7 March 1991 Income Tax Severed Letter - R & D Expenditure

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.

Dear Sirs:

Re: R&D Expenditure

We are writing in reply to your letter of March 12, 1991, wherein you requested a favourable ruling XXX

Our Comments

As discussed in our telephone conversation of March 13, XXX R Thompson), due to the time constraints involved we are unable to provide an advance income tax ruling by March 15 per your request. Although a binding confirmation of the income tax consequences of a proposed transaction can only be provided in the form of an advance ruling, we can offer the following general comments related to the availability of investment tax credit for a payment made by a pharmaceutical corporation to a university in Canada to undertake scientific research activities.

Where a pharmaceutical corporation (the "Payer") makes a payment to a university in Canada (the "Performer") to be used for research activities, those activities must qualify as scientific research and experimental development ("SR&ED") as defined in paragraph 37(7)(b) of the Income Tax Act (the "Act") and subsection 2900(1) of the Income Tax Regulations (the "Regulations"). Technical guidelines that reflect the Department's interpretation of these provisions of the Act and Regulations are discussed in the enclosed Information Circular 86-4R2. SR&ED activities would not include the activities of teaching or training. In addition, a payment to the Performer does not constitute an expenditure on SR&ED to the extent that the amount of the payment may reasonably be considered to have been made to enable the Performer to acquire a building, or a leasehold interest in a building in which the Payer has, or may reasonably be expected to acquire, an interest.

In order for the Payer to be entitled to deduct from his income a payment made in the year to the Performer, pursuant to clause 37(1)(a)(ii)(B) of the Act the following conditions must be met:

• 1) the Payer must carry on business in Canada in the taxation year;
• 2) the funds have to be used by the Performer for SR&ED carried on in Canada;
• 3) the SR&ED activity carried on by the Performer has to be related to the business of the Payer in the year the expenditure is made;
• 4) the Payer must complete and file Form T661, "Claim for Scientific Research and Experimental Development Expenditures"; and
• 5) the Payer must be entitled to exploit the results of the SR&ED.

Such a payment made should be expended by the Performer within a reasonable time frame, generally two years from the date of receipt. Whether SR&ED activities are related to a Payer's business is generally a question of fact which must be determined on a case by case basis. SR&ED activities related to a business include any SR&ED activities that may lead to or facilitate an extension of the Payer's business. Such a requirement will generally be satisfied when the results of the SR&ED will, if successful, have a direct and beneficial application in the business that is carried on by the Payer in the year the payment is made. While the determination of whether a Payer is entitled to exploit the results of the SR&ED is again a question of fact, this requirement will normally be fulfilled where the Payer receives the right to use patents that result from the SR&ED project on an exclusive or non-exclusive basis regardless of any reasonable territorial restrictions or where the Payer is entitled to distribute and market any products that result from the SR&ED project. Similarly, the right to use the results of an SR&ED project based on a license arrangement in circumstances where the Payer is charged a royalty, license fee or some other amount would also constitute an entitlement to exploit the results of SR&ED.

An investment tax credit is available to the Payer in respect of a qualified expenditure on SR&ED activities. To be eligible as a qualified expenditure, the expenditure must first qualify as a deduction from the Payer's income as an expenditure on SR&ED (as described above). In some circumstances, the entire amount of an expenditure on SR&ED made by a taxpayer would not be considered a qualified expenditure because certain types of expenditures, referred to as prescribed expenditures, are excluded from the definition of a qualified expenditure. However, generally in the case of a payment made to a Performer (as defined herein) which qualifies as a deduction from income for SR&ED, the entire payment will be a qualified expenditure eligible for investment tax credit.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada Taxation.