7 March 1991 Income Tax Severed Letter - SR & Ed - Charities - Business Expenses

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.

Subject: XXX

XXX

Overview

XXX

SR&ED

Generally, subsection 37(1) provides that a taxpayer who carries on business in Canada in a taxation year may deduct current and capital expenditures for SR&ED carried on in Canada. The expenditures must relate to a business of the taxpayer and can be deducted in the year the expenditure is made or may be carried forward to any future year. In addition, for payments described in subparagraph 37(1)(a)(ii) (see Appendix I) the taxpayer must be entitled to exploit the results of the SR&ED. In respect of payments for pre-competitive SR&ED described in subparagraph 37(1)(a)(iii) of draft income tax legislation released by the Department of Finance on July 13, 1990, there must be a potential for application of the results in businesses other than the business of the taxpayer.

Payments described in subparagraph 37(1)(a)(ii) include payments to approved associations, approved research institutions and other similar institutions. One of the criteria upon which the Department provides approval to such organizations is that they only carry on activities which are unquestionably SR&ED. XXX However, some training may qualify as SR&ED in circumstances where a member of an SR&ED team is trained in a certain procedure in order to carry out a series of tests as part of an SR&ED project XXX The Science Advisors Section, Audit Programs Directorate is responsible for determining the eligibility of expenditures as SR&ED and it may be desirable to have a representative attend any meeting that may be convened.

Payments described in subparagraph 37(1)(a)(ii) also include payments to a non-profit corporation for SR&ED within the meaning of 149(1)(j) of the Act and to an approved university or college and, for these purposes, the Department considers that all Canadian universities and affiliates are approved. Certain payments to the approved organizations of XXX Similarly qualify as SR&ED expenditures.

A pamphlet on SR&ED that the Directorate recently produced is attached for your information.

Charities

In calculating taxable income, corporations may deduct gifts to registered charities but these may not exceed 20% of their income. Donations by individuals are subject to the same limitation and are eligible for a tax credit equal to 17% of the first $250 of gifts and 29% of amounts over $250.

In order to qualify for registration, an organization must be constituted and operated exclusively for charitable purposes. Advancement of education and other purposes beneficial to the community as a whole in a way which the law regards as charitable are two headings of charitable purposes which may have particular application here. Educational benefits must be made available to a broad segment of the community to qualify as a charitable endeavour. Advancement of education includes: a) promoting serious research in a recognized field of knowledge for educational purposes and b) the advancement of science and scientific institutions.

The Registration Directorate is responsible for granting registration as a charity for income tax purposes.

Deductible Expenditure

Depending upon the facts of a specific situation, expenditures for corporate sponsorship of XXX would be currently deductible as a promotional or advertising business expense if the expenditures are incurred by the taxpayer for the purpose of gaining or producing income from a business. Whether the expenditures are reasonable and motivated primarily by business reasons would need to be closely examined in determining their deductibility.

Clause 37(1)(a)(ii)(A) of the Act refers to an approved association and clause 37(1)(a)(ii)(B) refers to an approved research institute or other similar institute. The Assistant Deputy Minister of Revenue Canada Taxation will grant approval to an association or an institute if it meets the following criteria:

• a) it has the facilities and personnel capable of carrying out SR&ED,
• b) it carries on only activities that are unquestionably SR&ED,
• c) the typical requirements for non-profit status are satisfied, such as no personal benefit to members, no control of other associations, satisfactory provisions for distributions of assets on dissolution, etc.,
• d) the general public will be a beneficiary of the results of successful SR&ED, and
• e) the funding of the organization will be sufficient to ensure continued research by it.

Clause 37(1)(a)(ii)(B) also refers to an approved university or college. The Department considers that all Canadian universities and affiliated colleges are approved.

Clause 37(1)(a)(ii)(C) refers to a corporation resident in Canada and exempt from tax under paragraph 149(1)(j). The major provisions encompassed in paragraph 149(1)(j) of the Act are as follows:

• a) no part of the non-profit corporation's income can be payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder;
• b) the corporation cannot acquire control of any other corporation;
• c) the corporation cannot carry on any business;
• d) the corporation must expend amounts in Canada either on SR&ED directly undertaken by or on behalf of itself, or by payments to an organization described in clause 37(1)(a)(ii)(A) or (B) of the Act, and such expenditures cannot be less that 90% of its income for the period; and
• e) the corporation must be constituted exclusively for the purpose of carrying on or promoting SR&ED.

Payments made to an approved organization XXX under clause 37(1)(a)(ii)(E) qualify as SR&ED provided that the approved organization makes payments to an association, institution or corporation described in any of clauses (A) to (C).