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.
September 23, 1998
Audit Directorate Income Tax Rulings and
Specialized Compliance Interpretations Directorate
Enhancement Division Michel Lambert
Jim Millen, Acting Director
Attention: Ms. Mara D. Praulins
7-980908
Definition of Canada for SR&ED
We are writing in reply to your memorandum of April 8, 1998, wherein you requested our interpretation of the word Canada for the purposes of claiming expenses for scientific research and experimental development (SR&ED) and the related investment tax credit. We apologize for the delay in responding to your request.
You also requested confirmation that the provincial (Nova Scotia) SR&ED tax credit is not available to the taxpayer, considering that the SR&ED work was done in the waters between Newfoundland, Labrador and Greenland.
XXXXXXXXXX
OUR OPINION
The definition of Canada
According to paragraph 4 of Interpretation Bulletin IT-494, the term " in Canada " includes the territorial sea of Canada which, in general terms, embraces the water and airspace within what is known as the 12 nautical mile limit.
Section 3 of the Territorial Sea and Fishing Zones Act, reads in part as follows:
3(1) (...) the territorial sea of Canada comprises those areas of the sea having, as their inner limits, the baselines described in that section and, as their outer limits, lines measured seaward and equidistant from those baselines so that each point of the outer limit line of the territorial sea is distant twelve nautical miles from the nearest point of the baseline.
3(2) The internal waters of Canada include any areas of the sea that are on the landward side of the baselines of the territorial sea of Canada.
Section 2 of this act states in part that "Every provision of this Act extends and applies to every Act of Parliament (...)". Therefore, we are of the opinion that the Territorial Sea and Fishing Zones Act is applicable to the Income Tax Act (Canada).
In Mersey Seafoods Limited v. M.N.R., 85 DTC 731, our department took the position that processing activities which took place on board a vessel outside the 12 nautical mile limit were not carried out " in Canada ". The judge agreed with our position after an extensive review of all available documents on this matter.
Section 255 of the Act which expands the definition of "Canada" will generally not be relevant for the purpose of SR&ED tax credit.
The Supreme Court of Canada, in Reference re Offshore Mineral Right of British Columbia, (1967) S.C.R. 792, stated at page 821
"The rights now recognized by international law to explore and exploit the natural resources of the continental shelf do not involve any extension of the territorial sea. The superjacent waters continue to be recognized as high seas."
We are also of the view that the definition of Canada in the Income Tax Conventions Interpretation Act is not relevant as this definition applies only to the tax conventions between Canada and other countries.
Therefore, we are of the opinion that the term "Canada" does not include the area of water off the coastline of Canada outside the 12 nautical mile limit notwithstanding the 200 nautical mile fishing limit. Therefore, SR&ED performed beyond the 12 nautical mile limit are not done in
Canada and are not eligible for the SR&ED tax credit. To recognize SR&ED performed inside the 200 nautical mile fishing limit as an expense under subsection 37(1) of the Act would require a legislative amendment.
The Nova Scotia SR&ED tax credit
You requested our confirmation that the Nova Scotia SR&ED tax credit is not available to the taxpayer. This credit is available to a corporation in regards to an eligible expenditure made by it. Paragraph 6(1)(a) of the Income Tax Act (Nova Scotia) gives the definition of "eligible expenditure":
""eligible expenditure" means an expenditure made after 1983 by a corporation with a permanent establishment in the Province in respect of scientific research to be carried out in the Province that is a qualified expenditure under subsection 127(9) of the Federal Act, without reference to paragraph (b) thereof".
Under paragraph 127(9)(a) of the Income Tax Act (Canada), a qualified expenditure is, inter alias, an expenditure described in paragraph 37(1)(a) and subparagraph 37(1)(b)(i). In both cases, the SR&ED must be performed in Canada. If the SR&ED expenditure qualifies under subsection 37(2) instead of 37(1), it cannot qualify as SR&ED for the Nova Scotia SR&ED tax credit.
If the SR&ED is performed in Canada, we must establish if it is also done in Nova Scotia. In the Income Tax Act (Nova Scotia), we did not find any provision that extends the definition of Nova Scotia for the purposes of the Income Tax Act (Nova Scotia). Therefore, the expression "in the Province" must be read in its ordinary and grammatical sense. We are of the opinion that SR&ED carried on in the waters between Newfoundland, Labrador and Greenland is not eligible for the Nova Scotia SR&ED tax credit because this area is not "in the Province" as required under paragraph 6(1)(a) of the Income Tax Act (Nova Scotia).
We would like to bring to your attention that, in some cases, expenditures incurred in respect of SR&ED can be incurred outside Canada and still be eligible to a deduction under subsection 37(1) of the Income Tax Act (Canada). XXXXXXXXXX
XXXXXXXXXX
R. S. Biscaro, CA
Director
Resources, Partnerships and
Trust Division
Income Tax Rulings and
Interpretations Directorate
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