19 March 1999 Income Tax Severed Letter 9900506 - DEFINITION OF "IN CANADA"

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:

Definition of "in Canada" for SR&ED purposes.

Position:

SR&ED carried out in the economic zone of Canada was not carried out "in Canada" for the purposes of subsection 37(1) or definition of "qualified expenditure" under subsection 127(9).

Reasons:

Limitation imposed in the Territorial Sea and Fishing Zones Act and the Oceans Act, providing only the internal waters and the territorial sea of Canada to be "in Canada". Any other zones outside the 12-mile outside limit of that sea would not be in Canada for SR&ED purposes.

		March 19, 1999

	Specialized Compliance Enhancement	Resources, Partnerships and
	   Division	   Trusts Division
	Mel Machado, A/Manager	F.B. Fontaine
		957-4364
	Attn:	Louise Green
		Tax Incentive Audit Section	990050

Definition of “in Canada” for the purposes of Scientific
Research and Experimental Development (“SR&ED”)

This is in reply to your memorandum dated December 16, 1998 concerning our memorandum of September 23, 1998 (“1998 response”) in respect of XXXXXXXXXX . (the “taxpayer”) as it relates to the above captioned subject.

In our 1998 response, we opined that the taxpayer’s SR&ED performed outside the coastline of Canada and beyond the 12 nautical mile limit of the territorial sea of Canada would not be considered to be carried out “in Canada.” The taxpayer disagrees with our opinion and obtained a brief prepared by a firm of Chartered Accountants contending, among other things, that as the particular SR&ED was carried out in the “exclusive economic zone of Canada” pursuant to the Oceans Act, the work would be carried out “in Canada.”

We do not agree with the taxpayer’s contention. In our 1998 response, we indicated that the inclusion of the territorial sea as being in Canada, is based on the Territorial Sea and Fishing Zones Act which applies to every Act of Parliament and which, therefore, would be applicable to the Income Tax Act (the “Tax Act”). For the exclusive economic zone of Canada to be considered “in Canada,” we would expect such inference to be included in the Oceans Act and also a provision therein regarding its application to every Act of Parliament.

The Oceans Act generally describes the following geographic locations:

(1) The territorial sea of Canada extending to 12 nautical miles from the mainland coastline; (section 4).

(2) The contiguous zone of Canada which extends to 24 nautical miles from the outer limit of the territorial sea of Canada; (section 10).

(3) The exclusive economic zone of Canada as being 200 nautical miles from the outer limit of the territorial sea of Canada; (section 13).

(4) The continental shelf of Canada extending to the same distance as in (3); (section 17).

Of the four locations described above, only the territorial sea of Canada is considered part of Canada. This is confirmed in section 7 of the Oceans Act which states that “For greater certainty, the internal waters of Canada and the territorial sea of Canada form part of Canada.” There is no similar provision in the Oceans Act in respect of the other geographic locations described in (2) to (4) above. In point of fact, section 11 of the Oceans Act clearly infers that the contiguous zone of Canada which extends only 24 nautical miles from the outer limit of the territorial sea is not “in Canada.” Section 11 states that “A person who is responsible for enforcement of a federal law......and who has reasonable grounds to believe that a person in the contiguous zone of Canada would, if that person were to enter Canada, commit an offence under that law may,.... prevent the entry of that person into Canada...”

It is our view, in the absence of specific provisions to the contrary, that to allow an area extending 200 nautical miles from the outer limit of the territorial sea as being in Canada, which area includes the contiguous zone of Canada (described above), would be inconsistent with the intent of section 7 of the Oceans Act and of the meaning of the terms “Canada” or “in Canada” for the purposes of the SR&ED provisions under the Tax Act.

Our views regarding section 255 of the Tax Act, the Income Tax Conventions Interpretation Act and the Mersey Seafoods case remain as stated in the 1998 response.

Based on the above comments, we would conclude that where the taxpayer’s SR&ED was carried on in the economic zone of Canada, it would not be considered to be carried on in Canada for the purposes of subsection 37(1) and the definition of “qualified expenditure” in subsection 127(9) of the Tax Act.

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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