30 November 1995 Ruling 9604783 - 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.

Principal Issues:

Whether proposed foundation for R & D in XXXXXXXXXX qualifies under 149(1)(j)

Position:

Limited ruling provided that it will be considered the be constituted exclusively for the purpose of carrying on or promoting SR&ED for the purposes of 149(1)(j).

Reasons:

It satisfies the criteria but whether it qualifies for exemption is question of fact and an ongoing test.

XXXXXXXXXX							960478
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling with respect to the proposed incorporation of the XXXXXXXXXX (the "Corporation").

You advise that to the best of your knowledge and that of the individuals named below, the issue involved in this ruling is not being considered in respect of the taxpayers concerned by any Tax Services Office or Taxation Centre.

Unless otherwise stated, all references to statute are to the Income Tax Act and regulations thereunder ("Regulations").

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1.The following individuals are

XXXXXXXXXX

PROPOSED TRANSACTIONS

2.XXXXXXXXXX propose to incorporate the Corporation, without share capital, under the provisions of Part II of the Canada Corporations Act. They will be the first directors of the Corporation.

3.The principal provisions of the proposed articles of incorporation and the bylaws of the Corporation will be as follows:

(a) the Corporation will be constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development ("SR&ED"), as defined in subsection 2900(1) of the Regulations, in Canada in the area of XXXXXXXXXX

(b) the Corporation will not acquire control, as described in paragraph 149(8)(a), of any other corporation;

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

(d) the Corporation will carry on its operations without the purpose of gain for its members and any profits 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;

(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;

(g) in the event of dissolution or winding-up of the Corporation, all assets remaining after payment of its liabilities shall be distributed to one or more of the following entities which are not members of the Corporation:

(i) an approved association that undertakes SR&ED;

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

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

(iv) an approved organization that makes payments to an association, institution or corporation described in any of the clauses (a), (b) or (c) above

and for this purpose, the term "approved" means approved for the purposes of subparagraph 37(1)(a)(ii), and the organizations referred to in (i), (ii), (iii) and (iv) above refer to the organizations described in clauses 37(1)(a)(ii)(A), (B), (C) and (E), respectively; and

(h) in each year the Corporation shall expend in Canada not less than 90% of its income for the year, calculated with reference to subsections 149(8) and (9), on expenditures described in clauses 149(1)(j)(ii)(A) and (B).

4.Membership in the Corporation shall be limited to persons, firms, corporations, organizations and other groups interested in furthering its objects, and shall consist 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. Any fees or dues paid by the members will not be eligible for a deduction under clause 37(1)(a)(ii)(C) of the Act.

5.The head office of the Corporation will be situated in

XXXXXXXXXX

Unless otherwise ordered by the board of directors, the fiscal year end of the Corporation will be XXXXXXXXXX.

6.The Corporation does not intend to undertake research projects directly. Instead, it will make payments to institutions described in clause 149(1)(j)(ii)(B) to be used by such institutions for SR&ED in accordance with procedures and conditions outlined in 12 and 13 below.

7.The Corporation will advertise the availability of research funds in

XXXXXXXXXX

8.In order to raise funds, the Corporation intends to raise the level of awareness among Canadians in general and to

XXXXXXXXXX

9.In addition to the solicitation of funding from XXXXXXXXXX the Corporation will also solicit funding from individual members of the Canadian public as well as from non-profit organizations.

10.It is anticipated that contributors from the XXXXXXXXXX will provide funds to the Corporation in order to finance particular projects related to their businesses and that they will negotiate with the Corporation the terms under which they will be entitled to exploit the results of such projects. The Corporation expects to enter into an agreement with each contributor in which it will give the contributor all or a portion of the rights to exploit the results of the research activities financed by the contributor. Accordingly, an agreement entered into between the Corporation and a contributor may provide for the following:

(a) the contributor will own the rights to exploit the results of the research project;

(b) the Corporation and the contributor will share the rights to exploit the results of the research project in equal or other proportions; or

(c) the Corporation will license to the contributor the right to exploit the results of the research project in exchange for royalty or other payments.

Alternatively, corporate donors may provide funds to the Corporation to be used to support basic research or applied research, the primary purpose of which is the use of the results therefrom by the contributor in conjunction with other scientific research and experimental development activities in the area of XXXXXXXXXX undertaken or to be undertaken by or on behalf of the contributor that relate to a business of the contributor and that has the technological potential for application to other businesses of a type unrelated to that carried on by the contributor.

11.Notwithstanding 10(c) above, you advise as follows:

"The Corporation does not anticipate earning any royalty income. Any royalties earned by the Corporation would be insignificant in relation to its income from other sources and would be used to pay its general administrative expenses and expended on funding research."

12.Researchers seeking funding from the Corporation will be required to submit a research proposal to the Corporation's board of directors for approval. Each application will be reviewed by an internal review panel and by an outside panel of experts. The decision to grant funding to a particular project will take into account both the external and internal reviews. In determining whether to approve a particular project for funding, the following factors will be considered:

(a)the scientific merit of the project;

(b)the relevance of the project XXXXXXXXXX of the Corporation;

(c)how the project fits with other research being funded by the Corporation; and

(d)whether the Corporation will be able to solicit funding for the project.

13.Research grants awarded by the Corporation will not be provided directly to the individual applicant, but will be given to and administered by XXXXXXXXXX which employs the individual. Funds awarded for research training will be provided to the person entrusted with the training of the recipient of such award (the "mentor"). In such cases, both the recipient and the mentor will be expected to provide periodic written reports on how the funds are used.

A project that receives funding approval will be allocated a set budget, typically for one year. In addition to the reporting requirements noted above, recipients of grants exceeding one year in duration will be required to provide the Corporation with annual progress reports and a final report at the completion of the research project. In addition, the Corporation expects data resulting from projects it funds to be published in peer review XXXXXXXXXX journals. Receipt of funds from the Corporation should be acknowledged by recipients and/or mentors in such publications.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed formation and operation of the Corporation is to create a corporation that qualifies under paragraph 149(1)(j) and to facilitate the funding of scientific research and experimental development in Canada in the field of XXXXXXXXXX.

RULING GIVEN

Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm that the Corporation, upon its incorporation, will be a corporation that is constituted exclusively for the purpose of carrying on or promoting SR&ED for the purposes of paragraph 149(1)(j).

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued by Revenue Canada on September 28, 1990 and the Special Release thereto dated September 30, 1992 and is binding on the Department provided the Corporation is incorporated as proposed above on or before XXXXXXXXXX This ruling is based on the Act in its present form and does not take into account the effects of any proposed amendments thereto.

COMMENTS

The determination of whether the Corporation qualifies under paragraph 149(1)(j) is a question of fact which can only be made following a review of the Corporation's activities for the particular taxation year in respect of which it is seeking exemption. Such a determination is a matter for which the local Tax Services Office is responsible. It is nevertheless our opinion that a corporation operating in the manner described above would generally qualify for tax exempt status pursuant to paragraph 149(1)(j).

Yours truly,

Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate