22 June 1993 External T.I. 9315365 F - Approved Association

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:  XXXXXXXXXX

This is in reply to your facsimile transmission of May 21, 1993 concerning the Department's guidelines and requirements to be met in order that the XXXXXXXXXX may qualify as a dedicated R & D facility. Following our telephone conversation (Fontaine/XXXXXXXXXX), you particularly requested information concerning the requirements to become an "approved association" or a "non-profit corporation for scientific research and experimental development".

Under subparagraph 37(1)(a)(ii) of the Income Tax Act (the "Act") a taxpayer may qualify for scientific research and experimental development ("SR&ED") tax incentives by making a payment to, among other entities, an approved association or a corporation resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act ("non-profit corporation").

Approved Association

An association, in order to be considered "approved", must receive written approval from our Minister.

In order for any organization to become an "approved association", it must meet the criteria of a non-profit organization and be able to demonstrate that it is able to carry out SR&ED on an ongoing basis. More specifically, the requirements are as follows:

(a)     it must have the facilities and personnel capable of carrying out SR&ED as defined in the Act;

(b)     it must carry on only activities that are unquestionably SR&ED;

(c)     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.;

(d)     the general public must be a beneficiary of the results of successful research; and

(e)     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 would require copies of the following documentation relating to the organization and its activities:

(i)     identification of the legislation under which the association was or is to be created;

(ii)     copies of the organization's charter, code of ethics and by-laws which should indicate that it will satisfy all requirements in clause 37(1)(a)(ii)(A) of the Act and the post-amble thereto, as well as how its property will be distributed in the event of wind-up;

(iii)     a description of the association's arrangements for obtaining funds;

(iv)     a description of the association's arrangements for disbursing funds;

(v)     financial statements for prior years if the association already exists; and

(vi)     details of the research activities to be carried out by the association in the future and evidence that it has the staff and facilities to carry out such activities.

Non-profit Corporation for SR&ED

In order for a corporation to be considered a non-profit corporation for SR&ED for a particular fiscal period, the following criteria must be satisfied:

a)     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 and no part of the income may be payable to or otherwise available for the personal benefit of any member thereof;

b)     the directors and members and those directors and members who also serve as officers shall serve as directors, members and officers without remuneration and no director, member or officer shall directly or indirectly receive any profit from his/her position as director, member or officer provided that a director or officer may be paid for reasonable expenses incurred by him/her in the performance of his/her duties;

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

d)     the objects of the corporation must be to exclusively carry on or promote SR&ED. The SR&ED can 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 above; and

e)     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 made 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 can provide an advance income tax ruling, for which there is a charge, confirming that a particular corporation to be incorporated will be "constituted exclusively for the purpose of carrying on or promoting SR&ED". In order to do so, we would require the following information.

1.     The information and deposit described in paragraphs 15(a) to 15(g) of Information Circular 70-6R2 dated September 21, 1990.

2.     A copy of the proposed articles of incorporation and by-laws, which should include the information described in a) to e) above.

3.     A detailed description of the corporation's arrangements for obtaining funds.

4.     A detailed description of the corporation's arrangements for disbursing the funds received and the screening process to determine that the funds are to be spent on expenditures which qualify as SR&ED.

5.     A description of the follow-up procedure, if any, to be undertaken to ensure that the payments made to organizations listed in clause 149(1)(j)(ii)(B) of the Act are used for SR&ED purposes.

6.     A description of the corporation's SR&ED activities currently planned to be undertaken or funded.

7.     The name and address of the entity which is planning to incorporate the corporation and any proposed interaction between the two entities.

8.     The arrangements to be entered into in order to ensure that the contributors of funds to the corporation will be entitled to exploit the results of the SR&ED.

We trust these comments will be of assistance.

Yours truly,

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