18 December 1989 Income Tax Severed Letter AC74225 - SR & ED Qualifying Expenditures

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.

W.A. Fulton                                Specially Rulings
Chief                                        Directorate
Audit Programs Directorate                 D. Turner
Scientific Research Audit                  957-2094
Applications Section

Attention: R.P. Laramy

Subparagraph 37(7)(c)(ii) of the Income Tax Act (the "Act")

This is in reply to your memorandum of August 9, 1989, concerning the Department's interpretation of subparagraph 37(7)(c)(ii) of the Act. In your memorandum you have requested the following:

1) That we review your comments related to the subparagraph and provide our views.

2) That we outline the interpretative position that the Department has adopted with respect to subparagraph 37(7)(c)(ii) expenditures.

3) Whether our position in respect to subparagraph 37(7)(c)(ii) of the Act could apply, with such modifications as necessary, to expenditures contemplated by subparagraph 37(7)(c)(i) of the Act.

Our Comments

We have reviewed your comments related to (Paragraph 37(7)(c)(ii) of the Act and offer the following comments.

1) In our view, subparagraph 37(7)(c)(ii) of the Act should be interpreted if it were a list of expenditures which, qualify for Scientific Research; and Experimental Development ("SR & ED") purposes. As stated in your memorandum this position is supported by paragraphs 10 and 14 of Interpretation Bulletin IT-151R3 , the draft IT-I51R4 the Budget paper; and to some extend, the Technical Notes. Given this interpretation, current expenditure would qualify provided met he requirements of either clause (A) or (B) of subparagraph 37(7)(c)(ii) of the Act. This view has been confirmed balance as being in accordance with the intent of the legislation.

21(1)(b)

2) The Department's interpretative position in respect of subparagraph 37(7)(c)(ii) of the Act is that current expenditures on activities must satisfy the requirements of either clause (A) or (D) in order to qualify as being in respect of SR & ED. Our interpretation of those requirements is as follows:

     a)   Clause (A) includes an expenditure which is incurred
          for and all or substantially all of which is
          attributable to the prosecution, or to the provision of
          premises, facilities equipment for the prosecution, of
          SR & ED in Canada:  Paragraph 37(7)(b) of the Act
          defines SR & ED as having the meaning given by
          subsection 2900(1) of the Regulations.  The term "all
          or substantially all" has been interpreted to mean 90%
          or more for purposes of the Act.  Thus to qualify under
          clause (A) an expenditure must be both incurred for and
          90% or more attributable to SR & ED as defined in
          subsection 2900(1) of the Regulations.  Whether an
          expenditure is incurred for and attributable to SR & ED
          is a question of fact, however, we offer the following
          comments:

          23

          In our opinion, the words "incurred for" require the
          application of a purpose test for each expenditure and
          the words "attributable to" require the application of
          a results test as well.  Thus, in our view, it is not
          sufficient that an expenditure was intended to be used
          substantially for research it must have actually been
          used in that manner in order to be deductible.

     ii)  Paragraph 2.8 of IC 86-4R2 points out that it is not
          the overall purpose of an activity or program, but
          rather what is actually occurring at a technical level
          that is relevant.  As such, whether an activity is
          eligible or ineligible is to be determined solely by an
          examination of the nature and characteristics of the
          activity itself.

     b)   Expenditures which do not qualify under clause (A) may
          qualify under clause (B).  Clause (B) includes
          expenditures of a current nature that are directly
          attributable, as determined by regulation, to the
          prosecution, or to the provision of premises,
          facilities or equipment for the prosecution, of SR & ED
          in Canada.  Although the words "directly attributable"
          could be interpreted to be more restrictive than the
          wording of clause (A) , the definitions in subsections
          2900(2) , (3 & (4) of the Regulations actually allow
          many expenditures to qualify under clause (8) which
          would not have qualified under clause (A).  For
          example, Clause (A) has an all or nothing type of
          wording and thus an expenditure either qualifies or it
          does not.  However, paragraph 2900(2)(b) of the
          Regulations allows a of employee salaries, wages and
          related benefits to qualify where the employee spends a
          portion of his time directly undertaking, supervising
          or supporting SR & ED prosecution.

3) In our opinion, subparagraph 37(7)(c)(i) of the Act should similarly be interpreted as though it were a list of expenditures. A current expenditure would qualify under subparagraph 37(7)(c)(i) of the Act provided it was incurred for, and all or substantially all attributable to or directly attributable (as determined by regulation) to, the prosecution of SR & ED carried on outside Canada.

We trust our comments will be of assistance.

B.W. Dath Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch