30 November 1995 Ruling 9600943 - PARA. 149(1)(J) CORPORATION

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:

Qualification of corporation as being constituted exclusively to carry on or promote SR&ED under 149(1)(j) of the Act and qualification of payments made by contributors to the corporation for ITC purposes.

Position:

Rulings provided.

Reasons:

Similar rulings previously provided. Ref: 932628 dated XXXXXXXXXX 1994

XXXXXXXXXX							960094

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")

This is in reply to your letter dated XXXXXXXXXX and your facsimile transmission dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX proposes to apply for the Corporation's incorporation. We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues in the requested ruling is:

(a)being considered by a Tax Services Office or a Taxation Centre in connection with any income tax return already filed, and

(b)the subject of any notice of objection or is under appeal.

Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

XXXXXXXXXX

Proposed Transactions

1.XXXXXXXXXX proposes to incorporate the Corporation under the provisions of XXXXXXXXXX will be the first directors of the Corporation.

2.The principal provisions of the proposed articles of incorporation and the by-laws of the Corporation will be as follows:

(a)The sole purpose for which the Corporation will be incorporated is to exclusively carry on or promote scientific research and experimental development ("SR&ED") (as defined in subsection 2900(1) of the Income Tax Regulations (the "Regulations")) that is basic research or applied research XXXXXXXXXX in Canada, although not limited exclusively to within Canada.

(b)The Corporation will not acquire control (as defined in subsection 149(8) of the Income Tax Act (the "Act")) of any other corporation.

(c)The Corporation will not carry on any "business" as that term is defined in subsection 248(1) of the Act.

(d)The Corporation will carry on its operations without the purpose of gain for its members and any profits of, or other accretions to, the Corporation will be used in promoting its objects.

(e)No part of the income of the Corporation will be payable to or otherwise available for the personal benefit of any member of the Corporation or to persons who will contribute financially to the Corporation.

(f)The directors and members and those directors and members who also serve as officers shall serve as such without remuneration, and no director, member or officer who is a director or member shall directly or indirectly receive any profit from his/her position as a director, member or officer, except that a director or officer may be paid for reasonable expenses incurred by him/her in the performance of his/her duties. However, a director, member or officer may serve the Corporation in another capacity and receive compensation therefor.

(g)In the event of a dissolution or winding-up of the Corporation and after the payment of all debts and liabilities outstanding at the time of such dissolution or wind-up, its remaining property shall be distributed or disposed of to one or more Canadian entities referred to in clauses 37(1)(a)(ii)(A), (B), (C) or (E) of the Act to be used in Canada, exclusively for SR&ED that is basic research or applied research by stimulating and coordinating the study and development of XXXXXXXXXX research, which SR&ED either:

(I)relates to a business of the contributors to the Corporation and the results of which such contributors shall be entitled to exploit; or

(II)in the case of corporate contributors to the Corporation, shall be basic research or applied research carried on in Canada, the primary purpose of which is the use by the contributors of results therefrom in conjunction with other SR&ED activities related to the study and development of XXXXXXXXXX research undertaken or to be undertaken by or on behalf of the contributors that relate to a business of those contributors, and which SR&ED has the technological potential for the application to other businesses of a type unrelated to that carried on by the contributors.

(h)The Corporation, in carrying on or promoting SR&ED for a period, will expend amounts in Canada on SR&ED totalling not less than 90% of its income (as defined in subsection 149(9) of the Act) for the period to:

(I)undertake directly or on its behalf SR&ED that is basic research or applied research related to the study and development of XXXXXXXXXX research, which SR&ED (i) shall relate to a business of each contributor to the Corporation, and the results of which SR&ED said contributor will be entitled to exploit, or (ii) where the contributor is a corporation, the SR&ED shall be basic or applied research, the primary purpose of which is the use by the contributor of results therefrom in conjunction with other SR&ED activities related to the study and development of XXXXXXXXXX research undertaken or to be undertaken by or on behalf of the contributor that relate to a business of that contributor, and which SR&ED has the technological potential for the application to other businesses of a type unrelated to that carried on by the contributor; and

(II)fund, through research contracts with XXXXXXXXXX SR&ED in Canada related to the study and development of XXXXXXXXXX research to be carried out by researchers employed by XXXXXXXXXX which SR&ED (i) shall be related to a business of each contributor and which SR&ED said contributor shall be entitled to exploit, or (ii) in the case of a corporate contributor to the Corporation, shall be basic research or applied research carried on in Canada, the primary purpose of which is the use by the contributor of results therefrom in conjunction with other SR&ED activities related to the study and development of XXXXXXXXXX research undertaken or to be undertaken by or on behalf of the contributor that relate to a business of that contributor, and which SR&ED has the technological potential for the application to other businesses of a type unrelated to that carried on by the contributor.

3.Membership in the Corporation shall be limited to individuals, corporations and other persons and such unincorporated associations interested in furthering the Corporation's objects, and shall consist of its first directors and thereafter, from time to time, of anyone whose application for admission as a member has received the approval of the board of directors of the Corporation.

There shall be no membership fees or dues unless otherwise directed by the board of directors. If such fees or dues are charged, they will not be eligible for a deduction under clause 37(1)(a)(ii)(C) or subparagraph 37(1)(a)(iii) of the Act.

4.The head office of the Corporation will be situated XXXXXXXXXX and its operations may be carried on throughout Canada.

