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:
Corporation carried on two unrelated businesses prior to acquisition of control. However, each business was related to separate SR&ED work. After control was acquired a business was discontinued while the other was carried on for profit. Is the whole of pre-acquisition pool of SR&ED expenditure related to the continued business to eventually allow the write-off of the pool from income of that one business after control was acquired.
Position:
The law under subsection 37(6.1) does not allow it.
Reasons:
The intent of the law under 37(1)(h) and 37(6.1), together with 249(4) is to restrict trading in corporations having undeducted SR&ED pools.
The meaning of the words in 37(6.1)(b)(i) "where the business to which amounts...may reasonably be considered to have been related", when interpreted in accordance with the ordinary rules of construction and in light of the teleological approach laid down by the Supreme Court of Canada. The plain meaning of these words would oblige that any amount of SR&ED pool deducted after acquisition of control would be apportioned to the business carried on. Accordingly, where the business has been discontinued, such relationship is lost and the SR&ED that was related to that pre-acquisition business would not be deductible.
XXXXXXXXXX F. B. Fontaine
981038
Attention: XXXXXXXXXX
April 27, 1999
Dear Sirs:
Re: Scientific Research and Experimental Development
(“SR&ED”) Pool after Acquisition of Control
Subsection 37(6.1) of the Income Tax Act (the “Act”)
This is in reply to your letter dated April 17, 1998 in which you requested a technical interpretation with respect to the following hypothetical situation as it relates to paragraph 37(1)(h) and subsection 37(6.1) of the Act.
The situation is described as follows:
1. During a taxation year, a corporation carries on two separate and unrelated businesses and in respect of each business, the corporation carries on separate SR&ED projects.
2. Control of the corporation is acquired by a person or group of persons before the end of the year. However, after acquisition of control, the corporation ceases to carry on one of the businesses but continues the other business for profit or a reasonable expectation of profit.
3. The income from the continued business is equal to or greater than the expenditure in the SR&ED pool.
It is your opinion that despite the discontinuance of one business, the corporation should not be prevented from deducting the SR&ED pool from the income of the other business in the year following acquisition of control. It is also your opinion that in the circumstances described, the only limitation under subsection 37(6.1) would be the extent of the corporation’s income from the business carried on after acquisition of control.
You suggest that, in the spirit and object of subsection 37(1) of the Act, the continuance of one business after acquisition of control should be sufficient for the purposes of subparagraph 37(6.1)(b)(i) of the Act.
You have asked that we comment on your interpretation of subsection 37(6.1) of the Act as it relates to the situation described above. In this regard we offer the following comments:
(1) The intent of paragraph 37(1)(h) and subsection 37(6.1) of the Act combined with subsection 249(4) of the Act was to restrict trading in corporations having undeducted SR&ED pools which effectively are reduced to nil at the time control of such corporations is acquired. Similar limitations are provided in subsections 127(9.1) and (9.2) of the Act in respect of the deduction of investment tax credit by a corporation following acquisition of control.
(2) Pursuant to subsection 37(1) of the Act, a corporation may deduct a SR&ED expenditure that is related to “a business” from the income of any business where a taxpayer carries on more than one business. This was made possible as a result of an amendment to subsection 37(1) under 1988, c. 55 in respect of expenditures incurred after December 15, 1987. That amendment basically changed the words “related to the business” in subsection 37(1) of the Act to “related to a business”. Prior to that time, a taxpayer could claim, in respect of a business carried on by it, a SR&ED expenditure related only to that business. However, no similar wording change was made in the law under subsection 37(6.1) of the Act.
(3) Based on the plain meaning of the wording, purpose and intent of the legislation under subsection 37(6.1) of the Act, even if both businesses of the corporation were carried on after acquisition of control, it appears that in order that a deduction, after acquisition of control, of a pre-control SR&ED expenditure pool may be made, it would be necessary to determine the amount of income from each business to which the particular SR&ED expenditure was related. If this was not so, the words in subparagraph 37(6.1)(b)(i) of the Act would be meaningless if one business produced no income and did not have any expectation of profit after acquisition of control. Without those words, the legislation would not be able to impose the restriction that was intended.
(4) In the absence of specific legislation, we find it difficult to accept how an expenditure that was in a year related to one business but not related to another business of a corporation would, in a later year, be related to that other business. In conclusion, it is our position that the words in subparagraph 37(6.1)(b)(i) of the Act determine what portion of the expenditures in the SR&ED pool relates to each particular business carried on by the corporation in a year after control of the corporation was acquired.
The above comments represent an expression of opinion which, as indicated in paragraph 22 of Information Circular 70-6R3, is not an advance income tax ruling and, accordingly, is not binding on Revenue Canada.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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