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.
TO S.C. Lemelin Manager Scientific Research Audit Section
Owen McCallum
FROM Merchandising, Manufacturing and Construction Section B. Fields 957-2096
SUBJECT: Subcontracted Scientific Research
and Experimental Development (SR & ED) Activities
This is in reply to your memorandum of September 9, 1987, concerning whether or not the expenditures incurred by a taxpayer (the "performer") in respect of routine engineering activities that are performed on behalf of another taxpayer (the "contractor") and that directly support an SR & ED project of the contractor would be SR & ED expenditures of the performer.
You have indicated that you are concerned that a performer may be entitled to the various incentives that are available in respect of SR & ED expenditures incurred before November 21, 1985, even though the expenditures that are incurred by the performer relate to activities that are routine in nature.
In order to fall within the ambit of subparagraph 37(l)(a)(i) of the Act a taxpayer must carry on a business in Canada and make an expenditure in respect of SR & ED that is "related to the business and directly undertaken by or on behalf of the taxpayer". Although the comments in paragraph 10 of IT-151R2 suggest that these tests will be met in respect of the expenditures made in the year by a corporation whose business consists of doing SR & ED under contract for fees, it is important to note that these comments were made in the context of a corporation that derives all or substantially are of its revenue from the prosecution of SR & ED or the sale of rights in or arising out of SR & ED. In our view, the use of the words "SR & ED ... directly undertaken by... the taxpayer" in subparagraph 37(1)(a)(i) in the context of a performer would require that the activities of the performer must qualify as SR & ED in and by themselves. Consequently, the performer's activities would have to be viewed in isolation from the activities of the contractor. Thus, even though the expenditures that are incurred by the contractor in respect of the activities that are performed on his behalf by the performer can be considered SR & ED expenditures of the contractor if they directly support the contractor's SR & ED project, it does not necessarily follow that the performer has carried out SR & ED. For the purpose of determining whether or not the performer's expenditures qualify it will be necessary to establish that the performer's activities, in isolation, constitute SR & ED within the meaning of Regulation 2900(1).
It is also our view that in interpreting subsection 2900(1) of the Regulation that paragraph 2900(l)(c) is not to be read alone and that, properly construed, it includes the requirement set out in the preamble that the activities must be part of a systematic investigation or search carried out in a field of science or technology. Although subsection 2900(1) does not specifically indicate that the systematic investigation must be carried out by the performer, we believe, based on the above comments concerning 37(l)(a)(i) that an expenditure that is in respect of any of the activities described in paragraph 2900(l)(c) will only be deductible under paragraph 37(l)(a)(i) if the activity is part of a systematic investigation or search carried out by the claimant. Thus, a performer that does routine engineering work that directly supports a contractor's SR & ED project would not, in our view, be entitled to the various incentives for SR & ED in respect of the expenditures incurred.
Should you have any question concerning the above comments please case Brian Fields at 957-2096.
Original Signed by Original signÉ par
T. HARRIS
Chief Merchandising Manufacturing and Construction Section Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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