31 October 1989 Income Tax Severed Letter AC58322 - SR & ED - Approved Association or Research Institute

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.

R. Albert (613) 957-2098

19(1)

October 31, 1989

Dear Sirs:

Re: Subparagraph 37(1)(a)(ii) of the Income Tax Act (the "Act")

We are writing in reply to your letter of July 7, 1989 and subsequent telephone discussion concerning the taxation implications of the provisions of subparagraph 37(1)(a)(ii) of the Act.

19(1)

Clause 37(1)(a)(ii)(E) of the Act provides for the deduction of payments made to "an approved organization that makes payments to an association, institution or corporation described in any of clauses (A) to (C)" to be used for scientific research and experimental development ("SR & ED") carried on in Canada, related to a business of the taxpayer, and provided that the taxpayer is entitled to exploit the results of such SR & ED. In particular, you have asked for an interpretation of the associations, institutions and corporations described in clauses 37(1)(a)(ii)(A) to 37(1)(a)(ii)(C) of the Act to which the approved organizations may make eligible payments.

Clause 37(1)(a)(ii)(A) of the Act refers to an approved association and clause 37(1)(a)(ii)(B) refers to an approved research institute or other similar institute. The Assistant Deputy Minister of Revenue Canada, Taxation will grant approval to an association or an institute if it meets the following criteria:

a) it has the facilities and personnel capable of carrying out SR & ED,

b) it carries on only activities that are unquestionably SR & ED,

c) the typical requirements for non-profit status are satisfied, such as no personal benefit to members, no control of other associations, satisfactory provisions for distribution of assets on dissolution, etc.,

d) the general public will be a beneficiary of the results of successful SR & ED, and

e) the funding of the organization will be sufficient to ensure continued research by it.

Clause 37(1)(a)(ii)(B) also refers to an approved university or college. The Department considers that all Canadian universities and affiliated colleges are approved.

Clause 37(1)(a)(ii)(C) refers to a corporation resident in Canada and exempt from tax under paragraph 149(1)(j). The major provisions encompassed in paragraph 149(1)(j) of the Act are as follows:

a) no part of the non-profit corporation's income can be payable to, or otherwise available for the personal benefit of, any proprietor, member or shareholder;

b) the corporation cannot acquire control of any other corporation;

c) the corporation cannot carry on any business;

d) the corporation must expend amounts in Canada either on SR & ED directly undertaken by or on behalf of itself, or by payments to an organization described in clause 37(1)(a)(ii)(A) or (B) of the Act, and such expenditures cannot be less than 90% of its income for the period; and

e) the corporation must be constituted exclusively for the purpose of carrying on or promoting SR & ED.

The concept of control and income are provided for in subsection 149(8) of the Act and are indicated below:

a) A corporation is controlled by another corporation if more than 50% of its issued share capital (having full voting rights under all circumstances) belongs to

        i) the other corporation, or

       ii) the other corporation and persons with whom the other
           corporation does not deal at arm's length, but a
           corporation shall be deemed not to have acquired
           control of a corporation if it has not purchased (or
           otherwise acquired for a consideration) any of the
           shares in the capital stock of that corporation.

b) There shall be included in computing a corporation's income all gifts received by the corporation and all amounts contributed to the corporation to be used for scientific research and experimental development.

As discussed, we are enclosing a copy of Interpretation Bulletin IT-151R3 . We trust that the above comments and those in the Bulletin will be of assistance.

Yours truly,

R.E. Thompson for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosure