18 December 1989 External T.I. 74225 F - SR&ED Qualifying Expenditures

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.

SUBJECT: Subparagraph 37(7)(c)(ii) of the Income Tax Act (the "Act")

This is in reply to your memorandum of August 9, 1989, concerning the Department's interpretation of subparagraph 37(7)(c)(ii) of the Act.  In your memorandum you have requested the following:

1)     That we review your comments related to the subparagraph and provide our views.

2)     That we outline the interpretative position that the Department has adopted with respect to subparagraph 37(7)(c)(ii) expenditures.

3)     Whether our position in respect to subparagraph 37(7)(c)(ii) of the Act could apply, with such modifications as necessary, to expenditures contemplated by subparagraph 37(7)(c)(i) of the Act.

Our Comments

We have reviewed your comments related to (Paragraph 37(7)(c)(ii) of the Act and offer the following comments.

1)     In our view, subparagraph 37(7)(c)(ii) of the Act should be interpreted if it were a list of expenditures which, qualify for Scientific Research; and Experimental Development ("SR & ED") purposes.  As stated in your memorandum this position is supported by paragraphs 10 and 14 of Interpretation Bulletin IT-151R3, the draft IT-151R4 the Budget paper; and to some extend, the Technical Notes.  Given this interpretation, current expenditure would qualify provided met he requirements of either clause (A) or (B) of subparagraph 37(7)(c)(ii) of the Act.  This view has been confirmed balance as being in accordance with the intent of the legislation.

     21(1)(b)

2)     The Department's interpretative position in respect of subparagraph 37(7)(c)(ii) of the Act is that current expenditures on activities must satisfy the requirements of either clause (A) or (D) in order to qualify as being in respect of SR & ED.  Our interpretation of those requirements is as follows:

a)     Clause (A) includes an expenditure which is incurred for and all or substantially all of which is attributable to the prosecution, or to the provision of premises, facilities equipment for the prosecution, of SR & ED in Canada:  Paragraph 37(7)(b) of the Act defines SR & ED as having the meaning given by subsection 2900(1) of the Regulations.  The term "all or substantially all" has been interpreted to mean 90% or more for purposes of the Act.  Thus to qualify under clause (A) an expenditure must be both incurred for and 90% or more attributable to SR & ED as defined in subsection 2900(1) of the Regulations.  Whether an expenditure is incurred for and attributable to SR & ED is a question of fact, however, we offer the following comments:

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     In our opinion, the words "incurred for" require the application of a purpose test for each expenditure and the words "attributable to" require the application of a results test as well.  Thus, in our view, it is not sufficient that an expenditure was intended to be used substantially for research it must have actually been used in that manner in order to be deductible.

ii)     Paragraph 2.8 of IC 86-4R2 points out that it is not the overall purpose of an activity or program, but rather what is actually occurring at a technical level that is relevant.  As such, whether an activity is eligible or ineligible is to be determined solely by an examination of the nature and characteristics of the activity itself.

b)     Expenditures which do not qualify under clause (A) may qualify under clause (B).  Clause (B) includes expenditures of a current nature that are directly attributable, as determined by regulation, to the prosecution, or to the provision of premises, facilities or equipment for the prosecution, of SR & ED in Canada.  Although the words "directly attributable" could be interpreted to be more restrictive than the wording of clause (A) , the definitions in subsections 2900(2), (3) & (4) of the Regulations actually allow many expenditures to qualify under clause (8) which would not have qualified under clause (A).  For example, Clause (A) has an all or nothing type of wording and thus an expenditure either qualifies or it does not.  However, paragraph 2900(2)(b) of the Regulations allows a of employee salaries, wages and related benefits to qualify where the employee spends a portion of his time directly undertaking, supervising or supporting SR & ED prosecution.

3)     In our opinion, subparagraph 37(7)(c)(i) of the Act should similarly be interpreted as though it were a list of expenditures.  A current expenditure would qualify under subparagraph 37(7)(c)(i) of the Act provided it was incurred for, and all or substantially all attributable to or directly attributable (as determined by regulation) to, the prosecution of SR & ED carried on outside Canada.

We trust our comments will be of assistance.

B.W. DathDirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch