20 August 1990 Ministerial Correspondence 900404 F - 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.

August 20, 1990

Dear Sirs:

Re: Scientific Research and Experimental Development ("SR&ED")

We are writing in reply to your letter of April 10, 1990 and further to our telephone conversation of July 16, wherein you requested our comments on the phrase "entitled to exploit the results of such SR&ED" in subsection 37(1) of the Income Tax Act (the "Act").  We apologize for the delay in responding to your letter.

OUR COMMENTS

It is our opinion that 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 funding taxpayer 1) receives the right to use the results of the SR&ED on an exclusive or non-exclusive basis, regardless of any reasonable territorial restrictions, or 2) is entitled to distribute and market any products that result from the SR&ED.  Similarly, the right to use the results of an SR&ED project based on a license arrangement where the Canadian researcher charges the funding taxpayer a reasonable royalty, license fee or some other amount would also constitute an entitlement to exploit the results of SR&ED.

In some situations a Canadian researcher, described in one of clauses 37(1)(a)(ii)(A) to (E) of the Act, carrying on SR&ED in Canada may be entitled to own the rights to the intangible property, such as patents or copyrights, arising out of the SR&ED. If the funding taxpayer receives, in consideration for a reasonable royalty payable to such a researcher, the exclusive rights to manufacture and distribute in Canada products made as a result of using those rights, the funding taxpayer would normally be considered to be entitled to exploit the results of the SR&ED performed.  This entitlement will not be affected in the situation where that funding taxpayer also had the rights to manufacture and distribute products outside Canada and assigned those rights to another corporation in consideration for royalties to be received based on the use of those rights.

A funding taxpayer that receives the right to manufacture or distribute products resulting from the SR&ED may decide to assign all of those rights to another party in exchange for royalties based on the products produced or sold.  In such a case, the funding taxpayer would still normally be considered to have met the "entitled to exploit" test.  However, the requirement that the expenditure made by the funding taxpayer be related to a business of that taxpayer would not automatically be met.  In order to do so, the results of the SR&ED must be considered to have a direct and beneficial application in a business that is carried on by the taxpayer in the year by leading to or facilitating an extension of that existing business.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust these comments will be of assistance.

Yours truly,

R.E. Thompsonfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch