28 February 1992 Internal T.I. 9120477 F - ITC for CCPCS on Research Partnerships

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.

February 28, 1992

24(1)

Claim for Investment Tax Credit

With reference to your letter of July 10, 1991 we reconsidered our views on the eligibility of a Canadian Controlled Private Corporation ("CCPC") which is a partner in a partnership to avail itself of the enriched level ( 35%) Investment Tax Credits with respect to the allocation of investment tax credit from the partnership to the CCPC.

The Department's position that the enhanced investment does not flow through a partnership to the individual partners which are CCPCs is a long standing one that we believe has been consistently applied. To the best of our knowledge the position has been accepted by most taxpayers. This position has been endorsed by Current Amendment's and continuously supported by the Rulings Directorate. Nevertheless, in response to your request we asked that our legal advisors consider this issue.

We provided your views to Legal Services summarized as follows:

1)     At common law it is the partners rather than the partnership that carry on business, including the making of expenditures.

2)     Section 96 of the Act creates the fiction that it is the partnership that carries on business for the restricted purposes of computing income, taxable income and certain losses.

3)     Subsection 127(8) extends the fiction that the partnership carries on business for the investment tax credit calculation but only for the referenced paragraphs in the subsection 127(9) investment tax credit definition.

4)     The enhanced investment tax credit in subsection 127(10.1) is referenced in paragraph (e) of the investment tax credit definition but it is not included in the fiction created by subsection 127(8). Consequently, it is necessary to resort to the common law approach.

5)     Under the common law approach the expenditures are shared by the partners and the enhanced investment tax credit is allowed accordingly.

We also asked that they consider the following analysis:

a)     Subsection 127(8) was specifically legislated to deal with the allocation of investment tax credit to partners and it does not refer to paragraph (e) of the definition of investment tax credit in subsection 127(9). Paragraph (e) deals with the enhanced investment tax credit pursuant to subsection 127(10.1). We consider this omission to be deliberate.

b)     Specific rules to selectively flow through the enhanced investment tax credit to a Canadian-controlled private corporation who is a partner would be complicated. This is especially so, when the enhanced investment tax credit claimed would only be available to qualifying partners whereas the adjustment to the partnership's claim for scientific research and experimental development (subsection 127(12.1)) would affect all partners. Rules against unreasonable allocations would be needed.

c)     The enhanced investment tax credit for Canadian- controlled private corporations is an incentive to encourage a relatively small corporation to use its resources to incur the expenditures and accept the risks of performing scientific research and experimental development. In a typical partnership arrangement the committed resources of all the partners are available and the expenditures and risks are jointly assumed by the partners. Consequently, there is no compelling reason to provide the partnership or any of its members with the same level of incentive vouchsafed a Canadian-controlled private corporation carrying on scientific research and experimental development in isolation.

In our view, the fact that subsection 127(8) is in the Act is a clear indication that the fiction in section 96 is meant to be maintained in the calculation of the investment tax credit for the purpose of determining who made an expenditure or acquired an asset. In other words, if there were no subsection 127(8), no investment tax credit would be available to the partner since such a person did not have an expenditure or acquisition.

We suggest that additional support for this view of the scheme of the Act is found in the provisions of subsections 127(12), 127(12.1) and subparagraph 53(2)(c)(vi). Subsections 127(12) and 127(12.1) contemplate the partnership acquiring depreciable property and making expenditures and as result having to reduce the partnership's  cost of that property or expenditure. Subparagraph 53(2)(c)(vi) provides that the investment tax credits derived from partnership operations reduce the adjusted cost base of the partner's partnership interest. In other words, even in the calculation of investment tax credit, the fiction of the partnership as the tax entity separate from its partners is preserved;  much like a corporation and its shareholders.

21(1)(b)

While there is some sympathy for the two taxpayer CCPCs involved in this case, our technical interpretation of the law is that such corporations are not entitled to claim the enhanced investment tax credit.

for DirectorManufacturing Industries,Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c. Patrick Saint-Pierre       Audit Programs Directorate