28 March 1996 Ministerial Letter 9607338 - SR&ED

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.

March 28, 1996

Barry Lacombe Manufacturing Industries,
Assistant Deputy Minister Partnerships and Trusts
Verification, Enforcement Division
and Compliance Research Branch F.B. Fontaine
957-4364

960733

XXXXXXXXXX

This is in reply to your memorandum dated February 20, 1996 concerning expenditures relating to the general administration or management of a corporation ("corporate costs") whose revenue is derived all or substantially all from the prosecution of scientific research and experimental development ("SR&ED") or from the sale of rights in or arising out of SR&ED carried on by the corporation ("sole-purpose company").

You have requested our comment as to whether the positions that you have taken in your response to the taxpayer's concerns in respect of the expenditures described above are in accordance with the wording and intent of the Income Tax Act (the "Act").

The taxpayer appears to argue that even though a sole purpose-company's sole business is the prosecution of SR&ED, there is some difficulty under current audit practice in allowing its corporate costs that were incurred prior to February 23, 1994 and excluded from the definition of "prescribed expenditure" to qualify for the investment tax credit (the "ITC").

For the purpose of subsection 37(1) of the Act an expenditure must meet the "substantially all or directly attributable" test. Only where this test is met, which is a question of fact, would a corporate cost that was incurred prior to February 23, 1994 by a sole-purpose company qualify for the ITC. It is our view that this interpretation, as provided in your correspondence to the taxpayer dated September 8, 1995 and October 19, 1995, has addressed the taxpayer's concerns. Accordingly, we agree that the explanations given are in accordance with the Act and the Income Tax Regulations.

We note that the Department's administrative policy under which certain corporate costs of a sole-purpose company otherwise would have qualified for the ITC has been cancelled, applicable to all years under audit with no exceptions, pursuant to application policy paper, number SR&ED-94-02, dated July 12, 1994.

The taxpayer is also claiming that paragraph 39 of Interpretation Bulletin, IT-151R4 (the "IT") fails to clarify what particular expenditures relating to foreign activities would qualify under subsection 37(1) of the Act. Whether an expenditure with regard to foreign activities qualifies under subsection 37(1) of the Act can only be determined on the facts of each particular case. Accordingly, we would agree that paragraph 39 of the IT represents generally the Department's position in accordance with the interpretation of the law.

We hope our comments will be of assistance to you.

Denis Lefebvre
Assistant Deputy Minister
Policy and Legislation Branch