25 July 1989 Income Tax Severed Letter AC74066 - Refundable Investment Tax Credit on SR & ED Expenditures - Qualifying Corporation

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.

July 25, 1989

W.A. Fulton                                  Head Office
Chief                                        Specialty Rulings
Scientific Research                            Directorate
  Audit Applications Section                 C.R. Bowen
                                             957-2096
R.S. Nanner

Subject:  Qualifying Corporation
          Subsection  127.1(2) of the Act    File: 7-4066

We are writing in reply to your memorandum of June 26, 1989, wherein you requested our comments on whether the partners of a partnership that conducts scientific research and experimental development ("SR & ED") are entitled to the refundable investment tax credit ("RITC") in respect of the SR & ED expenditures meet the requirements of section 37 and subsection 127(9) of the Income Tax Act (the "Act") and that the partners are not "specified members" of the partnership as defined in section 248(1) of the Act.

Our Comments

The effect of subsection 127(8) of the Act is to allocate to a partner of a partnership his share of the investment tax credit that would have been available to the partnership if the partnership were a person and its fiscal period were its taxation year. In calculating the investment tax credit available to the partnership for allocation to its partners, the rate to be used is determined by subparagraph (e)(iv) of the definition of specified percentage in section 127(9) of the Act. The amount then allocated to the partner is included by virtue of paragraph (b) of the definition of investment tax credit in section 127(9) of the Act in computing that partner's investment tax credit at the end of that particular taxation year. Where a qualifying corporation (as defined in subsection 127.1(2) of the Act) is a member of a partnership, its share of the investment tax credit allocated to it from the partnership will not be eligible for the 35% rate of investment tax credit calculated in accordance with subsection 127(10.1) of the Act, as that calculation includes only those SR & ED expenditures made directly by the taxpayer and not those made by a partnership in which the taxpayer is a partner.

The calculation of the amount of investment tax credit that is eligible for a refund under subsection 127.1(2) of the Act includes the amount added to the investment tax credit pool of the taxpayer by virtue of paragraph (b) of the definition of investment tax credit. Therefore, it is our opinion that where a partner of a partnership is a taxpayer referred to in subparagraphs (a)(i), (ii) and (iii) of the definition of RITC (i.e., qualifying corporation, an individual other than a trust, and a trust each beneficiary of which is a qualifying corporation or an individual), that taxpayer will be entitled to claim a RITC on his share of the investment tax credit allocated to him from the partnership calculated in accordance with the subparagraph (a)(iv) and (v) in the definition of RITC. In our opinion, there is no RITC available under subparagraphs (a)(vi) and (vii) of the definition of RITC in respect of the SR & ED expenditures incurred by a partnership and allocated to a partner that is qualifying corporation. Other taxpayers not referred to in subparagraphs (a)(i), (ii) and (iii) of the definition of RITC will be entitled to claim on the investment tax credit allocated to them from the partnership, a RITC calculated in accordance with paragraph (b) of the definition of RITC.

We trust these comments will be of assistance.

R. Albert A/Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch