20 August 1992 External T.I. 9213925 F - SR&ED Entitled to Exploit Direction of $ for SR&ED

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.

Attention: 19(1)

August 20, 1992

Dear Sirs:

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

This is in reply to your request dated April 30, 1992, regarding the Department's position on the availability of the SR&ED deductions pursuant to section 37 of the Income Tax Act (the "Act"), which followed our comments to you of December 4, 1991 regarding the same subject.

You requested additional clarification of the following:

I.     Would it be necessary for the contributor to provide the funds to finance a particular project, identified at the time the contribution is made, for the contribution to qualify for the Tax Benefits, or would it be sufficient that the funds are specifically directed to the general research fund at the 24(1) research (the "Centre")?

II.     If the Centre allows the contributor to use the results of the SR&ED in exchange for a royalty, license or some other amount, would it be necessary that such amount be at fair market value, or could the Centre charge a nominal fee in order that the contributor be considered to have an entitlement to exploit the results of the SR&ED?

III. Would the Centre be required to present to the contributor a written report of the results of the SR&ED to substantiate the contributor's claim to the Tax Benefit?

Our Comments

I.     In reply to this request we can only reiterate our response in this area provided in our letter of December 4, 1991.   For a contribution to qualify under subparagraph 37(1)(a)(ii) of the Act it is a requirement that the funds are used by the University for SR&ED activities carried on in Canada.  It is essential that an audit trail exist evidencing that the funds were expended on SR&ED activities so that the Department is able to verify that this requirement has been met.  The Department has to be able to determine that the funds have been used by the Centre for SR&ED activities carried on in Canada.

II.     The phraseology "entitlement to exploit" is to be interpreted to mean that a contributor who is obliged to pay a licensing or royalty fee should be charged a reduced rate than that of a non-contributor so that the contributor would possess an advantage.  This would be considered to satisfy the "entitlement to exploit" requirement.

III.     In keeping with the "entitlement to exploit" requirement it is our opinion that in order to meet this criteria it would be necessary that the contributor have in his possession the results of the SR&ED project.

The above comments are an expression of opinion and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2.  We trust however that they are of assistance to you.

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