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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether amounts paid to a contract researcher would qualify as scientific research and experimental development carried on in Canada
Position:
Requirements of paragraph 37(1)(a)(i) satisfied if payer did not enter into the research contract as an agent of its parent corporation
Reasons:
If agency relationship exists between parent and subsidiary, contract research will not be completed on behalf of the payer - all factors relevant, not only Application policy paper #94-4
XXXXXXXXXX Lena Holloway, CA
2002-015372
November 20, 2002
Dear XXXXXXXXXX:
Re: Scientific Research and Experimental Development
We are writing in reply to your letter of July 19, 2002, wherein you enquired whether the costs incurred in the hypothetical scenario described below would qualify as expenditures for scientific research and experimental development ("SR&ED") under the Income Tax Act (Canada) (the "Act").
A wholly owned Canadian subsidiary (Cansub) of a U.S. parent company (Usco) enters into a contractual arrangement to perform scientific research for Usco. Under the terms of this arrangement, Cansub agrees to perform the research for a fee. All of the results of the research will be owned entirely by Usco and Cansub will have no right to exploit whatsoever. Cansub will be paid a fixed fee under the contract, which is negotiated in advance, and will be paid whether or not the results of the research are successful.
Cansub will not perform all of the research itself. For research that Cansub does not perform, it will enter into contracts with arm's length Canadian resident entities (Cancos) to complete the research required. The contract between Cansub and Usco provides that the Cansub can only enter contracts with the Cancos subject to prior approval of Usco. The terms of these secondary contracts are similar to the terms of the contract between Cansub and Usco (i.e. no rights to exploit, fixed fee, paid regardless of result, etc.). Cansub does not take any price risk on the payments to the Cancos as these are short-term contracts and funds are collected in advance from Usco to cover these contract payments. As well, some incidental payments are made directly by Usco to the Cancos. The Cancos are aware that Cansub is contracting for these services as a result of its contract with Usco.
Assuming the underlying activities performed by the Cancos would otherwise qualify as SR&ED as defined in section 248 of the Act, you have asked whether the payments made by Cansub to the Cancos would be payments described in either of paragraphs 37(1)(a)(i) or 37(1)(a)(i.1) of the Act. More specifically, you had asked us to identify the facts that would be relevant in making such a determination.
The answer to your question depends on whether the Cancos are performing SR&ED on behalf of CanSub or on behalf of Usco. This, in turn, depends on whether CanSub is an agent of Usco.
The scenario outlined in your letter questions whether the criteria used in section I of SR&ED Application Policy Paper number 94-04 ("APP 94-04") entitled "Definition of Contract Payments" would be relevant in making this determination. The criteria listed under section I of APP 94-04 demonstrate the circumstances under which a payment from a Canadian government or municipality or other public authority would be a contract payment, it was not set out in order to determine whether one person is acting as an agent of another. While these criteria may be relevant in arriving at such a determination, they are not, in and by themselves, sufficient to conclude that one person is acting as agent for another.
Whether SR&ED expenditures are incurred by a taxpayer on its own behalf or while acting as an agent for another depends on the terms of the arrangement. In general, an agency relationship exists where one person (principal) grants another person (agent) the authority to represent the principal and agrees to be bound by the agent's actions. In an agency relationship, the principal is responsible for reimbursing the agent for any expenses incurred by it. In addition, any property acquired by the agent (including the results of work performed) as well as any obligations incurred by the agent belong solely to the principal.
In the situation described above, the issue is whether, based on the terms of the agreement, Cansub is carrying on a business of performing SR&ED for a fee or is carrying out its tasks (including entering into contracts with the Cancos) as an agent of Usco. In making this determination the totality of the relationship must be examined. Thus, the mere fact that Cansub is not entitled to exploit the results of the scientific research is not sufficient, in and by itself, to conclude that it is acting as an agent for Usco.
Cansub may deduct the payments to the Cancos under subparagraph 37(1)(a)(i) if Cansub is not acting as an agent of Usco in making those payments and the expenditures are related to the business of Cansub. Paragraph 37(8)(c) provides that the prosecution of SR&ED, in and by itself, is only considered a business of the taxpayer to which the SR&ED relates if the taxpayer derives all or substantially all of its revenue from the prosecution of SR&ED. For this purpose, all or substantially all means 90% or more. If Cansub is an agent of Usco, then the payments would not relate to the business of Cansub but would relate to the business of Usco and no deduction under subparagraph 37(1)(a)(i) would be available.
Since CanSub has no rights to exploit the results of the research, it cannot claim the payments to the Cancos under subparagraph 37(1)(a)(i.1).
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of the Circular, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
D. Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content