18 May 1993 External T.I. 9308255 F - Approved for Scientific Research

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Approved Association for Scientific Research

This is in reply to your letter dated March 16, 1993 on behalf of a corporate client and the XXXXXXXXXX You requested that we provide you with information concerning the criteria our Minister uses in granting an organization the status of an approved entity pursuant to subparagraph 37(1)(a)(ii) of the Income Tax Act (the "Act").

Our Comments:

In accordance with clauses 37(1)(a)(ii)(A) to (D) of the Act, an entity providing scientific research and experimental development ("SR&ED") funding can qualify for the SR&ED tax incentives by making a payment to any one of the following entities which carry on SR&ED activities in Canada:

(A)      an approved association;

(B)      an approved university, college, research institute or other similar institution;

(C)      a corporation resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act; or

(D)      a corporation resident in Canada.

Currently, all Canadian universities and affiliated colleges are automatically considered by our Department to be "approved" entities. However, all other entities listed in clauses (A) and (B) above must receive written approval from our Minister in order to be considered "approved". A summary of the requirements to be satisfied by each of the above classes of entities is indicated below.

(A)      Approved Association

In order for any association, whether in existence or proposed to be created, to become an "approved" association, the following requirements must be met:

1.     it must have the facilities and personnel capable of carrying out SR&ED;

2.     it must carry on only activities that are unquestionably SR&ED;

3.     it must satisfy the requirements for non-profit status, such as no personal benefit to members, no control of other associations, satisfactory provisions for distribution of assets upon dissolution, etc.; and

4.     the funding of the association must be sufficient to ensure ongoing SR&ED.

Although there is no charge by our Department to "approve" an association, in order to do so we require certain documentation - a list of which can be provided if you are interested in obtaining approval of an association.

(B)      Approved Research Institute

The requirements to become an "approved" research institute or similar institution are identical to those outlined above for an association.

(C)      149(1)(j) Corporation

The following criteria must be met by a corporation so that it may be considered a non-profit corporation for SR&ED in a particular fiscal period:

(i)     the corporation's activities must be carried on without the purpose of gain for its members and any profits or other accretions shall be used in promoting its objects. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof;

(ii)     the directors and members including any director or member who also serve as an officer, shall serve in that capacity without remuneration. No director, member or officer shall directly or indirectly receive any profit from his/her position as director, member or officer, however it is permitted that a director or officer may be reimbursed for reasonable expenses incurred by him/her in the performance of his/her duties;

(iii)     the corporation must not acquire control of any other corporation nor will it carry on any business as that term is used in the Act;

(iv)     the objects of the corporation must be to exclusively carry on and/or promote SR&ED. The SR&ED activity may be directly undertaken by or on behalf of the corporation or by an entity described in clause 37(1)(a)(ii)(A) or (B) of the Act; and

(v)     the amounts to be expended in Canada on SR&ED must not be less than 90% of the corporation's income for the period.

The determination of whether a corporation will qualify under paragraph 149(1)(j) of the Act is a question of fact which can only be determined once the corporation's income tax return for a particular fiscal period is filed and the activities of the corporation reviewed by the District Taxation Office. No prior approval from our Department is required nor can it be obtained.

While the Rulings Directorate cannot provide any specific comments concerning the tax status of an existing corporation, we are able to provide an advance income tax ruling for which there is a charge confirming that a particular corporation which will be incorporated, will be "constituted exclusively for the purpose of carrying on or promoting SR&ED". In order for us to issue such a ruling we would require certain documents - a list of which can be provided if you are interested in incorporating a new corporation.

(D)      Corporations Resident in Canada

No prior approval is required nor can it be obtained from our Department for this type of entity. In order for this requirement to be satisfied, a corporation must simply be resident in Canada.

(E)      Approved Organization

Approval under clause 37(1)(a)(ii)(E) is intended to be restricted to the three granting councils which were specifically mentioned in the February 26, 1986 Budget Papers, i.e the Natural Sciences and Engineering Research Council, the Medical Research Council and the Social Sciences and Humanities research Council.

You indicate that the activities of the XXXXXXXXXX are not restricted to scientific research and experimental development. It is therefore unlikely that this Association could qualify as one of the entities described above. A direct payment by your client to a University for research could qualify assuming the research is related to your client's business.

We trust these comments will be of assistance.

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch