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.
19(1) J.D. Brooks
(613) 957-2097
February 5, 1990
This is in reply to your letter of August 2, 1989, in which you
requested our comments as to whether contributions in kind with
respect to scientific research and experimental development (“SR
& ED”) could qualify as SR & ED expenditures. I apologize for
the delay in responding. This issue is of interest to you as a
member of the 19(1) 19(1)
You provided a brief description of two examples of collaborative study involving the forest sector for our consideration. “Silviculture for Integrated Resource Management” and “Fish-Forestry Interaction Program.” These studies involve direct government funding and/or involvement, but they also depend significantly upon support other than financial support by companies in the forestry sector. Some of this non-financial support is provided by companies contributing the use of equipment or providing researchers and manpower.
In responding to your queries, I have addressed only the issue of whether contributions of property may be considered to be SR&ED expenditures. I have not considered, for instance, whether the projects referred to qualify as SR&ED since that did not appear to be your concern.
As you are aware, there is provision under the Income Tax Act (the “Act”) both for expenditures of a current nature and for expenditures of a capital nature to qualify as SR&ED. Subparagraph 37(l)(a)(i) of the Act refers to current expenditures on SR&ED carried on in Canada where the SR&ED is undertaken by the taxpayer or is undertaken on his behalf. This provision applies to persons carrying on SR&ED projects alone or jointly with other persons. With respect to a joint project, each participant would be considered to have directly undertaken SR&ED, and the expenditures incurred by a participant which could qualify under subparagraph 37(l)(a)(i) of the Act would be the current expenditures which he incurred for the project to the extent they were incurred for SR&ED. Thus as stated in paragraph 11 of our Interpretation Bulletin 151R3, provided the expenditures are related to the participant's business, the cost of materials consumed and the portion of salaries or wages which relate to the prosecution of SR&ED are qualifying expenditures to the participant. Having so qualified, the participant would be entitled to an investment tax credit with respect to such expenditures.
With respect to the Silviculture for Integrated Resource
management project, it appears that the involvement of 24(1)
would be sufficient to have it considered to be a joint
participant. With respect to the Fish-Forestry Interaction
Program, it appears that the joint participants consist only of
the three government bodies you named. Those companies which are
involved only incidently by lending their equipment to a project
would likely not be viewed as persons jointly carrying on SR&ED.
In that case, the only current expenditures which might qualify
under paragraph 37(l)(a) of the Act would be payments in cash or
in kind to institutions described in subparagraph 37(1)(a)(ii) of
the Act. A transfer of property would constitute a payment only
to the extent of the fair market value of the transferred
property at the time of the transfer.
To date, the only institutions which have been approved under subparagraph 37(1)(a)(ii) of the Act are institutions which are devoted to carrying on SR&ED as their prime goal. It is unlikely that a government department such as the federal Department of Fisheries and Oceans would be approved. However, even if a particular government agency were approved as an association under subparagraph 37(l)(a)(ii) of the Act, this would not be of assistance to those persons whose only involvement in a project is that of loaning equipment to be used in the project since no payment would be involved.
Concerning expenditures of a capital nature, such expenditures may qualify as SR&ED expenditures as provided for in paragraph 37(l)(b) of the Act. The acquisition by a person of a depreciable asset which will be used almost exclusively (at least 90 per cent of the time throughout its useful life) for SR&ED undertaken by or on behalf of the person may qualify pursuant to this paragraph.
However, where it is intended that an asset be used in SR-ED for a lesser portion of its useful life, the asset will not qualify under paragraph 37(l)(b) of the Act. If a person is not carrying on SR&ED, there is no provision under this paragraph to deduct expenditures of a capital nature. Thus, those companies whose only involvement is that of lending their equipment to a project would not be entitled to claim any amount as an SR&ED expenditure with respect to such equipment.
Although my response regarding contributions in kind is probably not as favourable as you may have hoped for, I trust that I have addressed your concerns. Please do not hesitate to enquire further if you desire any clarification.
Yours truly,
Director
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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