11 September 1996 Income Tax Severed Letter 9525106 - Truck used to transport employees, capital expenditure, scientific research and experimental development

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.

September 11, 1996

TO:Head Office FROM:Paul G. Lynch A:Tax Incentive Audit Section DE:Field Liaison and Mara Praulins Technical Projects Acting Chief 957-8973

Attention: Mel Machado FILE952510-7

SUBJECT:Truck purchased to transport employees claimed as SR & ED

This is in reply to your memorandum dated September 20, 1995, wherein you requested our opinion on whether a truck used in transporting employees to a certain work location can be considered to be attributable to the prosecution of Scientific Research & Experimental Development (SR & ED).

Facts

The taxpayer is involved in developing

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Since a part of the research is carried out in the field plots the taxpayer has purchased a truck to transport certain employees to these work locations. The taxpayer, in addition to other expenditures incurred in operation the truck, has also claimed SR & ED investment tax credits on the cost of the truck.

Our comments

We have assumed that activities on this project carried out both in the field plots and at the main business location constitute SR & ED. Thus, the narrow issue is whether or not the truck used to transport employees between these locations should qualify as a capital expenditure under paragraph 37(1)(b) to be included in the pool of deductible SR & ED expenditures.

It is our view that, in these circumstances, the truck could qualify as a SR & ED capital expenditure, notwithstanding that the nature of the asset and its direct use do not necessarily impart the typical image of SR & ED activities. Our analysis follows.

Our research indicates that travel expenditures are commonly allowed SR & ED expenditures, albeit in the context of current expenditures (i.e. paragraph 37(1)(a) or subsection 37(2) expenditures). Subsections 2900(2) and (3) provide some guidance as to when current expenditures are directly attributable to the prosecution of SR & ED, especially for incremental costs (i.e. paragraphs 2900(2)(c) and 2900(3)(b) of the Regulations). Similar guidance is not provided in the Regulations for capital expenditures described under subclause 37(8)(a)(ii)(A)(III). To qualify under paragraph 37(1)(b), a capital expenditure must be "an expenditure of a capital nature made by the taxpayer...in the year or a preceding year...on SR & ED carried on in Canada, directly undertaken by or on behalf of the taxpayer, and related to a business of the taxpayer". Further, under subclause 37(8)(a)(ii)(A)(III), a capital expenditure on or in respect of SR & ED includes only an expenditure incurred "for the provision of premises, facilities or equipment, where at that time it was intended 1. that it would be used during all or substantially all of its operating time in its expected useful life for, or 2. that all or substantially all of its value would be consumed in, the prosecution of SR & ED in Canada".

It is our view that the passages highlighted in bold in the preceding paragraph are the principal requirements to be met. The "all or substantially all" tests in 1 and 2 require little interpretation. Rather, these tests will or won't be met as measured against a 90% threshold.

Firstly, the truck must also be an expenditure of a capital nature incurred for the provision of premises, facilities or equipment. The truck would be a capital expenditure to this particular taxpayer. Although the truck would not be categorized as either premises or facilities, it would qualify as equipment. Webster's New World dictionary meaning of "equipment" includes the following definition, "goods used in providing service, especially in transportation". This definition would include the truck that is the subject of this memo.

Secondly, to qualify, the truck must be an expenditure that is intended to be used for or in the prosecution of SR & ED. The Webster's dictionary meaning of "prosecution" is "to carry on; engage in". It is our view that the truck allows the taxpayer to carry on or engage in SR & ED. We believe this is also (indirectly) supported by the acceptance of travel expenditures of a current nature for SR & ED purposes and would also be further strengthened in this case if the truck is also used to transport materials or equipment from one site to the other. Finally, we note that, in general, only buildings are precluded from consideration as SR & ED expenditures and all other capital expenditures could qualify if the requirements in subclause 37(8)(a)(ii)(A)(III) are met.

Notwithstanding this, we believe it would still be an onerous task to meet the "all or substantially all" tests in subclause 37(8)(a)(ii)(A)(III) as mentioned above, however this can only be determined upon verification.

We also would note that the provisions of section 67 of the Act will apply to limit this type of expense to the extent that the outlay or expense was reasonable in the circumstances.

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We trust that this is the information you require. Please do not hesitate to contact the author should you wish to discuss this matter further.

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