23 August 1979 Income Tax Severed Letter

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.

August 23, 1979

R.O. Earp (613) 995-1723

XXXX

Attention XXXX

Dear Sirs:

This will reply to your letter dated June 21, 1979, wherein you requested an interpretation concerning the treatment for income tax purposes of scientific research expenditures incurred in the type of situation described by you.

Section 2900 of the Income Tax Regulations defines " "scientific research" for purposes of sections 37 and 37.1 of the Income Tax Act as the "systematic investigation or search carried out in a field of science or technology by means of experiment or analysis," and goes on to make certain specific references to basic research, applied research and development. The words quoted above, however, are critical to the definition and unless that method is followed, development of a product by incorporating technical advances or technological information (which may have resulted from research) using engineering, computer programming or other professional sills Will not qualify as scientific research. It is our impression from your letter that this essential element of a "systematic investigation or search ..." may be lacking in the case of the custom manufacturers which you discuss and that, consequently, the expenditures would not qualify as scientific research for that reason alone.

In any event, it is a question of fact whether an activity constitutes scientific research and a determination can be made only after an examination of the complete and detailed description of a particular program and its specifications which should include the location and nature of the research facilities, the academic qualifications of persons to be involved in the project together with the proportion of their time to be devoted to it, whether patents are expected to be taken out for the product developed, and any other supporting data or explanations which may assist in the determination.

If a particular activity or contract is one that is already under way or completed, the determination must be initiated through the particular District Taxation Office of the taxpayer. If it is one that is proposed, we are prepared to give an advance ruling in respect of a request submitted in accordance with Information Circular 70-6R. Subsection 37(3) of the Income Tax Act authorizes the Minister to obtain the advice of other government departments and agencies and a rulings request should include written permission for the Department to refer the information concerning the particular activities to such other departments or agencies.

In view of our above comments, your question regarding the allowances under section 37.1 and subsection 20(1)(gg) becomes somewhat academic and we are not yet in a position to give it in-depth consideration. It is our view, however, that an expenditure which is a job cost in respect of a contract for the supply of equipment could not qualify as an expenditure on scientific research. In order to so qualify, among other requirements, it is necessary that the outcome of the particular activity cannot be predicted with certainty. The mere acceptance of the order for the special purpose equipment would indicate that this required element of "uncertainty" would not be present. Admittedly, the particular form of each contract may be relevant to a determination but as we have said, the whole question is one of fact.

We regret that we are unable to be of more assistance at this time, but trust that our comments will be helpful if it is necessary for you to pursue the matter further.

Yours truly, Original Signed by J.J. SANDERS

Original Signé Par for Director General Corporate Rulings Directorate Legislation Branch

ROE/mj Sec. 37.1 20(1)(gg)