30 November 1993 Income Tax Severed Letter 931850A F - Application of 78(4)

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.

Audit Programs Division Manufacturing Industries, J.P. Lavigne, Director Partnerships and Trusts Division P. Feely/F.B. Fontaine Specialized Audit Programs Section

Application of Subsections 78(4), 37(1), 127(5) and 127.1(2) of the Income Tax Act (the "Act")

This is in reply to your memorandum dated June 24, 1993 concerning the above provisions of the Act. We apologize for the delay in responding.

You are concerned with the interaction of (i) subsection 78(4) of the Act which deems wages and salaries to be incurred when paid 180 days from the end of the year in which they were accrued and (ii) the retroactive proposed amendment to paragraph 2900(2)(b) of the Income Tax Regulations (the "Regulations") which includes wages and salaries that are incurred (rather than paid) in the year.

It is your view that, notwithstanding sections 37, 127 and 127.1 of the Act which refer to "expenditures" rather than "expenses", under subsection 78(4) wages and salaries accrued in a year that are not paid prior to 180 days of the year would reduce the amount of deductible wages and salaries under subsection 37(1) of the Act that otherwise would have qualified as scientific research and experimental development expenditure ("SR&ED") and also for the investment tax credit ("ITC") incentives under sections 127 and 127.1 of the Act. You request our comments on this aspect and also on the significance of the use of the words "expense" and "expenditure".

It is also your view that wages and salaries that are not considered "incurred" under subsection 78(4) of the Act would become deductible expenditures for the purpose of subsection 37(1) and qualify for the ITC at the time they are paid.

Subsection 78(4) of the Act provides that the provisions thereof are applicable "for the purposes of this Act". It is our view that an expenditure that is "made" or "incurred" in a taxation year for the purposes of section 37 would not include wages and salaries that are "deemed not to have been incurred... in the year and...deemed to be incurred...in the taxation year in which the amount is paid" pursuant to subsection 78(4) of the Act. Accordingly, where the year in which wages and salaries were accrued and included in SR&ED expenditure does not coincide with the year in which they are so deemed to be incurred under subsection 78(4) of the Act, we agree that the SR&ED expenditure should be adjusted to delete the accrued wages and salaries in the year in which they were claimed, and claimed in the year the wages and salaries are effectively paid. Consequently, such accrued wages and salaries also would not qualify for the ITC incentives in the year of accrual since they would not be considered to be an expenditure described under paragraph 37(1)(a) or subparagraph 37(1)(b)(i) at that time. Rather, they would qualify for such incentives in the year they are effectively paid.

As stated in the first paragraph on page 39 of Interpretation Bulletin IT-151R4, the previous administrative position described at paragraph 11 of IT-151R3 that allowed certain accrued remuneration at year end to be considered "paid" is no longer necessary and has been deleted. That position was taken for the purposes of paragraph 2900(2)(b) of the Regulations and in effect avoided the 180-day rule in subsection 78(4) of the Act.

With regard to the use of the words "expenditure" in sections 37, 127 and 127.1 and "expense" in subsection 78(4) of the Act, there does not appear to be any particular significance for tax or accounting purposes from the point of view of the dictionary definitions of these terms, even when compared with the word "outlay" which is also used in the Act. In general, all of these words have the meaning of "spending of money" or "amount of money spent or expended".

We hope our comments will be of assistance to you.

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