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:

1. Whether arrangement between parties is a joint venture or a partnership?

2. Are the joint venture unitholders entitled to claim SR&ED deductions pursuant to subsection 37(1)?

Position: 1. Joint venture.

2. Question of fact. Must satisfy all of the requirements of section 37.

Reasons:

1. Applying the criteria set out by the courts, the better view is that the arrangement is a joint venture.

2. A joint venturer must satisfy the requirements of paragraphs 37(8)(b) or (c) to claim the SR&ED. Where a joint venturer does not otherwise have an XXXXXXXXXX business, such that the only business of a joint venturer is the prosecution of SR&ED, those joint venturers would not be entitled to deduct the SR&ED by virtue of paragraph 37(8)(c).

		May 10, 1999

Mel Machado Resource Industries
A/Manager Section
Tax Incentive Audit Section A. Seidel
Audit Directorate (613) 957-8974

	Attention: Mara Praulins	982186

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This is in reply to your memorandum requesting our comments with respect to the entitlement of participants in a "joint venture" to claim scientific research and experimental development ("SR&ED") expenditures and related investment tax credits.

Backgroun.d

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Issues

In your view, subsection 37(1) of the Act requires that the taxpayer must be carrying on business in Canada to claim the SR&ED deductions. For SR&ED to be related to a business carried on by a taxpayer, it is necessary to have some interconnection or link between the SR&ED activities and the taxpayer's business.

A. Is the arrangement between the parties a joint venture or a partnership?

B. If yes to A above, does the formation of a joint venture and subscription to a unit in the joint venture constitute a taxpayer to be in the XXXXXXXXXX business?

C. Are the joint venturers viewed as being entitled to exploit the results of the SR&ED by virtue of being a member of the joint venture?

D. Is there a concern with the arrangement that converts the XXXXXXXXXX% investment tax credit rate for individuals (XXXXXXXXXX% of which is refundable) to the XXXXXXXXXX% rate for Canadian-controlled private corporations (XXXXXXXXXX% of which is refundable).

Our Comments

Issue A - Is the arrangement a joint venture or a partnership?

Analysis

The terms "partnership" and "joint venture" are not defined in the Act. Black's Law Dictionary (1990) defines "joint venture" as follows:

"A legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit. An association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. A one-time grouping of two or more persons in a business undertaking. Unlike a partnership, a joint venture does not entail a continuing relationship among the parties."

In the case of Woodlin Developments Ltd. v. The Minister of National Revenue, 86 DTC 1116, TCC, Christie, A.C.J.T.C. refers to Jones J. quote from Volume 2 of Williston on Contracts (3rd ed. 1959), at pages 563-565 in Central Mortgage & Housing Corp. v. Graham et al., 43 D.L.R. (3d) 686, as follows:

"Besides the requirement that a joint venture must have a contractual basis, the courts have laid down certain additional requisites deemed essential for the existence of a joint venture. Although its existence depends on the facts and circumstances of each particular case, and while no definite rules have been promulgated which will apply generally to all situations, the decisions are in substantial agreement that the following factors must be present:

(a) A contribution by the parties of money, property, effort, knowledge, skill and other asset to a common undertaking;

(b) A joint property interest in the subject matter of the venture;

(c) A right of mutual control or management of the enterprise;

(d) Expectation of profit, or the presence of "adventure", as it is sometime called;

(e) A right to participate in the profits;

(f) Most usually, limitation of the objective to a single undertaking or ad hoc enterprise."

Pursuant to section 1(d) of the Partnership Act (Alberta), "partnership" means "the relationship that subsists between persons carrying on a business in common with a view to profit". Pursuant to section 1(a) of the Partnership Act, "business" includes "every trade, occupation and profession". In determining the existence of a partnership, a rule which has been recognized ever since the case of Cox v. Hickman, (1860) 8 H.L. Cas. 268, is that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case.

Osborn's Concise Law Dictionary (Sixth Edition) describes a partnership as follows:

"The relation which subsists between persons carrying on business in common with a view to profit. ... In general, every partner is entitled and bound to take part in the conduct of the business, unless it is otherwise agreed between them. Every partner is liable for the debts of the partnership to the whole extent of his property. ... As regards third persons, the act of every partner, within the ordinary scope of the business, binds his co-partners, whether they have sanctioned it or not."

