30 June 1995 External T.I. 9510985 - SR&ED ROYALTY INCOME CANADIAN INVESTMENT INCOME

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Can royalty income be considered active business income?

2. Can the outlay and expense referred to in subsection 129(6), be R&D expense that comes under 37(1)?

Position TAKEN:

1. The Department recognizes that royalty income may be 	classified as active business income depending on the 	circumstances.

2. R&D expenses may come within the scope of subsection 129(6) of the Act.

Reasons FOR POSITION TAKEN:

1. IT-73R4 at paragraph recognizes that under certain 	conditions royalty income may be from an active 	business.

2. The expression "any outlay and expense" used at  	subsection 129(6) is sufficiently broad enough to 	encompass all forms of payments including R&D expenses 	under subsection 37(1) of the Act.

		5-951098
XXXXXXXXXX		Franklyn S. Gillman

Attention: XXXXXXXXXX

June 30, 1995

Dear Sirs:

Re: Sections 37 and 129 of the Income Tax Act (the "Act")

This is in reply to your letter dated April 10, 1995 wherein you requested clarification as to the interaction of sections 37 and 129 of the Act.

Where a taxpayer derives all or substantially all of it's revenue from the prosecution of scientific research and experimental development ("SR&ED") (including the sale of rights arising out of SR&ED carried on by the taxpayer), we would normally view these activities as the carrying on of a business. In such a case subsection 129(6) of the Act would have no application.

Where a taxpayer incurs SR&ED expenses in accordance with subsection 37(1) of the Act but was not carrying on a business at that time, there would be no deduction available to the taxpayer under subsection 37(1) of the Act, but the incurred expenses may be deductible pursuant to some other section of the Act depending upon the particular facts.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch