26 September 1991 External T.I. 9113565 F - Interpretation of Research Institute Structured as a Trust/Research Institute as a 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.

5-911356

Dear Sir or Madam:

Re:  Clauses 37(7)(f)(iii)(A) and (B)  of the Income Tax Act (the "Act")

This is in reply to your letter dated May 9, 1991 wherein you requested the Department's interpretation of the above captioned clauses.

You expressed your concern as to whether a payment made to a corporation resident in Canada, that is exempt from tax under paragraph 149(1)(j) of the Act, but that is at arm's length with the payer, would be subject to the provisions of clause 37(7)(f)(iii)(B) of the Act and therefore classified as a non-qualifying expenditure.  Expressing your concern another way, the payment having not been termed a non-qualifying expenditure under the provisions of clause 37(7)(f)(iii)(A) of the Act by virtue of the fact that the resident corporation is at arm's length with the taxpayer, would this fact automatically exclude it from being subject to the provisions of clause 37(7)(f)(iii)(B) of the Act ?

Your reasoning was that "... if the provisions of clause 37(7)(f)(iii)(B) of the Act were to apply to such a corporation, clause 37(7)(f)(iii)(A) of the Act would not serve any useful purpose for a corporation resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act (underlined text added).  If clause 37(7)(f)(iii)(B) of the Act were considered to apply to such a corporation, one would be faced with the anomaly that an approved research institute structured as a trust could use payments from arm's length taxpayers to pay its rent without a portion being denied section 37 treatment, whereas an approved research institute structured as a corporation could not. "It was also your opinion that "the same results would apply to an approved research institute that was structured as a corporation or an approved association that was structured as a corporation and that was at arm's length with the taxpayer."

You requested the Department's comments with regards to the above analysis.

The Department shares the above described view regarding the interaction of clauses 37(7)(f)(iii)(A) and (B) of the Act.  When statutory interpretation is used to ascertain the intent of the Legislature, it usually deals with a situation of rival construction of words, phrases or clauses.  When dealing with such a predicament, one must judge one interpretation against another and should it be that either interpretation is plausible, but one of the interpretations results in an absurdity, then it must be concluded that the Legislature did not intend such a result and the other interpretation will apply.

If the intention of the Legislature was to restrict expenditures of Canadian resident corporations exempt from tax under paragraph 149(1)(j) of the Act, then this could have been more readily accomplished under the more general clause 37(7)(f)(iii)(B) and the specific reference to paragraph 149(1)(j) corporations omitted altogether from clause (A).  On the other hand, if the intent was to only refer in clause 37(7)(f)(iii)(B) to those corporations referred to in clause (A) of the Act that are not dealing at arm's length with the taxpayer, the reference to them would be practical and serve a purpose.

Yours truly,

for DirectorBusiness and General DivisionRulings Directorate