2 December 2004 External T.I. 2004-0096811E5 - SR&ED Approved Status

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.

Principal Issues: The client requested clarification of the criteria relating to "approved" status for SR&ED.

Position: General comments provided.

Reasons: The determination as to whether a particular entity can be approved can only be made following a review of a particular applicant's submission and related documentation as outlined in Application Policy SR&ED 96-10.

Bob Naufal, CMA
XXXXXXXXXX (613) 952-1506
2004-009681
December 2, 2004

Dear XXXXXXXXXX:

Re: Approved Associations - Scientific Research and Experimental Development ("SR&ED")

We are writing in response to your letter dated September 30, 2004, wherein you requested clarification of the approval criteria contained in Application Policy SR&ED 96-10. In the letter, you appear to be describing actual situations. Unfortunately, we are unable to provide definitive comments on those situations without a complete review of all the facts and underlying documentation. However, we are prepared to provide the following general comments.

Our Comments

Application Policy SR&ED 96-10 provides guidance on the "approval" process for certain entities who wish to obtain approved status under the Income Tax Act (the "Act"). To be considered "approved" an entity must meet the criteria of a non-profit organization ("NPO") and be able to clearly demonstrate that it meets all of the following requirements:

(a) the entity must have the facilities, equipment and personnel capable of carrying out SR&ED as defined in the Act;

(b) the entity must carry on only activities that are unquestionably SR&ED;

(c) in order to satisfy the requirements for non-profit status, there must be no personal benefits to members, no control of other associations, satisfactory provisions for the distribution of assets upon dissolution, etc.;

(d) the general public must be a beneficiary of the results of any successful research; and

(e) the funding of the association or research institute must be sufficient to ensure ongoing SR&ED.

In our view, criteria (a), (b) and (e) above are self-explanatory in that, an applicant requesting approved status must clearly demonstrate, in its submission, that it has the proper infrastructure in place to fund and carry out activities that are clearly SR&ED. Accordingly, an NPO that contracts out 100% of its SR&ED activities to an arm's length party may not meet criteria (a) and (b).

Generally, an entity meets the criteria of an NPO (requirement (c) above) if it is organized and operated exclusively to carry out SR&ED activities on a not for profit basis. Accordingly, an NPO would not distribute or otherwise make available any of its income for the personal benefit of a member. Whether a particular entity is an NPO is a question of fact that can only be determined after a review of the purpose and activities of the entity. In this regard, the documents (letters patents, articles of incorporation, by-laws, etc.) creating and governing the entity would typically be reviewed.

With respect to criteria (d) above, in a typical commercial business environment, a corporation involved in carrying out SR&ED would normally benefit from the results arising out of the SR&ED, either by way of licensing the results of the SR&ED or the sale of such results (for example a patent). In such a situation, the general public (or a sector thereof) does not benefit from the results of the SR&ED without acquiring, in some manner, the results of the SR&ED. However, an applicant for "approved" status would typically undertake SR&ED, the results of which would become part of the public domain (e.g. published in a journal or presented at a conference). In such a situation, the general public (or a sector thereof) would benefit from the results of the applicant's SR&ED without acquiring said results. For example, an applicant for "approved" status may be a research institute undertaking basic medical research, the results of which will be published in a medical publication available to the medical community in general. In such a situation, both the institute and the general public benefit from the results of the SR&ED.

Typically, it is a legal entity (either an association, non-profit corporation) that generally applies for "approved" status. However, in the past, we have granted approved status to a specific branch / division of a multi-functional organization (entity), where the SR&ED is centralized and carried out in that specific branch / division. In this regard, the branch / division seeking approval must be able to clearly demonstrate that it has the infrastructure in place to meet the above-mentioned requirements, and can operate as if it was a separate legal entity.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust our comments will be of some assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate