29 June 1989 Ruling 73913 F - Investment Tax Credits on SR & ED Expenditures Reimbursed by U.S. Parent Corporation

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.

We are writing in reply to your memorandum of May 11, 1989, wherein you requested our comments related to Investment Tax Credits (ITC's) being claimed by 24(1)   on scientific research and experimental development (SR & ED) expenditures for which it was reimbursed by its U.S. parent corporation.  In addition, you have requested our opinion as to the interpretation of the phrase "entitled to exploit results" as used in subparagraph37(1)(a)(ii) of the Income Tax Act (the "Act").

Facts

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-     24(1)

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District Office Opinion

In your opinion, subsections 127(5), 127(9), 127(11.1) and paragraph 12(1)(x) of the Act require the ITC to be based on the net SR & ED expenditures after deducting any "non-government assistance".

Taxpayer's Representation

The taxpayer's opinion is that the deduction of "non-government assistance" does not apply to assistance received from a non-resident corporation.  The taxpayer states that as 24(1) is not subject to Part I tax, it does not deduct the reimbursement of SR & ED costs in computing its Canadian taxable income.  Therefore, paragraph (c) of the definition of "contract payment" in subsection 127(9) of the Act does not apply, and thus no reduction of the costs which qualify for ITC purposes is warranted under paragraph 127(11.1)(c) of the Act.  In addition, the payments would not be considered to be non-government assistance.  The definition of non-government assistance in subsection 127(9) of the Act includes only amounts included in income pursuant to paragraph 12(1)(x) of the Act and the taxpayer has included the amount in income under section 9 of the Act.

The taxpayer also points out that subparagraph 2901(e)(ii) of the Regulations to the Income Tax Act (the "Regulations") does not serve to deem the expenditures to be prescribed expenditures which would not be qualified for the ITC.

The taxpayer also made representation as to the meaning of entitled to exploit the results as stated in subparagraph 37(1)(a)(ii) of the Act.  In its opinion, the entitlement to exploit need not be exclusive or unrestricted, and the exploitation need not actually occur.

Our Comments

We offer the following comments concerning the above issues:

1)     We concur with the taxpayer that paragraph (c) of the definition of "contract payment" in subsection 127(9) of the Act does not apply since the U.S. parent is not entitled to a deduction under clause 37(1)(a)(ii)(D) of the Act as it is not subject to Canadian income tax.

2)     We agree with the taxpayer that the payments are not considered to be "non-government assistance".  It is our view that the wording in subparagraph 12(1)(x)(v) of the Act "to the extent that the amount was not otherwise included in computing the taxpayer's income" provides that paragraph 12(1)(x) will not apply where an amount is included in income under some other provision, such as subsection 9(1) of the Act. Provided the taxpayer includes the amounts in income under subsection 9(1) of the Act pursuant to generally accepted accounting principles, the amounts would not be considered "non-government assistance".

3)     As the payments are neither "contract payments" nor "non-government assistance" it is our opinion that paragraph 127(11.1)(c) of the Act would not cause a reduction in the amount of qualified expenditures for the purposes of the definition of "investment tax credit" in subsection 127(9) of the Act.

4)     We also agree with the taxpayer that subparagraph 2902(e)(ii) of the Regulations is not applicable as the U.S. parent is not subject to Canadian income tax.

5)     In our opinion, the determination of whether a taxpayer is "entitled to exploit the results" of an SR $ ED project, as that term is used in subparagraph 37(1)(a)(ii) of the Act is generally a question of fact dependent upon the contractual arrangements that exist between the parties.  However, in general, it is our view that the requirement would normally be fulfilled where the taxpayer receives the right to use the results of the SR & ED on an exclusive or non-exclusive basis, regardless of any reasonable territorial restrictions.  In addition, exploitation need not actually occur as that would depend on commercial viability etc. of the results of the SR & ED.   In the case 24(1) based on the information received, it would appear to meet the requirement of being "entitled to exploit the results" despite its restricted territory and the 6% royalty payment.

We trust our comments will be of assistance to you.

Acting Chief Merchandising, Manufacturing and Construction SectionSmall Business and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch