11 September 1990 Ministerial Letter 901298 F - Scientific Research and Experimental Development

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.

September 11, 1990

Dear Sirs:

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

We are writing in reply to your letter of June 15, 1990, wherein you requested our comments on 1) the deductibility of SR&ED expenses under paragraph 18(1)(a) of the Income Tax Act (the "Act") and 2) the availability of investment tax credit ("ITC") to a company performing SR&ED activities on behalf of another taxpayer.

Your Questions

1.     Where a limited partnership carries on SR&ED activities and chooses to deduct the expenses under paragraph 18(1)(a) of the Act, rather than subsection 37(1) of the Act, will the restriction on the deductibility of SR&ED expenses provided for in paragraph 96(1)(g) of the Act be applicable?

2.     Where a limited partnership, which chooses to deduct its SR&ED expenditures under paragraph 18(1)(a) of the Act, has entered into an agreement with a company under which the company will carry on SR&ED activities on behalf of the partnership, will that company be entitled to ITC on such SR&ED expenditures?

Our Comments

While we are unable to provide confirmation of the income tax effects of the particular fact situations outlined in your letter, we can offer the following general comments related to the deductibility of SR&ED expenditures under paragraph 18(1)(a) of the Act and ITC available to the performer of SR&ED.

1.     Although we recognize that in accordance with generally  accepted accounting principles certain amounts expended on SR&ED activities will be permitted as a deduction in the year incurred for accounting purposes, it is our opinion that those SR&ED expenditures of a taxpayer which are described and provided for in section 37 of the Act must deducted for income tax purposes in accordance with that section or not at all.  Such amounts deducted under section 37 of the Act by a partnership in calculating its income will be subject to the restriction in paragraph 96(1)(g) of the Act.  Should the amounts expended by a taxpayer on research and development activities not be described in section 37 of the Act, then those expenses will be deductible for income tax purposes only to the extent that they are permitted under section 9 of the Act and are not contrary to other provisions of the Act, such as paragraphs 18(1)(a) and (b) of the Act.  Such expenses allowed to be deducted by a partnership in calculating its income would not be subject to the restriction in paragraph 96(1)(g) of the Act.

2.     In order for a company performing SR&ED activities (the "Performer") on behalf of another taxpayer to have a "qualified expenditure" (as defined in subsection 127(9) of the Act) eligible for ITC, the expenditure must be "related to a business" of the taxpayer.  In many cases, this requirement would not be met unless the Performer was a sole-purpose SR&ED company described in paragraph 37(7)(e) of the Act.  Where an amount expended by a Performer meets the definition of qualified expenditure, paragraph 127(11.1)(c) of the Act reduces such amount eligible for ITC by, inter alia, the amount of any contract payment which the Performer has received, is entitled to receive or can reasonably be expected to receive in respect of that expenditure made by the Performer.  Contract payments of the Performer will include any amount payable by a person resident in Canada for SR&ED related to the business of that person regardless of whether the person has deducted the amount of the expenditure under section 37 of the Act or has chosen not to deduct the amount at all.

These comments represent our opinion of the law as it applies generally.  As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust these comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch