28 July 1992 Administrative Letter 9220946 F - Scientific Research One Pool Or Many Pools

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.

     922094

     C.R. Bowen     957-8585

July 28, 1992

Appeals and Referrals Division10th floor, 88 Metcalfe

Attention: Jim NordinSection Chief

24(1) Pooling Concept under Section 37

We are writing in reply to a memo from S.D.S. Wong dated July 9, 1992, wherein our comments were requested on the Department's policy of assessing subsection 37(1) of the Income Tax Act (the "Act") as one pool rather than as separate pools under each of the paragraphs.

Background

For the taxation years 1982 to 1984, the Taxpayer included amounts in paragraphs 37(1)(d) to (g) of the Act in respect of scientific research and experimental development ("SR&ED"), but did not include the related SR&ED expenditures incurred in the year in paragraphs 37(1)(a) and (b) of the Act.  The resulting negative balance in subsection 37(1) of the Act was added into

the Taxpayer's income under paragraph 12(1)(v) of the Act.  As a consequence, the Taxpayer utilized non-capital losses that would have otherwise expired in the year and affected the additional allowance available under section 37.1 of the Act. 

Taxpayer's Opinion

The Taxpayer is of the opinion that subsection 37(1) of the Act does not operate as a pool, so that where amounts that are included under paragraphs (d) to (g) exceed the amounts claimed under paragraphs (a) to (c) plus the amount under paragraph (c.1), a taxpayer is required to include the excess in income under paragraph 12(1)(v) of the Act.  The words "such amounts as may be claimed by the taxpayer" which appear in the introduction of each of the paragraphs 37(1)(a) to (c) of the Act (as applicable for the years 1982 to 1984) were elective and permitted a taxpayer to choose what part of the SR&ED expenditures incurred in the year were to be added to the pool and in which year.  Therefore, a taxpayer could claim any amount between zero and the maximum allowable, without regard to the quantum of amounts described in paragraphs (d) to (g).  Any doubt in the interpretation of the Act should be resolved in the favour of enhancing the Taxpayer's ability to carry forward deductions.  The subsequent amendments to the provisions of the Act should not be interpreted in such a manner as to retroactively and detrimentally affect the Taxpayer's position, in the absence of clear evidence to the contrary.

Department's Position

The Department's position is stated in paragraph 2 of IT-151R3 dated June 24, 1988.  Previous to that, paragraph 3 of IT-151R2 dated December 16, 1980 had one line, also supporting the pool concept, which stated that:

For taxation years ending after 1973, subsection 37(1) basically computes a taxpayer's balance of unclaimed scientific research expenditures and allows a taxpayer to deduct in computing income for a taxation year such portion of the balance as he desires.

In summary, under paragraphs 37(1)(a) to (c) of the Act, the expenditures made by a taxpayer in respect of SR&ED carried on in Canada are required to be accumulated in a pool in the year the expenditures are incurred.  The amount that may be deducted under subsection 37(1) of the Act is the amount, if any, by which the aggregate of expenditures under paragraphs (a) to (c.1) exceeds the aggregate of amounts under paragraphs (d) to (g).  Paragraphs (a) to (c.1) provide for additions to the pool and paragraphs (d) to (g) provide for deductions from the pool.  A debit balance in the pool may be claimed under paragraph 20(1)(t) of the Act; a

credit balance in the pool must be brought into income under paragraph 12(1)(v) of the Act.  Including the full amounts under paragraphs (d) to (g) of the Act and no amounts under paragraphs (a) to (c.1) of the Act is contrary to the intent of subsection 37(1) of the Act.  

Legal Opinions

23

Our Comments

The words "such amounts as may be claimed by the taxpayer" have never appeared elsewhere in the Act and were introduced as a result of amendments to subsection 37(1) of the Act applicable to the 1974 and subsequent taxation years.  Prior to those amendments, that subsection did not operate as a pool and all expenditures incurred in the year had to be included under paragraph 37(1)(a) of the Act and claimed in that year or be lost forever.  The amendments in 1974 allowed a taxpayer to choose any part thereof as the deduction in the year and the unclaimed amount could be carried forward and deducted in future years.  Subsection 37(1) of the Act was substantially amended again in 1987.  The December 16, 1987 Explanatory Notes and subsequent explanatory notes issued in April and June 1988 regarding those amendments, state by way of background, "that expenditures made by a taxpayer for SR&ED carried on in Canada are accumulated in a pool".

While there have been numerous approaches or principles of interpretation popular with the courts over the years, the current most widely held approach is the modern principle of statutory construction as summarized by E.A. Driedger in The Construction of Statutes (2nd edition), Butterworths, Toronto, 1983 at page 87:

To-day there is only one principle or approach, namely the words of an Act are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.

The basic method of construction using the modern rule summarized by Driedger at page 105 indicates, inter alia: If, notwithstanding that the words are clear and unambiguous when read in their grammatical and ordinary sense, there is disharmony within the statute, statutes in parti materia, or the general law, then an unordinary meaning that will produce harmony is to be given the words, if they are reasonably capable of bearing that meaning.

This principle was accepted in the court case Stubart Investments Ltd., 84 DTC 6305, (SCC) at pages 6323-24 and repeated in several subsequent cases, e.g., Canterra Energy Ltd, 85 DTC 5245 (FCTD) and Lor-Wes Contracting Ltd., 85 DTC 5310 (FCA).  In the case Prince Albert Pulp Company Ltd. heard at the FCTD, 90 DTC 6527 and in the appeal to the FCA, 92 DTC 6189, the judges held that although there was some ambiguity in interpreting the words "has deducted" and "deducted" found in subsection 13(7.1) of the Act, the words should be interpreted using an interpretation permissible from the language employed that would be in a manner consistent with the calculation of income and expenses on an accrual basis and reconcilable to other related provisions.

We agree with the comments in the paragraph at the bottom of page 2 and on page 3 contained in the memo to the Vancouver District Office written by Rulings Directorate dated May 9, 1989 (a copy of which is attached), which indicate, in summary, that the words "such amounts as may be claimed" mean amounts which a taxpayer is permitted to claim.  The discretion as to how much may be deducted in respect of SR&ED expenditures is provided for in the words "there may be deducted" in the preamble of subsection 37(1) of the Act.  To adopt the position suggested by the Taxpayer would mean that in the year a taxpayer incurred SR&ED expenditures and received amounts to which paragraphs (d) to (g) applied, but chose to have no deduction under subsection 37(1) of

the Act, that taxpayer would automatically be faced with an income inclusion under paragraph 12(1)(v) of the Act.  This result does not reflect an appropriate interpretation of subsection 37(1) of the Act.

In summary, it is our opinion that, based on the intent of the legislation 23, the Department's position should be maintained.

We trust our comments will be of assistance.

for DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch