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: General information concerning "approved" recipients of payments in respect of scientific research & experimental development

Position: Discussed paragraph 37(1)(a)(ii) in general terms.

Reasons: Prior positions taken.

952775
XXXXXXXXXX Allan Nelson
(613) 957-9768
Attention: XXXXXXXXXX

November 2, 1995

Dear Sirs:

Re: XXXXXXXXXX
Scientific Research & Experimental Development ("SR&ED") Claim

We are writing in reply to your letter to us dated May 10, 1995, and our October 17, 1995 telephone conversation (XXXXXXXXXX/Nelson) concerning XXXXXXXXXX claim for SR&ED.

Background

It is our understanding that as a result of a recent audit by our Department, XXXXXXXXXX 1991 claim for SR&ED has been disallowed. You have asked us for information concerning how entities, such as the XXXXXXXXXX mentioned in your letter, would be "approved" so that future payments made by XXXXXXXXXX to such entities, could qualify for SR&ED claims, pursuant to subparagraph 37(1)(a)(ii) of the Income Tax Act (Canada) (the "Act").

Our Comments

As noted in Information Circular 70-6R2 (copy attached), we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. However, we will offer the following general comments, which we hope will be of assistance to you.

In accordance with clauses 37(1)(a)(ii)(A) to (D) of the Act, an entity providing SR&ED funding can qualify for the SR&ED tax incentives by making a payment to any one of the following entities which carry on SR&ED activities in Canada:

(A)an approved association;

(B)an approved university, college, research institute or other similar institution;

(C)a corporation resident in Canada and exempt from tax under paragraph 149(1)(j) of the Act; or

(D)a corporation resident in Canada.

Alternatively, pursuant to clause 37(1)(a)(ii)(E), an entity providing SR&ED funding can qualify for the SR&ED tax incentives by making a payment to an approved organization which carries on SR&ED activities in Canada and that makes payments to an association, institution or corporation described above in any of (A) to (C).

Currently, all Canadian universities and affiliated colleges are automatically considered by our Department to be "approved" entities. However, all other entities listed in clauses (A) and (B) above must receive written approval from our Minister in order to be considered "approved". A summary of the requirements to be satisfied by each of the above classes of entities is indicated below.

(A) Approved Association

In order for any association to become an "approved" association, the following requirements must be met:

1. it must have the facilities and personnel capable of carrying out SR&ED;

2. it must carry on only activities that are unquestionably SR&ED;

3. 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.; and

4. 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 require certain documentation, a list of which can be provided if you are interested in obtaining approval of an association.

(B) Approved Research Institute

The requirements to become an "approved" research institute or similar institution are identical to those outlined above for an association.

(C) 149(1)(j) Corporation

The following criteria must be met by a corporation in order to be considered a non-profit corporation for SR&ED in a particular fiscal period:

1. 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. No part of the income may be payable to or otherwise available for the personal benefit of any member thereof;

2. the directors and members, including any director or member who also serves as an officer, shall serve in that capacity without remuneration. No director, member or officer shall directly or indirectly receive any profit from his/her position as director, member or officer. However, it is permitted that a director or officer may be reimbursed for reasonable expenses incurred in the performance of his/her duties;

3. the corporation must not acquire control of any other corporation nor will it carry on any business, as that term is used in the Act;

4. the objects of the corporation must be to exclusively carry on and/or promote SR&ED. The SR&ED activity may 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; and

5. 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 determined once the corporation's income tax return for a particular fiscal period is filed and the activities of the corporation are reviewed by a Tax Services Office. No prior approval from our Department is required nor can it be obtained.

While the Income Tax Rulings Directorate cannot provide any specific comments concerning the tax status of an existing corporation, we are able to provide an advance income tax ruling confirming that on incorporation, a particular corporation, will be "constituted exclusively for the purpose of carrying on or promoting SR&ED". There is a fee charged for these rulings, and in order for us to issue such a ruling we would require certain documents, a list of which can be provided if you are interested in incorporating a new corporation.

(D) Corporations Resident in Canada

In order to meet the requirements of this provision, the recipient corporation must be resident in Canada, the payments made to it are to be used for SR&ED carried on in Canada that is related to a business of the taxpayer making the payments, and the taxpayer must be entitled to exploit the results of that SR&ED. No prior approval is required, and since the matter involves a question of fact, prior approval cannot be obtained from our Department for this type of entity.

(E) Approved Organization

Approval under clause 37(1)(a)(ii)(E) is intended to be restricted to the three granting councils which were specifically mentioned in the February 26, 1986 Budget Papers, i.e the Natural Sciences and Engineering Research Council, the Medical Research Council and the Social Sciences and Humanities Research Council.

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

enclosure