4 December 1991 External T.I. 9117325 F - SR & ED "Related to a Business" & ITC

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.

5-911732 

Dear Sirs:

Re:  Scientific Research and Experimental Development (SR&ED)

This is in reply to your request dated June 18, 1991, regarding the Department's position on the availability of the SR&ED deductions pursuant to section 37 of the Income Tax Act (the "Act") and the related Investment Tax Credits pursuant to subsection 127(5) of the Act and section 127.1 of the Act.

You requested that we base our comments under the following circumstances:

I.                   24(1)

II.      An approved Canadian university (approved for the purposes of subparagraph 37(1)(a)(B) of the Act) has a research centre (the"Centre") devoted exclusively to 24(1) research.

III.     The taxpayer makes a contribution to the university and specifically directs that the funds be used by and for the Centre.

IV.      As a matter of policy, any funds contributed to the university subject to specific conditions are used by the university in accordance with those conditions.  If the conditions are not acceptable to the university, the contributions are not accepted.

V.       The taxpayer can direct that the funds be used at the Centre for:

        A.   a specific research project; or

        B.   form part of the general fund to be used on numerous ongoing projects at the discretion of the Centre. Generally, any intellectual property developed under V.A above becomes the property of the taxpayer, while such property under V.B above becomes the property of the university to use at its discretion.  In most cases, the universities make such property available to the industry as a whole through publications in trade journals and other public forums.

        Assuming that:              

1.   The contribution is made to the general fund at the Centre,  VB above; and

2.   The SR&ED relates to the business of the taxpayer;

you requested whether the taxpayer would be entitled to claim the SR&ED deductions under clause 37(1)(a)(ii)(B) of the Income Tax Act (the"Act") and the related Investment Tax Credits (the "ITC") pursuant to subsection 127(5) of the Act and section 127.1 of the Act.

Of particular concern was the requirement in subsection 37(1)(a) of the Act that;

    "... the taxpayer is entitled to exploit the results of such scientific research and experimental development ..."

C.You stated that as a practical matter, it would be impossible to specifically trace the use of the taxpayer's particular contribution from the general fund to a specific project and requested that in a case of directing contributions to the general fund of the Centre, would the Department consider that the taxpayer was "... entitled to exploit the results" since the intellectual property would become part of the public domain?

As a related question and assuming that the taxpayer would be entitled to the SR&ED deduction and related ITCs, you asked what documentary evidence, in addition to the records to support the original contribution, would the taxpayer require, to support his claim?  Specifically, in completing the Form T661, proposed Schedule A - "Third Party Payments", would the university have to provide some sort of description of how the general fund was used in the year of the contribution and possibly allocate the usage between eligible and non-eligible expenditures (e.g. building additions, etc.)?

Our Comments

While we are only capable of providing confirmation of the tax effects of proposed situations in the form of advance income tax rulings, we nevertheless are prepared to provide the following general comments for your assistance. In general, where a taxpayer (the "Payer") makes a contribution to an approved university in Canada (the "University") to be used for research activities, those activities must qualify as SR&ED as defined for purposes of the Act in order for the Payer to receive the enriched tax treatment.  The Department considers that all Canadian universities and affiliated colleges are approved for purposes of clause 37(1)(a)(ii)(B) of the Act.  Technical guidelines that reflect the Department's interpretation of SR&ED activities are discussed in Information Circular 86-4R2 a copy of which we enclose herewith.  SR&ED activities would not include the activities of teaching or training.  It may be that an individual performing SR&ED will, as a consequence, become more trained in performing SR&ED, but training cannot be a purpose in and by itself.

A contribution to a University 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 University 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.

A Payer will be entitled to deduct from its income a contribution made in the year to a University pursuant to clause 37(1)(a)(ii)(B) of the Act, provided that the following conditions are met:

         a)  the Payer carries on business in Canada in the taxation year;

         b)  the funds are to be used by the University for SR&ED carried on in Canada;

         c)  the SR&ED activity carried on by the University is related to the business of the Payer in the year the expenditure is made;

         d)  the Payer completes and files Form T661, "Claim for Scientific Research and Experimental Development Expenditures"; and

         e)  the Payer is entitled to exploit the results of the SR&ED.

For contributions to qualify under subparagraph 37(1)(a)(ii) of the Act it is a requirement that the funds are used by the University for SR&ED activities carried on in Canada. It is essential that an audit trail exist evidencing that the funds were expended on SR&ED activities so that the Department is able to verify that this requirement has been met.  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, for example, 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 a 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.  It is the Department's opinion that where intellectual property is made available to the public at large, the requirement found in subparagraph 37(1)(a)(ii) of the Act, "... that the taxpayer is entitled to exploit the results ..." obtained from the SR&ED would not be fulfilled.

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

We trust that the above will be of assistance to you.  Should you wish, the Department will be pleased to review your proposed transaction with the purpose of providing an advance income tax ruling.

for DirectorManufacturing Industries, Partnerships  and Trusts DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch