12 December 1988 Income Tax Severed Letter 5-6777 - [Scientific Research and Experimental Development ("SR & ED") "Non-Government Assistance"]

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.

M. Eisner (613) 957-2142

DEC 12 1988

Dear Sirs:

Re: Scientific Research and Experimental Development ("SR & ED") "Non-Government Assistance"

This is in reply to your letter of October 7, 1988 in which you asked us to reconsider a position set out in our letter to you dated September 28, 1988 wherein it was indicated that a taxpayer would not be entitled to an investment tax credit ("ITC") with respect to a reimbursement by virtue of paragraph 127(11.1)(c) of the Income Tax Act (the "Act"). This position was based on the concurrence that a reimbursement constituted non-government assistance as defined in subsection 127(9) of the Act in the following circumstances:

a) A Canadian corporate taxpayer (Canco) incurs qualified SR & ED expenditures in Canada and owns all rights arising therefrom.

b) A related non-resident corporation (NRCo) reimburses Canco for a portion of the qualified expenditures. The portion not reimbursed is the ratio of Canadian sales to worldwide related group sales, as in a typical cost-sharing arrangement.

c) Canco retains all Canadian rights. NRCo has the exclusive right to use the results of the SR amp; ED worldwide, with the exception of Canada, at no additional charge.

d) NRCo does not carry on business in Canada.

With respect to the above situation, the definition of non-government assistance in subsection 127(9) refers to an amount that would be included in income under paragraph 12(1)(x) of the Act if that paragraph were read without reference to subparagraph (vi) and (vii) thereof. We agreed that the reimbursement of expenditures reduced the SR amp; ED pool because the amount was an amount described in subparagraph 12(1)(x)(vi) of the Act.

You have now expanded your comments to indicate that in this situation the reimbursement would be included in Canco's income pursuant to generally accepted accounting principles. With respect to these circumstances, it is the Department's general position that such an amount would not be included in a recipient's income under paragraph 12(1)(x) to the extent that it was otherwise included in a taxpayer's income in the year of receipt or a previous year by virtue of subparagraph 12(l)(x)(v). On this basis, the reimbursement received by Canco would not be regarded as being "non- government assistance" and Canco would be entitled to an ITC in respect of the gross amount of the qualified expenditures. In addition, there would be no reduction of Canco's SR amp; ED pool under paragraph 37(1)(d) of the Act.

We trust that the foregoing will be of assistance.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch