

RE Scientific Research Audit Paper Vancouver District Office

In response to your request of June 17, 1985, we have completed a technical review of the above-noted paper prepared by the Vancouver D.O. and wish to provide the following comments.

1) On page 7, the discussion of current expenditures incurred in Canada does not include payments deductible under subparagraph 37(1)(a)(iii) (i.e. to an approved university, college, research institute or other similar institution to be used for scientific research related to the class of business of the taxpayer).

2) On page 8, in the discussion of capital expenditures incurred in Canada, reference should be made to paragraph 37(1)(b) not 37(1)(h).

3) Also on page 8, note 2 of the Explanatory Notes should make reference to subsection 37(6), not 37(b).

4) On page 10, the last line of clause a) under Effective Dates should read "... subject to ...", not "... subject is ...".

5) The statement is made on page 15 that a specified area of a building can be considered as being wholly attributable to R & D if dedicated to R & D for a "... lengthly indefinite period". It would appear to us that the determination of a building's status as being wholly attributable to R & D can only be made based on the facts of each particular case. Factors such as the length of the proposed R & D program, plans for future projects, convertibility of the premises for other uses, etc. must all be taken into account.

6) Additional commentary should be added to the section referred to in 5) above for capital assets acquired after May 23, 1985 to reflect the modified requirement that "all or substantially all" of a capital asset be used for R & D in order to qualify. In addition, the new requirement that current expenditures after May 23, 1935 must be "directly attributable" to R & D should be highlighted.

7) On page 16 Item 13 it should be noted that the duplication of R&D claims is under study in Corporate Rulings. Our present position is that in subcontract arrangements both parties may be performing qualified activities but that the party receiving a fee is reimbursed within the meaning of Regulation 2902(e) and is denied the ITC.

Vancouver D.O has also prepared a paper entitled "Scientific Research Tax Credits (SETC) and Part VIII tax". We provide the following comment:

1) XXXX

2) On page 3, Part VIII Tax Refund, we found this explanation difficult to follow. For instance, in 1. Corporation's SRTC may confuse readers who may not know it refers to issues purchased by the corporation rather than issued by the corporation. Also we believe that deductions under 2(b) may be duplicated under 2(d)(ii). We suggest it is better to closely follow the wording of subsection 194(2) and use an example to illustrate the application.

3) On page 5, the commentary on Late Designation and Penalty should note that for issues made prior to March 1, 1984, the designation may be made up to 90 days after Royal Assent was granted and still be deemed to have been made on or before the last day of the month following the month in which the share was issued. Royal Assent was granted January 19, 1984. Accordingly, for issues made prior to March 1, 1984, the designation will not be considered late if filed on or before April 18, 1984.

4) XXXX

5) On page 6, point 3 should be changed to indicate that the maximum designation for SRTC is 100% of the consideration, giving rise to a tax credit of 50% to the investor.

We trust the above information will be of assistance.

Yours truly,

for Director Corporate Rulings Division Legislation Branch