5.The current plan of the Corporation with regard to funds available for research in a specific area has not been determined. It is anticipated that the research activities of the Corporation will include

XXXXXXXXXX

6.The Corporation will solicit funding from contributors such as
XXXXXXXXXX

Under an agreement with the Corporation, a contributor of this type will provide funding to the Corporation in order to finance a particular research project and will negotiate with the Corporation the terms under which it will be entitled to exploit the results of the research, such as the right of first refusal for any resulting patents.

XXXXXXXXXX

Also to be reimbursed will be other costs incurred on behalf of the Corporation, including consumable supplies, as well as an appropriate charge for overhead computed as a percentage of direct costs.

Under the agreement between the Corporation and
XXXXXXXXXX

However, the Corporation and contributors shall be granted a first option to a world-wide licence in respect of such property.

7.An agreement entered into between the Corporation and a particular contributor to financially support specific SR&ED activities will provide the terms with regard to entitlement to exploit the results of the particular research project being funded by the contributor. In all cases the particular research activities will be performed under the agreement on a collaborative basis and the terms of which will include the assignment by the Corporation to the contributor of:

(a)the Corporation's rights to all world-wide, sublicensable royalty bearing rights arising out of the SR&ED as well as a licence under all patent rights covering inventions from the SR&ED;

(b)the Corporation's patent rights relating to the publication of information resulting from the SR&ED; and

(c)the Corporation's rights to file a patent application or maintain an issued patent in respect of inventions arising out of the SR&ED.

8.As noted in paragraph 7 above, the Corporation will assign all royalty bearing rights arising out of the SR&ED to the contributor. Accordingly, the Corporation will not earn any such royalty.

9.The follow-up procedure to ensure that projects being funded through the Corporation are being used for SR&ED will include a written report provided, upon request, to the contributor confirming the amount of SR&ED carried out and the expenditures incurred on specific research projects by the Corporation.

10.The fiscal year end of the Corporation will be
XXXXXXXXXX

Purpose of the Proposed Transactions

11.The purpose of the proposed transactions herein described is to create a corporation that qualifies under paragraph 149(1)(j) of the Act and to facilitate the funding of SR&ED related to the study and development of XXXXXXXXXX research.

Rulings Given

Provided that the above statements of fact and proposed transactions are accurate and constitute complete disclosure of all of the relevant facts and proposed transactions, and provided that the proposed transactions are carried out as herein described, our rulings in respect of the proposed transactions are as follows:

A.At the time of incorporation, the Corporation will be considered to be constituted exclusively for the purpose of carrying on or promoting SR&ED for the purposes of paragraph 149(1)(j) of the Act.

B.Provided that the Corporation qualifies under paragraph 149(1)(j) of the Act and is resident in Canada, and the contributor carries on a business in Canada in a taxation year, the contributor's payments to the Corporation as described in paragraph 6 above will qualify as payments described in clause 37(1)(a)(ii)(C) of the Act. Accordingly, provided that the contributor files with his return of income for the year a prescribed form (T661) containing prescribed information, such payments may, subject to subsection 18(9) of the Act and to the extent that they exceed the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the contributor in computing the contributor's income from the business for the year.

C.Provided that a payment referred to in paragraph B above qualifies under subparagraph 37(1)(a)(ii) of the Act and is not an expenditure prescribed for purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act, an expenditure specified by the contributor for purposes of clause 194(2)(a)(ii)(A) of the Act or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a qualified expenditure within the meaning of subsection 127(9) of the Act for purposes of calculating the contributor's investment tax credit, as defined in subsection 127(9) of the Act.

D.Where a contributor is a corporation and carries on a business in Canada in a taxation year, the contributor's payments to the Corporation will qualify as payments described in subparagraph 37(1)(a)(iii) of the Act, provided that:

i) the payment is made for "basic research" or "applied research", as defined in paragraphs 2900(1)(a) and (b) of the Regulations, carried on in Canada,

ii) the primary purpose of the payment is for the contributor to use the results from the basic or applied research in conjunction with other SR&ED activities directly undertaken by or on behalf of the contributor that relate to the contributor's business, and

(iii)the basic or applied research has technological potential for application in other types of businesses that are unrelated to the business carried on by the contributor.

Accordingly, provided that the contributor files with its return of income for the year a prescribed form (T661) containing prescribed information, such payments may, subject to subsection 18(9) of the Act and to the extent that they exceed the aggregate of the amounts described in subparagraphs 37(1)(d) to (h) of the Act, be deducted by the contributor in computing its income from the business for the year.

E.Provided that a payment referred to in paragraph D above qualifies under subparagraph 37(1)(a)(iii) of the Act and is not an expenditure prescribed for purposes of the definition of "qualified expenditure" in subsection 127(9) of the Act, an expenditure specified by the contributor for purposes of clause 194(2)(a)(ii)(A) of the Act or an expenditure in respect of which a prescribed form containing prescribed information has not been filed, such a payment will, subject to subsection 127(11.1) of the Act, be a qualified expenditure within the meaning of subsection 127(9) of the Act for purposes of calculating the contributor's investment tax credit, as defined in subsection 127(9) of the Act.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided that the proposed incorporation of the Corporation described in paragraph 1 above is completed on or before XXXXXXXXXX.

Opinion

The determination of whether the Corporation will qualify under paragraph 149(1)(j) of the Act is a question of fact which can only be made following a review of the activities of the Corporation for the fiscal period for which it is seeking tax exemption. The responsibility for such determination belongs to the Tax Services Offices. Nonetheless, it is our view that a corporation operating in the manner described above would generally qualify for tax exempt status pursuant to paragraph 149(1)(j) of the Act.

Yours truly,

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