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 full amount of assistance in respect of SR&ED (for both qualified and non-qualified expenditures) reduces the qualified expenditures for ITC.
Position: Generally yes (but is question of fact).
Reasons: Wording of 127(18).
April 29, 1999
Audit Directorate Income Tax Rulings and
Specialized Compliance Interpretations Directorate
Enhancement Division B.G. Dodd
957-8954
M. Machado, A/Manager
Tax Incentive Audit Section 981181
Subsection 127(18) - Assistance and Contract Payments for SR&ED
We are writing in reply to your May 4, 1998 memorandum in which you request our opinion on whether subsection 127(18) of the Income Tax Act (the "Act") is broader than former paragraph 127(11.1)(c).
The general effect of either of these provisions is to reduce, for investment tax credit purposes, the amount of qualified expenditures by any assistance or contract payments which the taxpayer has received or is entitled to, or can reasonably be expected to, receive. It is your view that under subsection 127(18) of the Act, assistance in respect of SR&ED, whether to compensate for qualified or non-qualified expenditures, should be netted against qualified expenditures.
Paragraph 127(11.1)(c) of the Act, which applied prior to taxation years beginning after 1995, last read as follows:
"the amount of a qualified expenditure ... made by a taxpayer shall be deemed to be the amount of the qualified expenditure ... less the amount of any government assistance, non-government assistance or contract payment that can reasonably be considered to be in respect of the expenditure ..."
Subsection 127(18), which applies to taxation years beginning after 1995, reads as follows:
"Where ... the taxpayer has received government assistance, non-government assistance or a contract payment that can reasonably be considered to be in respect of scientific research and experimental development, the amount ... shall be applied to reduce the taxpayer's qualified expenditures ... that can reasonably be considered to be in respect of the scientific research and experimental development."
(For purposes of this memorandum, we refer to "government assistance, non-government assistance or a contract payment" simply as "assistance".)
Whereas former paragraph 127(11.1)(c) of the Act is effective where the assistance can be linked to qualified expenditures, subsection 127(18) is effective where the assistance can be linked to scientific research and experimental development. Whether assistance can reasonably be considered to be in respect of scientific research and experimental development, as set out in subsection 127(18) of the Act, is a question of fact to be determined based on the specifics of the particular situation. As discussed in our September 24, 1997 memorandum to you, the policy intent is that subsection 127(18) applies on a project-by-project basis and we agree with its application on that basis. Accordingly, it is our general view that where the assistance is in respect of a SR&ED project, which may include qualified and non-qualified expenditures, the assistance will reduce the amount of the qualified expenditures pursuant to subsection 127(18) of the Act. However, where it is clear that the assistance, or a portion thereof, is in respect of something other than scientific research and experimental development, it is our view that such assistance (or portion thereof, as the case may be) would not reduce the qualified expenditures.
We note that our views are generally consistent with the Revenue Canada comments on this issue as set out in the Research and Development Roundtable at the 1997 Ontario Tax Conference, which we understand were prepared by your Division.
You refer to the effect this could have in the case of shared-use-equipment. You note that such equipment is used partly for SR&ED and partly for some other purpose and only a portion of its capital cost is treated as a qualified expenditure. Where assistance is received for the equipment, then part of the assistance is for SR&ED and part is for the other intended use. It would appear to you that the full amount of the assistance would be applied to reduce the portion which is the qualified expenditure. You note that this would be contrary to the principle of breaking down assistance or a contract payment into its component parts and netting only the part applicable to SR&ED against the SR&ED qualified expenditures. (The issue of breaking down assistance for purposes of former paragraph 127(11.1)(c) of the Act was discussed in our memorandum to you dated March 12, 1998.)
The expressions "first term shared-use-equipment" and "second term shared-use-equipment" are defined in subsection 127(9) of the Act. In each case, the definition refers, in part, to depreciable property that is used by the taxpayer (for the relevant time period) "primarily for the prosecution of scientific research and experimental development" (emphasis added). As noted above, it is a question of fact whether assistance is in respect of SR&ED. However, in the case of shared-use-equipment, given that by definition, such equipment must be used primarily for SR&ED, it would seem to us that it would generally be the case that assistance in respect of such equipment could "reasonably be considered to be in respect of scientific research and experimental development" as contemplated by subsection 127(18) of the Act and thus would reduce the related qualified expenditure.
Moreover, if a particular expenditure on shared-use-equipment is, in fact, a qualified expenditure, it must necessarily be in respect of scientific research and experimental development. In this regard, "qualified expenditure" is defined in subsection 127(9), in part, as follows:
" "qualified expenditure" incurred by a taxpayer in a taxation year means
(a) an amount that is an expenditure incurred in the year by the taxpayer in respect of scientific research and experimental development that is an expenditure
(i) for first term shared-use-equipment or second term shared-use-equipment ..." (underlining added)
Accordingly, where an expenditure in respect of shared-use-equipment gives rise to a qualified expenditure, the expenditure for the equipment must, by definition, have been in respect of scientific research and experimental development and, in our view, any assistance in respect of such equipment can thus reasonably be considered to be in respect of scientific research and experimental development such that subsection 127(18) of the Act would apply.
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We hope this will be of assistance.
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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