9 April 1997 External T.I. 9708595 - APPLICATION FOR APPROVED ASSOCIATION STATUS

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.

Principales Questions:

approved association status and 149(1)(j) corporation

Position Adoptée:

list criteria

Raisons POUR POSITION ADOPTÉE:

Environmental Technology Centre
Environment Canada
3439 River Road 5-970859
Ottawa, Ontario
K1A 0H3

Attention: Mr. Wayne Richardson

April 9, 1997

Dear Sirs:

Re: Application for "Approved Association" Status

This is pursuant to our telephone conversation (Vanasse/Richardson) of April 1, 1997 where you required some general guidelines concerning the scientific research and experimental development ("SR&ED") tax incentives that are available under the Income Tax Act (the "Act").

Subparagraph 37(1)(a)(ii) of the Act provides, inter alia, that a taxpayer may deduct (subject to certain conditions and requirements) an amount, which is an expenditure of a current nature, paid to either an approved research institute or a corporation exempt from tax under paragraph 149(1)(j) of the Act.

Application for "approved association"

In order that an association or organization may obtain "approved" status, it is necessary that certain information and documents in respect of the association be submitted to this Directorate for consideration and approval. The terms "association" or "organization" used below include a corporation.

The requirements in respect of the application for, and the granting of, such approved status are described as follows:

1.An association, in order to be considered "approved" for the purposes of section 37 of the Act, must receive written approval from our Minister.

2.In order for an organization to become an approved association, it must meet the criteria of a non-profit organization and be able to demonstrate that it is able to carry out SR&ED in Canada on an ongoing basis. More specifically, the organization must meet all the following requirements:

(a)It must have the facilities and personnel capable of carrying out SR&ED as defined in the Act.

(b)It must carry on only activities that are unquestionably SR&ED.

(c)It must satisfy the requirements for non-profit status; such as, no personal benefit to its members, no control of other associations, satisfactory provisions for distribution of assets upon dissolution, etc.

(d)The general public must be a beneficiary of the results of any successful research.

(e)The funding of the association must be sufficient to ensure ongoing SR&ED.

3.There is no charge by our Department to approve an association. However, in order to do so, we would require copies of the following documentation relating to the organization and its activities:

(a)identification of the legislation under which the association was created;

(b)copies of the organization's charter, code of ethics and by-laws which should indicate

(i)that the organization does satisfy all requirements described in clause 37(1)(a)(ii)(A) of the Act and the post-amble thereto, and

(ii)how its property will be distributed in the event of a wind-up;

(c)a detailed description of the association's arrangements for obtaining funds;

(d)a detailed description of the association's arrangements for disbursing funds;

(e)financial statements for prior years; and

(f)details of the research activities to be carried out by the association in the future and evidence that it has the staff and facilities to carry out such activities.

Corporation exempt from tax under paragraph 149(1)(j) of the Act

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 made once the corporation's income tax return for a particular fiscal period is filed and the activities of the corporation are reviewed by the tax services office. There is no requirement that a 149(1)(j) corporation be approved by this Department.

Paragraph 149(1)(j) of the Act states:

"a corporation that was constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development, no part of whose income was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof, that has not acquired control of any other corporation and that, during the period,

(i)did not carry on any business, and

(ii)expended amounts in Canada each of which is

(A)an expenditure on scientific research and experimental development (within the meaning that would be assigned by subsection 37(8)(a) if subsection 37(8) were read without reference to paragraph 37(8)(d)) directly undertaken by or on behalf of the corporation, or

(B)a payment to an association, university, college or research institute or other similar institution, described in clause 37(1)(a)(ii)(A) or (B) to be used for scientific research and experimental development, and

the total of which is not less than 90% of the amount, if any, by which the corporation's gross revenue for the period exceeds the total of all amounts paid in the period by the corporation because of subsection (7.1)"

This Directorate does not provide any specific comments concerning the tax status of an existing corporation however, we can provide an advance income tax ruling, for which there is a charge, confirming that a particular corporation to be incorporated will be "constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development" for purposes of the preamble to paragraph 149(1)(j) of the Act.

Please note that a corporation may be simultaneously a 149(1)(j) corporation and an approved research institute under 37(1)(a)(ii)(B) of the Act.

Deduction for the taxpayer

Generally, section 37 provides that a taxpayer carrying on a business in Canada in a taxation year may deduct in calculating income from the business for the year current and capital expenditures for SR&ED carried on in Canada that relate to a business of the taxpayer. In addition, where a taxpayer makes payments to "approved association" or to corporations exempt from tax under paragraph 149(1)(j) of the Act, subparagraph 37(1)(a)(ii) of the Act provides that such payments are deductible only if they are to be used for SR&ED carried on in Canada related to a business of the taxpayer and if the taxpayer making the payment is entitled to exploit the results of the SR&ED. A taxpayer who has made SR&ED expenditures in a year in respect of a particular business, may, to the extent that those expenditures have not been deducted in the year, deduct those expenditures in any subsequent year in calculating income from that or any other business carried on by the taxpayer in the subsequent year (subject to certain limits where the taxpayer is a corporation whose control has been acquired by a person or group of persons). In addition to the special deduction for SR&ED expenditures as describes above, both current and capital SR&ED expenditures incurred by a taxpayer may qualify for enhanced rates of investment tax credit and investment tax credit cash refund.

We are enclosing for your perusal a copy of Interpretation Bulletin IT-151R4 - Scientific Research and Experimental Development Expenditures - and Information Circular IC-86R3 - Scientific Research and Experimental Development - dealing with SR&ED tax incentives. Should you require any additional information, do not hesitate to contact us.

Yours truly,

Marc Vanasse
Acting Section Chief
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

Attachments