28 May 1990 Ministerial Letter 59378 F - Investment Tax Credit

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.

May 28, 1990

Dear Sirs:

Re:  Investment Tax Credits (ITC's)

We are writing in reply to your letter of January 8, 1990, concerning the availability of ITC's.  In your letter, you requested our opinion as to whether the partners in the hypothetical situation detailed below would be considered to be "specified members" as defined in subsection 248(1) of the Income Tax Act (the "Act").  In addition, you requested our views as to what is required for a partner to be considered to be involved in the partnership business on a "regular, continuous and substantial basis".  The hypothetical situation outlined in your letter was as follows:

1)     Company A carried out scientific research and experimental development ("SR & ED") with a view to creating a product which is unrelated to its existing business.

2)     Mr. B, an unrelated party, wished to participate in the SR & ED project.  A partnership was formed between Mr. B  and Company A before 1987.  Company A transferred its patents and know-how to the partnership as its initial capital contribution and Mr. B contributed cash.

3)     The partnership continues to carry out SR & ED.  The SR & ED is primarily carried out by a researcher who is under contract with the partnership.  Mr. B and the principals  behind Company A are involved in establishing a market for the product, although this is not being done on a day-to-day basis.

4)     Company A and Mr. B have continued to fund the partnership's SR & ED activity by making further cash capital contributions.

5)     If and when the SR & ED is successful and complete, the partnership will exploit its results and the profits will be allocated to the two partners proportionate to their respective capital interests.

Our Comments

In our opinion, it is a question of fact whether a member of a partnership is actively engaged in the activities of the partnership business on a regular, continuous and substantial basis.  As such, any determination of whether or not a particular partner is a "specified member" can only be made when all of the relevant facts are known.  In the above hypothetical situation a determination could not be made as we require more information related to the daily activities of the partnership and the responsibilities of each partner. However, in making a determination of actively engaged in an actual fact situation the Department would consider the following:

1)     Does the partner carry out the activities of the partnership's business (such as research) or are the activities carried out by another partner, employees or by third parties?

2)     Where the partnership engages others to carry out activities of the partnership (such as research), are the activities which relate to management, decision making, direction, promotion, etc., performed by the partner himself?  Is the partner directly involved in the supervision of employees or contractors or is such supervision performed by another partner or a third party?

3)     Who makes the decisions related to the daily operation (other than financing) of the partnership?  Is it the partner himself, other partners, or a third party?

The more involved the partner is in these activities, the less likely he is to be a "specified member", although the requirements of regular, continuous and substantial involvement must also be satisfied.  However, as these concepts call for objective judgment based on an appreciation of the full circumstances of a particular situation we are not prepared to provide any further elaboration on their application.

We trust our comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch