23 July 1992 Income Tax Severed Letter 9203215 - SR & ED Accounting and Interest Expense

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.

5-920321
24(1) Franklyn S. Gillman
(613) 957-8953

Attention: 19(1)

July 23, 1992

Dear Sirs:

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

This is in reply to your letter dated January 29, 1992 wherein you requested a technical interpretation whether accounting fees and interest expense could be considered qualified expenditures under section 2900 of the Income Tax Regulations (the "Regulations").

A review of the transaction you have enunciated should be the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2 dated September 28, 1990. As expressed at paragraph 6 in the Information Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions.

While we are unable to provide confirmation of the tax effect with regards to situations such as the ones you described, we offer the following general comments for your assistance.

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Interpretation Bulletin IT-151R3 states at paragraph 10:

"Subparagraph 37(7)(c)(ii) provides that current expenditures on SR&ED in Canada include only expenditures that were incurred for, and all or substantially all of which were attributable or directly attributable (as determined by Regulation 2900) to the prosecution, or to the provision of premises, facilities or equipment for the prosecution, of SR&ED in Canada. It is the Department's view that the expression "all or substantially all" means at least 90 per cent." Paragraph 14 of the IT then goes on to state that:

• "Current SR&ED expenditures do not include general administrative expenses or factory overhead expenses that would have been incurred even if SR&ED had not been carried on. Such expenses are neither all or substantially all attributable to, nor directly attributable to, the prosecution of SR&ED. Where, for example, a taxpayer rents a photocopy machine that will be used approximately 50 per cent of the time for SR&ED activities and 50 per cent of the time for other purposes, no portion of the rental payments is considered to be an expenditure that is directly attributable to SR&ED. Also, although a portion of the salary or wages and related benefits of an employee who directly undertakes, supervises or supports the prosecution of SR&ED is, as indicated above, considered to be directly attributable to the prosecution of SR&ED, none of the overheads (e.g. telephone, office equipment, etc.) that could be allocated to that particular employee are considered to be directly attributable to the prosecution of SR&ED unless it can be established that these overheads would not otherwise have been incurred."

The expense must be incurred for and at least 90% must be attributable to the prosecution of the SR&ED or directly related to the prosecution of SR&ED as required in paragraph 2900(2)(c) of the Regulations. Items such as accounting expenses incurred to file forms, as consultation to set up an accounting system or to meet with Revenue Canada, Taxation auditors do not meet that criteria and would therefore not qualify.

In order for interest expense to qualify as a current expense for SR&ED purposes IT-151R3 at paragraph 16 states the criteria as follows:

• "Interest expense incurred on money borrowed for the purpose of undertaking SR&ED is deductible as an SR&ED expenditure only to the extent that the borrowed money is used to make SR&ED expenditures which are otherwise deductible under section 37."

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We trust that these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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