1993 Administrative Letter 9324986 F - ITR 2900(7)

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.

January 11, 1994

Attention: Ms Mara Praulins Acting Chief

7-932498

Scientific Research and Experimental Development Salaries, Wages and Related Benefits

This is in reply to your memoranda of October 28 and September 2, 1993, requesting our comments regarding the interpretation of certain provisions of the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations") related to scientific research and experimental development ("SR&ED").

You list some expenses related to employee remuneration and you ask whether these expenses constitute "related benefits" or general overhead expenditures for the purposes of sections 37 and 127 of the Act and section 2900 of the Regulations.

More specifically, you refer to the portion of the employer's share of Canada Pension Plan and Unemployment Insurance Commission, payments to Workers Compensation Board and employer's health tax that pertain to employees who either directly undertake, supervise or support the prosecution of SR&ED.

You also request our opinion on what is meant to be "related benefits".

Your memoranda refer to Bill C-136. In what follows, it is assumed that the Parliament elected on October 25th will adopt Bill C-136 as it was written on June 14, 1993. It is also assumed that the new Government will adopt the proposed section 2900 of the Regulations as it was written on June 14, 1993.

THE REGULATIONS

Let us first look at the relevant provisions of the Regulations.

1.      Subsection 2900(4) of the Regulations, as proposed in Bill C-136, reads in part as follows:

"For the purposes of the definition "qualified expenditure" in subsection 127(9) of the Act, a prescribed proxy amount of a taxpayer for a taxation year in respect of a business in respect of which the taxpayer elects under clause 37(7)(c)(ii)(B) of the Act is the amount (...) which is 65% of the total of all amounts each of which is that portion of the amount incurred in the year by the taxpayer in respect of salary or wages of an employee who is directly engaged in scientific research and experimental development carried on in Canada that can reasonably be considered to relate to such work having regard to the time spent by the employee thereon. (...)"

2.      Subsection 2900(7) of the Regulations as proposed reads as follows:

"For the purposes of subsections (4) and (5), salary or wages of an employee incurred in a taxation year does not include related benefits, remuneration based on profits nor bonuses."

OUR OPINION

3.      You ask us for clarification of the expression "related benefit". Neither the Act nor the Regulations define this expression. However, the Act distinguishes salary or wages from related benefits. For example, subclause 37(7)(c)(ii)(B)(IV) states that "that portion of an expenditure made in respect of an expense incurred in the year for salary or wages and related benefits of an employee who is directly engaged in scientific research and experimental development" can be considered an SR&ED expenditure. In light of this subclause, we conclude that the related benefits are not a part of the salary or wages of an employee but rather something else. Consequently, the benefits taxable under section 6 or 7 of the Act cannot be considered to be related benefits, since they are part of the salary or wages of an employee. (See the meaning of "salary or wages" in subsection 248(1) of the Act)

4.      In your memorandum of June 21, 1993, you wrote the followings:

"Proposed subclause 37(7)(c)(ii)(B)(IV) includes the portion of an expenditure made in respect of an expense incurred in the year for salary or wages and related benefits of an employee directly engaged in SR&DE as eligible expenditures for purposes of section 37. Therefore, if the employer's share of CPP and UIC, payments to WCB, employer's health tax, etc. are related benefits, they will be included in section 37. However, if these items are not related benefits, they will not be captured in section 37. (...)"

5.      We would like to draw your attention to an important distinction. The test that must be satisfied under subclause 37(7)(c)(ii)(B)(IV) of the Act, as proposed in Bill C-136, is not whether the contribution is a "related benefit" but whether it is made in order to obtain a benefit related to a salary or wage for the employee who can benefit from this contribution. The relevant provisions of the proposed paragraph 37(7)(c) read as follows:

"references to expenditures on or in respect of scientific research and experimental development

(ii)      where the references occur other than in subsection (2), include only

(B) where a taxpayer has elected in prescribed form and in accordance with subsection (9) for a taxation year, expenditures incurred by the taxpayer in the year each of which is

(IV)      that portion of an expenditure made in respect of an expense incurred in the year for salary or wages and related benefits of an employee who is directly engaged in scientific research and experimental development in Canada that can reasonably be considered to relate to such work having regard to the time spent by the employee thereon (...)"

(our underlining)

This distinction must be made since the courts have already ruled that the contributions of an employer to plans similar to the plans referred to in your memoranda do not constitute a benefit for the employee. According to these decisions, it is not the contribution of the employer which constitutes the benefit for the employee but the amount that the employee effectively receives from these plans.

6.      Here are some examples of the relevant cases.

The courts have ruled that an employee derived no immediate benefit from the fact that his employer was offering a pension plan to its employees. In Pazuk v. M.N.R., the employer had contributed to a pension plan which had not been registered with the Department. On the issue of benefits, the Board stated:

"However, paragraph (a) of section 5 goes on to provide that the benefits must have been "received or enjoyed by" the person to be subjected to taxation "in the year in respect of, in the course of or by virtue of the office or employment". The appellant received nothing in the years 1949, 1950 or 1951 and, in my opinion, enjoyed no benefit in those years from his employer's contributions. At any rate, he neither received nor enjoyed benefits in those years in the amounts which have been added to his income by the respondent."

Further on, the Board comments:

"On the question of whether the appellant received a "benefit" from his employer's contributions in the years under appeal, I am of the opinion that he did not. Neither, for example, does an employee of a transportation company who, as a term of his employment, becomes entitled to a free pass annually on the company's transportation system receive any "benefit" in any year unless and until he takes advantage of his right and actually uses his pass for transportation in any specific year."

In Hogg v. Queen., the Court had to determine whether an employer's contributions to an "investment plan" were taxable for the employee. The employer was contributing an amount each year and the employee could collect these amounts after two years. The Court ruled that the amounts were taxable for the employee when he could claim them for use without restriction.

7.      In light of the precedents, we take the view that employer contributions to:

-     the Unemployment Insurance Plan

-     the Quèbec Pension Plan and the Canada Pension Plan

-     the Workers Compensation Board

constitute "expenditure made in respect of an expense incurred in the year for (...) related benefits of an employee". Therefore, they can be eligible as expenditures for SR&ED if they satisfy all the other requirements.

8.      However an employer's contributions to the Quèbec health insurance plan or its Ontario equivalent are not "related benefits" because it is not necessary to be an employee to benefit from these plans. In our opinion, employer contributions to these plans are general overhead expenditures.

NEW DRAFT LEGISLATION

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We hope the above information will be of use.

Section Chief

Manufacturing Industries, Partnerships

and Trusts Section

Manufacturing Industries, Partnerships

and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch