7 November 1990 Income Tax Severed Letter - SR & ED Cost Sharing Arrangement

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: SR&ED Cost Sharing Arrangement

This is in reply to your memorandum dated August 23, 1990 concerning the above-captioned subject.

Our understanding of the situation and your concerns is as follows:

• 1. Under certain international SR&ED cost sharing arrangements a Canadian taxpayer carries out qualifying SR&ED in Canada and is reimbursed for some of the expenditures by a non-resident person who does not carry on business in Canada.
• 2. Your understanding of the Department's position is that an amount that is otherwise included in income under subsection 9(1) of the Income Tax Act (the "Act") would not be considered as "non-government assistance" since such an amount would be excluded under paragraph 12(1)(x) of the Act by virtue of subparagraph (v) thereof. Also, in the situation described in 1 above, where a "reimbursement" is included in the taxpayer's income in accordance with generally-accepted accounting principles ("GAAP") the Department accepts, for tax purposes, that subsection 9(1) is applicable rather than paragraph 12(1)(x).
• 3. In some cases taxpayers treat reimbursements as income receipts while in other cases reimbursements are used to reduce the SR&ED expenditure in computing profit. In either case, taxpayers consider the reimbursements to be included in income by virtue of GAAP.
• 4. It is your opinion that even though a reimbursement received by a taxpayer in the above circumstances would usually constitute an expense reduction, the amount would be considered to be included in the taxpayer's income under subsection 9(1) and would not be "non-government assistance" for the purposes of subsection 127(11.1). Accordingly, where the reimbursement is received from a non-resident person described in 1 above in respect of a bona fide SR&ED cost sharing arrangement, the amount would not reduce the SR&ED expenditure base of the taxpayer for investment tax credit ("ITC") purposes pursuant to paragraph 127(11.1)(c).
• 5. You are proposing that the following administrative position be adopted for audit purposes.

"That reimbursements from most non-residents in respect of most bona fide SR&ED cost sharing arrangements would not reduce the SR&ED expenditure base for ITC purposes of the Canadian SR&ED performer".

Our comments are as follows:

(A) One of the correspondence you referred to, the Joyce/Gamage memorandum of June 29, 1989, addressed the situation where the Canadian taxpayer did not treat the reimbursement received from the non-resident parent as an income receipt but rather as a reduction from the current SR&ED expenditures. In respect of this latter treatment, the memorandum, in the last sentence under "Taxpayer's Representation", states that "the taxpayer has included the amount in income under section 9 of the Act."

(B) The Joyce/Gamage memorandum reflects our view that where a reimbursement is received by a Canadian taxpayer from a non-resident person in the circumstances described in 1 above and included in income under subsection 9(1), the reimbursement would be neither "non-government assistance" nor a "contract payment". Accordingly, the reimbursement would not reduce the qualified expenditure of the taxpayer for ITC purposes pursuant to paragraph 127(11.1)(c) of the Act.

(C) XXX

(D) According to the Explanatory Notes to Bill C-84 which added the definitions "contract payment", "government assistance" and "non-government assistance" and which amended subsection 127(11.1) to reduce the amount of an expenditure for the purposes of claiming the ITC, the ITC was intended to be calculated on an amount of a qualified expenditure net of a reimbursement received in respect thereof. However, by virtue of the unequivocal wording of paragraph (c) of the definition "contract payment" and subparagraph 2902(e)(ii) of the Regulations, it is our interpretation that a reimbursement, for this purpose, would not include an amount that was deducted by a non-resident payer in computing Canadian income tax. Accordingly, it is our view that the administrative position, subject to the comments in (C), would be in accordance with our interpretation of the law.

(E) Where a Canadian taxpayer incurs a SR&ED expenditure merely as an agent on behalf of a non-resident person, we agree that no deduction would be available to the taxpayer under subsection 37(1) of the Act in respect of such expenditure. Accordingly, since the expenditure would not be a "qualified expenditure", as the term is defined for the purposes of the definition "investment tax credit" under subsection 127(9) of the Act, the taxpayer would not be entitled to the ITC in respect thereof.

We trust our comments will be of assistance.