In general, a joint venture is regarded as a more informal and temporary relationship than a partnership and is usually confined to a single project or an undertaking of limited duration.

Paragraph 4 of Interpretation Bulletin IT-90 ("IT-90") states that as long as joint venturers do not hold their property under joint tenancy or tenancy in common, the property will not be considered to be partnership property.

Paragraph 5 of IT-90 states that in circumstances where persons associate and are only liable for their respective agreed portions of debt without each accepting total liability of the association's debts, such an arrangement is viewed as an indication that a partnership does not exist.

Conclusion

Based on the comments in IT-90 and applying the criteria set out in the Central Mortgage & Housing Corp. case, as outlined above, the following provisions in the Joint Venture Agreement (the "Agreement") support the view that the arrangement between XXXXXXXXXX and the "subscribers" is a joint venture:

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Issue B - Does the formation of a joint venture and subscription to a unit in the joint venture constitute a taxpayer to be in the XXXXXXXXXX business?

Analysis

Subsection 37(1) of the Act provides a deduction in respect of scientific research and experimental development "where a taxpayer carried on a business in Canada in a taxation year".

Paragraph 8 of Interpretation Bulletin IT-151R4 ("IT-151R4") discusses whether SR&ED can be considered to be related to a business and states the following:

"For SR&ED to be related to a business carried on by a taxpayer, it is necessary to have some interconnection or link between the SR&ED activities and the taxpayer's business. This requirement will generally be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business that is carried on by the taxpayer."

Paragraph 37(8)(b) of the Act provides, for greater certainty, that references to SR&ED related to a business include any SR&ED that may lead to or facilitate an extension of that business.

Paragraph 37(8)(c) of the Act provides that the prosecution of SR&ED is only a business of the taxpayer if all or substantially all of the taxpayer's revenue is derived from the prosecution of SR&ED. Included in revenue from the prosecution of SR&ED would be revenue arising from the sale of rights in or arising out of SR&ED carried on by the taxpayer or royalties earned from licensing the results of the SR&ED or the sale of the results of SR&ED.

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Conclusion

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Paragraph 37(8)(b) of the Act provides that SR&ED is related to a business of a taxpayer if it leads to or facilitates an extension of that business. Paragraph 37(8)(c) of the Act provides that the prosecution of SR&ED is not a business of a taxpayer unless "a taxpayer derives all or substantially all of the taxpayer's revenue from the prosecution of scientific research and experimental development". Since the revenue of the XXXXXXXXXX is XXXXXXXXXX income, XXXXXXXXXX, the "all or substantially all" requirement in paragraph 37(8)(c) of the Act would not be satisfied. Therefore, unless a Joint Venturer has an XXXXXXXXXX business, such that the requirement in paragraph 37(8)(b) of the Act could be met, the Joint Venturer would, subject to subsection 37(1.1) of the Act, be precluded from claiming any deductions under section 37 of the Act by virtue of paragraph 37(8)(c) of the Act. Subsection 37(1.1) of the Act would apply where a Joint Venturer is a corporation and the SR&ED is related to a business carried on by a corporation related to the Joint Venturer and the corporation is "actively engaged, at the time at which an expenditure or payment in respect of the scientific research and experimental development is made" by the Joint Venturer.

Issue C - Are the joint venturers viewed as being entitled to exploit the results of the SR&ED by virtue of being a member of the joint venture?

Analysis

Paragraph 12 of IT-151R4 states that a taxpayer is "entitled to exploit the results" of SR&ED if the taxpayer has the right to use a patent that results from the SR&ED, even if the taxpayer is charged a royalty or similar fee for the use of the patent, or where the taxpayer is entitled to distribute and market any product that results from the SR&ED.

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Conclusion

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However, as discussed in B above, each of the Joint Venturers must also satisfy the requirements of paragraph 37(8)(c) of the Act.

Issue D - Is there a concern with an arrangement that converts the XXXXXXXXXX% tax credit rate for individuals (XXXXXXXXXX% of which is refundable) to the XXXXXXXXXX% rate for Canadian-controlled private corporations (XXXXXXXXXX% of which is refundable)?

This is essentially a question of whether or not there is a tax avoidance transaction such that section 245 of the Act would apply. Information Circular 88-2 and the supplements thereto discuss in detail the Department's views as to whether or not a transaction is a tax avoidance transaction.

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If you wish to discuss any of the above, please contact the writer.

Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch