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Income Tax Interpretation Bulletin

Scientific research and experimental development expenditures [after December 15, 1987]

NO: IT-151R4

DATE: August 16, 1993

SUBJECT: INCOME TAX ACT
Scientific Research and Experimental Development Expenditures

REFERENCE:
Section 37 (also sections 13, 37.1, 87, 96, 110, 110.1, 118.1, 125, 127, 127.1, 149, and 194; subsections 11(2), 18(9), 88(1), 111(1), 248(1), 249(4) ; paragraphs 12(1)(v), 12(1)(x), 251(5)(b) of the Income Tax Act and sections 2900, 2901, 2902, 2903 and 4606 and paragraph 1102(1)(d) of the Income Tax Regulations).

Application

The comments in this bulletin generally apply to expenditures on scientific research and experimental development incurred after December 15, 1987. IT-151R3 will continue to apply, subject to certain transitional provisions, to those expenditures incurred before December 16, 1987.

Generally, this bulletin does not reflect the proposed amendments to the Income Tax Act and Regulations announced by the Department of Finance on December 2, 1992. However, the positions set out in paragraphs 17 to 20 of the bulletin are based on certain of the proposed amendments to the Income Tax Regulations that are effective for taxation years ending after 1989.


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Summary

This bulletin deals with the incentives available to taxpayers performing scientific research and experimental development (SR&ED). It discusses the mechanism by which expenditures of a current and capital nature on SR&ED carried on in Canada may be pooled and deducted in calculating the income from a business carried on by a taxpayer in the year the expenditure is made or in any subsequent year. It deals with the provisions that may restrict a corporation's ability to claim any portion of the pool of expenditures on SR&ED following an acquisition of the corporation's control. The deductibility of expenditures for SR&ED carried on outside Canada is also addressed.

The bulletin describes the investment tax credit provisions of the Act that allow a SR&ED performer to reduce its Part I tax payable and discusses the expenditures on SR&ED carried on in Canada that qualify for an investment tax credit.

The bulletin also explains the general basis of calculating the amount of investment tax credits. It discusses the enhanced investment tax credit available to certain Canadian controlled private corporations (CCPCs) for some of their qualified expenditures on SR&ED and it discusses the requirements a CCPC must meet to qualify for the enhanced investment tax credit.

The bulletin addresses the mechanism by which certain taxpayers may obtain a partial refund of the unused portion of the investment tax credits earned during the year and the conditions under which certain CCPCs may be refunded the full amount of the unused portion of the current year's investment tax credit for current expenditures on SR&ED.

Also, the bulletin addresses the consequences an amalgamation or a winding up may have on a SR&ED performer's pool of SR&ED expenditures and amount of investment tax credits. It discusses the particular consequences to a partnership incurring SR&ED expenditures and earning investment tax credits for the qualifying SR&ED expenditures.


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Discussion and Interpretation

1. The topics of this bulletin are discussed under the following headings:


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INTRODUCTION

Definition of Scientific Research and Experimental Development

2. For the purposes of section 37, Scientific Research and Experimental Development (SR&ED) is defined by paragraph 37(7)(b) to have the meaning given by regulation. Under subsection 2900(1) of the Income Tax Regulations, SR&ED means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis. According to subsection 2900(1) of the Regulations the following constitutes SR&ED:

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view; (b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view; or (c) development, namely, use of the results of basic or applied research for the purpose of creating new, or improved existing materials, devices, products or processes.

Where the following activities are undertaken directly in support of basic or applied research or eligible development activities, SR&ED includes engineering or design, operations research, mathematical analysis or computer programming and psychological research. However, SR&ED does not include the following activities:

  • market research or sales promotion;
  • quality control or routine testing of materials, devices or products;
  • research in the social sciences or the humanities;
  • prospecting, exploring or drilling for or producing minerals, petroleum or natural gas;
  • the commercial production of a new or improved material, device or product or the commercial use of a new or improved process;
  • style changes; and
  • routine data collection.

Technical guidelines that reflect the Department's interpretation of these provisions of the Act and Regulations are discussed in the current version of Information Circular 86-4, Scientific Research and Experimental Development.


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General Discussion of Conditions to Deduct

3. Generally, section 37 provides that a taxpayer carrying on a business in Canada in a taxation year may deduct in calculating income from the business for the year current and capital expenditures for SR&ED carried on in Canada that relate to a business of the taxpayer. A taxpayer who has made SR&ED expenditures in a year in respect of a particular business, may, to the extent that those expenditures have not been deducted in the year, deduct those expenditures in any subsequent year in calculating income from that or any other business carried on by the taxpayer in the subsequent year (subject to certain limits, as discussed in 37 below, if the taxpayer is a corporation whose control has been acquired by a person or group of persons). In addition, a taxpayer may deduct a current expenditure incurred in carrying on SR&ED outside Canada in the year the expenditure was made (see 38-40 below).

Taxation Year

4. References in subsection 37(1) to a "year" are generally references to a taxation year. However, in the case of an individual (other than a testamentary trust) who carries on an unincorporated business which has a fiscal year-end other than December 31, subsection 11(2) provides that the reference to a "year" relates to a fiscal period of the business ending in the year.

Calculation of Expenditure Pool

5. Subsection 37(1) provides for the calculation of a taxpayer's expenditure pool for SR&ED carried on in Canada. In general, the pool is increased by the amount of current and capital expenditures on SR&ED carried on in Canada, the amount of repayments of government and non- government assistance that had previously reduced the pool and the amounts that have been included in the taxpayer's income for a previous year under paragraph 12(1)(v). The taxpayer's pool is decreased by the amount of government and non-government assistance that the taxpayer has received, is entitled to receive or can reasonably be expected to receive for SR&ED expenditures, amounts claimed as investment tax credits in a preceding year that may reasonably be attributed to SR&ED expenditures of a current nature, and amounts deducted under subsection 37(1) in previous years (except amounts described in subsection 37(6) as discussed in 28 below). If the pool has a positive balance at the end of the year, the amount a taxpayer may deduct for that year under subsection 37(1) cannot be more than the balance in the pool. If the pool has a negative balance at the end of a year, paragraph 12(1)(v) provides that the negative balance must be included in the taxpayer's income for the year. Various other transactions, as described in 36 and 37 below, may also increase or decrease the taxpayer's expenditure pool.


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GENERAL REQUIREMENTS

General

6. In order to claim a deduction under subsection 37(1) in a taxation year, a taxpayer must satisfy certain requirements. The taxpayer must carry on a business in Canada in the year and must file with his return of income for the year form T661, Claim for Scientific Research and Experimental Development Expenditures Carried On in Canada.

Carrying on a Business

7. Whether a taxpayer is carrying on a business is a question of fact that must be determined on a case-by-case basis. In the case of a start-up operation, refer to the current version of IT-364, Commencement of Business Operations, which sets out factors to consider in determining whether a taxpayer has begun to carry on a business in Canada.

Related to a Business

8. Subparagraph 37(1)(a)(i) specifies that an expenditure of a current nature made by a taxpayer on SR&ED carried on in Canada, that is directly undertaken by or on behalf of the taxpayer, must also be related to a business of the taxpayer. Whether an expenditure on SR&ED is related to a taxpayer's business is generally a question of fact that must be determined on a case-by-case basis. Paragraph 37(7)(d) provides, for greater certainty, that references to SR&ED related to a business include any SR&ED that may lead to, or facilitate, an extension of that business. For SR&ED to be related to a business carried on by a taxpayer, it is necessary to have some interconnection or link between the SR&ED activities and the taxpayer's business. This requirement will generally be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business that is carried on by the taxpayer. Paragraph 37(7)(e) provides that the prosecution of SR&ED, in and by itself, is only considered a business of the taxpayer to which the SR&ED relates if the taxpayer derives all or substantially all of its revenue from the prosecution of SR&ED. For this purpose, a taxpayer deriving 90% or more of its revenue from the prosecution of SR&ED is considered to derive "all or substantially all" of its revenue from the prosecution of SR&ED. Revenue from the prosecution of SR&ED includes revenue from the sale of rights in or arising out of SR&ED carried on by the taxpayer (see 51 below). In regard to the application of paragraph 37(7)(e), please refer to the Act for certain transitional rules that may apply to SR&ED expenditures made after December 15, 1987.


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Business Carried on by a Related Corporation

9. Subsection 37(1.1) provides that (notwithstanding paragraph 37(7)(e)) for the purposes of subsection 37(1), where a corporate taxpayer performs SR&ED that is related to a business actively carried on by another corporation that is related to the taxpayer at the time the taxpayer makes an expenditure or payment for SR&ED, the SR&ED is considered to be related to a business of the taxpayer. Thus, for example, if the taxpayer performing SR&ED is a wholly-owned subsidiary of another corporation, the subsidiary's SR&ED will be considered to be "related to a business of the taxpayer" if the SR&ED is related to a business carried on by the parent. The parent must be actively engaged in the business at the time the subsidiary makes the expenditures on SR&ED. In determining whether two corporations are related for the purposes of subsection 37(1.1), the determination is to be made without reference to a right referred to in paragraph 251(5)(b).

Payments to be Used for SR&ED

10. Payments to be used for SR&ED (other than those described in 22 below) that are made to corporations resident in Canada and to certain approved entities described in subparagraph 37(1)(a)(ii) may be included in the calculation of the expenditure pool under subsection 37(1). Payments to these organizations will qualify only if they are to be used for SR&ED carried on in Canada related to a business of the taxpayer and if the taxpayer making the payment is entitled to exploit the results of the SR&ED.

Approval of Minister

11. The term "approved" as used in section 37 and defined in paragraph 37(7)(a) refers only to the approval, by the Minister, of associations or other organizations. It does not refer to the approval of SR&ED programs. To determine whether an institution or association has been approved by the Minister for purposes of section 37, the taxpayer should contact the organization in question. For the purposes of clause 37(1)(a)(ii)(B), all Canadian universities and affiliated colleges are considered to be approved. An "approved organization", for the purposes of clause 37(1)(a)(ii)(E), will include the Natural Sciences and Engineering Research Council, the Medical Research Council and the Social Sciences and Humanities Research Council. To apply for "approved" status an institution or association should send its application to the Director General, Rulings Directorate, Legislative and Intergovernmental Affairs Branch, Revenue Canada - Customs, Excise and Taxation, 88 Metcalfe Street, Ottawa, Ontario, K1A OL8.


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Entitlement to Exploit the Results

12. The determination of whether a taxpayer is "entitled to exploit the results" of SR&ED is a question of fact that can only be determined on a case-by-case basis. For example, this requirement is considered to be met in cases where the taxpayer has the right to use a patent that results from the SR&ED project even if the taxpayer is charged a royalty or similar fee for the use of the patent. This requirement is also considered to be met in cases where the taxpayer is entitled to distribute and market any product that results from the SR&ED project. In addition, where a taxpayer makes a payment for SR&ED to an approved university or other entity described in subparagraph 37(1)(a)(ii) and it is likely that the SR&ED project will not result in a product or patent, the taxpayer will be considered to have met this requirement if it can be established that the taxpayer has, as a consequence of the payment, been granted a preferential right to use the results of the SR&ED in its business. However, an arrangement involving payments to an entity described in subparagraph 37(1)(a)(ii) by a taxpayer who owns shares of a corporation which will exploit the results of an SR&ED project does not meet this requirement because it is the taxpayer making the payment who must be entitled to exploit the results of the SR&ED. In regard to the application of the requirement that the taxpayer be entitled to exploit the results of the SR&ED, please refer to the Act for certain transitional rules that may apply to payments made after December 15, 1987 and before 1989.

Payments for Basic or Applied Research

13. Under certain circumstances, subparagraph 37(1)(a)(iii) permits a corporation to include in its pool of SR&ED expenditures a payment made to a corporation that is resident in Canada and exempt from tax under paragraph 149(1)(j). To be included in the SR&ED expenditure pool under this subparagraph the payment must be for SR&ED that is basic or applied research carried on in Canada. The primary purpose of the payment for SR&ED must be for the taxpayer to use the results from the basic or applied research in conjunction with other SR&ED activities directly undertaken by or on behalf of the taxpayer that relate to the taxpayer's business. Furthermore, the basic or applied research must have technological potential for application in other types of businesses that are not related to the business carried on by the paying corporation.

SR&ED CARRIED ON IN CANADA

Expenditures for SR&ED Carried on in Canada

14. Subparagraph 37(7)(c)(ii) provides that references in section 37 (other than in subsection 37(2) (see 40 below)) to expenditures on or in respect of SR&ED in Canada include only:

(a) expenditures of a current or capital nature incurred for and all or substantially all of which were attributable to the prosecution, or to the provision of premises, facilities or equipment for the prosecution, of SR&ED in Canada; or

(b) expenditures of a current nature that were directly attributable to the prosecution of SR&ED in Canada (as determined by subsection 2900(2) of the Regulations), or expenditures of a current nature that were directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED in Canada (as determined by subsection 2900(3) of the Regulations).


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A current expenditure that is intended to be used 90% or more for SR&ED purposes at the time it is made and that is actually used in that manner will be considered to be "incurred for and all or substantially all attributable" to the prosecution of SR&ED, or to the provision of premises, facilities or equipment for the prosecution of SR&ED, as the case may be. For example, the wages of an employee hired for SR&ED purposes are considered all or substantially all attributable to the prosecution of SR&ED if 90% or more of this employee's time is devoted to the prosecution of SR&ED. The meaning of the expression "incurred for and all or substantially all attributable to" as it relates to capital expenditures is discussed in 29 below.

Current Expenditures

General

15. Current expenditures on SR&ED carried on in Canada may be included in the pool of SR&ED expenditures under paragraph 37(1)(a). Such expenditures may then be deducted in calculating income in the year, or in any subsequent year, subject to the overall limitations of subsection 37(1). While all expenditures on SR&ED may be considered expenditures of a capital nature, for the purposes of section 37, current expenditures on SR&ED are considered to be those expenditures that do not result in the acquisition of land, a leasehold interest in land, or property that would otherwise be depreciable property to the taxpayer.

16. To determine when current expenditures qualify for inclusion in the pool of SR&ED expenditures, the following guidelines apply. Where a taxpayer carries on SR&ED in Canada with the taxpayer's own staff, or contracts with another person to have such SR&ED directly undertaken on the taxpayer's behalf, current expenditures fall under subparagraph 37(1)(a)(i) and normal "accrual" accounting principles apply. For example, if a liability is incurred for materials that are later used in SR&ED, the cost of these materials is considered to be an expenditure on SR&ED in the year in which they are consumed in a qualifying activity, even though payment for them is made in a different year. Also, where an expenditure relates to a contract for services to be performed, such an amount will normally be included in the SR&ED expenditure pool under subparagraph 37(1)(a)(i). When the services are not performed before the end of the taxpayer's taxation year, subsection 18(9) will apply to deny the deduction until the taxation year in which the services are actually performed.


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Expenditures directly attributable to SR&ED

17. For the purposes of clause 37(7)(c)(ii)(B), subsection 2900(2) of the Regulations describes the expenditures that are considered to be directly attributable to the prosecution of SR&ED. Paragraph 2900(2)(a) of the Regulations provides that a current expenditure is directly attributable to the prosecution of SR&ED if it is the cost of materials consumed in such prosecution. Paragraph 2900(2)(b) provides that certain expenditures for employee remuneration are directly attributable to the prosecution of SR&ED. These expenditures are considered to include the portion of salaries, wages or related benefits incurred for an employee who directly undertakes, supervises or supports the prosecution of SR&ED to the extent the amount incurred can reasonably be considered to relate to such prosecution.

18. Paragraph 2900(2)(c) of the Regulations provides that certain other expenditures are also directly attributable to the prosecution of SR&ED. These other expenditures are considered to include any expenditure, or portion thereof, other than an expenditure referred to in paragraph 2900(2)(a) or (b) (see 17 above), that is directly related to the prosecution of SR&ED and that would not have been incurred if such prosecution had not occurred. For example, the portion of general and administrative expenses, such as the relevant portion of expenditures for training employees or for personnel or accounting staff, that is directly related to the prosecution of SR&ED and that would not have otherwise been incurred is considered to be directly attributable to the prosecution of SR&ED. Also, a portion of certain overhead expenses, such as the cost of light, heat and long distance telephone charges, is generally considered to be directly attributable to the prosecution of SR&ED if it can be established that such portion otherwise meets the requirements of paragraph 2900(2)(c). The portion of factory overheads or general and administrative expenses that does not meet the requirements of paragraph 2900(2)(c) may be included in the pool of SR&ED expenditures to the extent that it relates to the provision of premises, facilities or equipment for the prosecution of SR&ED carried on in Canada and otherwise meets the requirements of subsection 2900(3) of the Regulations as discussed in 19 below.


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19. For the purposes of clause 37(7)(c)(ii)(B), subsection 2900(3) of the Regulations describes the expenditures that are considered to be directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED in Canada. Paragraph 2900(3)(a) of the Regulations provides that the cost of the maintenance and upkeep of premises, facilities or equipment provided for SR&ED in Canada is directly attributable to the provision of such premises, facilities or equipment. Paragraph 2900(3)(b) provides that certain other expenditures are also directly attributable to the provision of premises, facilities or equipment for the prosecution of SR&ED carried on in Canada. These other expenditures are considered to include any expenditure, or portion thereof, that is directly related to the provision of premises, facilities or equipment for the prosecution of SR&ED in Canada and that would not have been incurred if these premises, facilities or equipment had not existed. For example, under this paragraph, if a building is used for the prosecution of SR&ED, a reasonable portion of the municipal taxes or the cost of insurance for the building is considered to be directly attributable to the SR&ED. In such cases, the method used to determine the portion of the municipal taxes that is directly related to this use must also be reasonable and may, for example, be based on the square meters of the building used for SR&ED over the total square meters of the building. Other methods can be used to determine the portion of an expenditure that is directly related to the provision of premises, facilities or equipment for the prosecution of SR&ED provided they are reasonable in the circumstances. In all cases, whichever method is used, the taxpayer must be able to support that it is reasonable.

20. Under subsection 2900(4) of the Regulations the references to an expenditure for the purposes of subsections 2900(2) and (3) of the Regulations are considered not to include a bonus, or remuneration based on profits, that is incurred in respect of a person who does not deal at arm's length with the payor or who is a "specified shareholder" of the payor. The term "specified shareholder" is defined in subsection 248(1). It includes a taxpayer who at any time in the year owns, directly or indirectly, 10% or more of the issued shares of any class of the capital stock of the payor or of any other corporation that is related to the payor. Thus, for example, if a corporation pays or accrues a bonus to its sole shareholder, the bonus is not directly attributable to the prosecution of SR&ED. However, a bonus paid or payable by the same corporation to an employee who is dealing at arm's length with the corporation and is not a specified shareholder of the corporation will not be prevented by subsection 2900(4) from being directly attributable to the prosecution of SR&ED.

Rental expense and payments enabling the recipient to acquire a building or leasehold interest

21. Rental expenses incurred after 1987 in respect of a building (other than a prescribed special-purpose building (see 30 below)) generally do not constitute expenditures on SR&ED under subparagraph 37(7)(f)(ii). However, rental expenses are excepted from this rule if they were incurred under a written lease agreement that was renewed, extended or entered into before June 18, 1987 by the taxpayer or a person with whom the taxpayer did not deal at arm's length at the time the lease was renewed, extended or entered into.


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22. Subparagraph 37(7)(f)(iii) provides that payments made by a taxpayer to an approved research institute or an approved association, which does not deal at arm's length with the taxpayer or to a corporation (other than a resident Canadian corporation that is tax- exempt under paragraph 149(1)(j) and is dealing at arm's length with the taxpayer), do not constitute SR&ED expenditures to the extent that they may reasonably be considered to have been made to enable the recipient to acquire a building or a leasehold interest in a building or to pay an amount in respect of the rental expense for a building. A payment made by a taxpayer to an approved university, college or organization 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 recipient to acquire a building, or a leasehold interest in a building in which the taxpayer has, or may reasonably be expected to acquire, an interest. Subparagraph 37(7)(f)(iii) applies to payments made after December 15, 1987 other than payments made under the terms of a written agreement entered into before December 16, 1987 with a person with which the taxpayer deals at arm's length.

Expenditures to acquire rights arising out of SR&ED

23. Subsection 37(4) provides that no deduction may be made under section 37 in respect of an expenditure to acquire rights in, or arising out of, SR&ED. As a result, expenditures made by a taxpayer to purchase or entitle the taxpayer to use the results of an SR&ED program in which the taxpayer did not participate may not be included in the pool of SR&ED expenditures. Subsection 37(4) will apply to deny a deduction for a royalty or other similar payment for products or processes that will have use beyond the SR&ED stage (i.e., which become part of a marketed product). Subsection 37(4) will generally not apply to deny a deduction for an expenditure on something that is merely a tool for performing SR&ED. For example, subsection 37(4) will not apply to deny a deduction for expenditures made to acquire capital property (that may result from the SR&ED efforts of others) required to support the taxpayer's SR&ED efforts but that will not be incorporated into the end product, provided the taxpayer is not acquiring any right to commercially exploit the results of the other party's SR&ED. Expenditures made by a taxpayer to acquire patents or other legal protection related to the results of an SR&ED program are not deductible under section 37 regardless of whether the taxpayer participated in the program.

Interest expense

24. Interest expense incurred on money borrowed for the prosecution of SR&ED is deductible as an SR&ED expenditure only to the extent that the borrowed money is used to make SR&ED expenditures which are otherwise deductible under section 37.


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Donations as SR&ED

25. Where an expenditure that qualifies for a deduction under subsection 37 is otherwise deductible under section 110.1 or 118.1, subsection 37(5) provides that no deduction for that expenditure may be made under section 110.1 or 118.1 in calculating for any taxation year the taxable income of, or the tax payable by, the taxpayer.

Capital Expenditures

Depreciable property related to a business

26. Capital expenditures on SR&ED carried on in Canada may be included in the pool of SR&ED expenditures under paragraph 37(1)(b). Such expenditures may then be deducted in computing income in the year, or in any subsequent year, subject to the overall limitations of subsection 37(1). Under this paragraph capital expenditures are only those expenditures that result in the acquisition of property that would be the taxpayer's depreciable property (other than property referred to in 30 below) if paragraph 37(1)(b) did not apply. Consequently, expenditures for the acquisition of land, property that is described in a taxpayer's inventory or eligible capital property (such as goodwill) may not be included under paragraph 37(1)(b). The comments in the current version of IT-128, Capital Cost Allowance - Depreciable Property, may be of assistance in determining whether a particular property is depreciable property. The amount of these capital expenditures that may be included in the taxpayer's SR&ED expenditure pool for a taxation year is limited to the lesser of:

(a) the total of all capital expenditures made in the year or any previous year ending after 1958 on SR&ED carried on in Canada that is directly undertaken by or on behalf of the taxpayer and that is related to a business of the taxpayer, and

(b) the amount that would be the undepreciated capital cost of the property so acquired as of the end of the taxation year, calculated as if no amount has been deducted in respect of the property under section 37 for the taxation year.

Property available for use

27. Subsection 37(1.2) deems a SR&ED expenditure of a capital nature not to have been made until the property acquired with the expenditure becomes "available for use" by the taxpayer as determined under subsections 13(26) to 13(32). Generally, subsection 37(1.2) applies to expenditures made after 1989. However, please refer to the Act for certain transitional rules that may apply to certain non-arm's length situations and certain reorganizations.


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Separate prescribed class

28. Paragraph 1102(1)(d) of the Regulations excludes from the classes of property on which capital cost allowance may be claimed property that has been acquired by an expenditure for which the taxpayer is allowed a deduction under section 37. Therefore, a taxpayer is prevented from duplicating claims for capital expenditures by claiming capital cost allowance on such property. In addition, subsection 37(6) provides that, for the purposes of section 13, an amount claimed under subsection 37(1) that may reasonably be considered to be in respect of property described in paragraph 37(1)(b) will be deemed to be an amount that has been allowed to the taxpayer as capital cost allowance. Since subsection 37(6) also deems the property to be of a separate prescribed class, subsection 13(1) may require an amount to be included in the taxpayer's income as recapture of capital cost allowance if the property is disposed of. In calculating the amount that would otherwise be the undepreciated capital cost of the property, the capital cost of the property will be reduced by the amounts that were deducted under subsection 37(1) that may reasonably be considered to be in respect of the property. For taxation years ending after 1987, paragraph 13(7.1)(e) reduces the capital cost of depreciable property and, consequently, the undepreciated capital cost of the property by the amount of any investment tax credit that was deducted in a preceding year for the property. Paragraph 13(7.1)(f) usually reduces the capital cost of depreciable property and, consequently, the undepreciated capital cost of the property by the amount of any assistance the taxpayer has received or is entitled to receive. However, paragraph 13(7.1)(a) provides that, the capital cost and undepreciated capital cost of the property is not reduced by an amount described in paragraph 37(1)(d). Accordingly, in the calculation of the undepreciated capital cost of the property the amount of government or non-government assistance the taxpayer received, is entitled to receive or can reasonably be expected to receive for the acquisition of the property, that would otherwise be depreciable property, used in the taxpayer's SR&ED projects (see 32 below) will not reduce the capital cost of the property. A taxpayer may be required to include an amount in income under subsection 13(1) even though there has not been a disposition of the particular property. For example, this could occur where the taxpayer has claimed a deduction under subsection 37(1) for the entire capital cost of the property and also claims any portion of the investment tax credit for that property.


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All or substantially all attributable to SR&ED

29. Clause 37(7)(c)(ii)(A) provides that capital expenditures for SR&ED include only expenditures that were incurred for and all or substantially all of which were attributable to the prosecution, or the provision of premises, facilities or equipment for the prosecution, of SR&ED in Canada. If the expenditure is for property that is to be used 90% of the time throughout its expected useful life for SR&ED in Canada, it is considered to be an expenditure "incurred for and all or substantially all of which is attributable to the prosecution of SR&ED in Canada." The requirement that the expenditure was incurred for and all or substantially all attributable to SR&ED is also met if 90% of the cost of the property is to be consumed in, or attributable to, the time during which the property is used for SR&ED. Thus, a piece of equipment which is to be used partly for SR&ED and partly for other purposes will meet this requirement if its anticipated use for other purposes does not normally exceed 10% of the time or if at least 90% of the expenditure or cost of the property acquired should normally be attributable to the time in which the particular property is used for SR&ED. The determination of whether a capital expenditure is all or substantially all attributable to SR&ED is usually made at the time the property is acquired. In making this determination, the intended use of the property in the year in which the expenditure was made as well as over its useful life will be considered. Subsequent use of the property also provides evidence of the taxpayer's intention at the time the expenditure was made. However, where the subsequent use is contrary to the taxpayer's stated intention, the onus is on the taxpayer to support the intention that the cost of the property was to be all or substantially all attributable to SR&ED in Canada. If an existing property is used temporarily for SR&ED, the direct costs (including maintenance and repairs) that would not have been incurred if the SR&ED had not been carried out may be included in the calculation of the SR&ED expenditure pool under paragraph 37(1)(a). No amount of the cost or undepreciated capital cost of that property may be included under paragraph 37(1)(b).

Buildings

30. Generally after 1987, capital expenditures that relate to the acquisition of a building (other than a prescribed special-purpose building) including a leasehold interest in a building, do not constitute expenditures on or in respect of SR&ED under subparagraph 37(7)(f)(i). However, this restriction does not apply if the building or leasehold interest was acquired before 1990 under a written obligation entered into before June 18, 1987, or if the construction of the building was started by or on behalf of the taxpayer before June 18, 1987. Prescribed special-purpose buildings are described in section 2903 of the Regulations. The comments in the current version of IT-79, Capital Cost Allowance - Buildings and Other Structures, may be of assistance in distinguishing between expenditures for the acquisition of buildings and expenditures for the acquisition of other structures.


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Projects Resulting in the Acquisition of Property

31. Certain projects result in the acquisition of property that can reasonably be expected to be used in the taxpayer's business or that will be sold. Projects, such as the development of a custom product, that may involve SR&ED activities may also involve commercial production activities that do not constitute SR&ED under paragraph 2900(1)(h) of the Regulations. To determine the eligible expenditures on SR&ED for such projects, the SR&ED activities and the non-SR&ED activities should be identified and the project costs allocated between these activities. Alternatively, the eligible expenditures on SR&ED for these projects may be determined by "carving- out" the costs that would have been incurred to produce the property if the technology had already existed. Those expenditures remaining after the carve-out are considered to be all or substantially all attributable to the prosecution, or the provision of premises, facilities or equipment for the prosecution, of SR&ED, as the case may be. The carve-out method or procedure is discussed in more detail in the current version of Information Circular 86-4, Scientific Research and Experimental Development. However, where a property is being constructed during a particular project for its experimental or technical content and is not being constructed for commercial use or sale, paragraph 2900(1)(h) is not considered to apply and it is not necessary to allocate the project costs between the SR&ED and the commercial production activities.

Assistance for SR&ED

Receipt and repayment of assistance

32. Paragraph 37(1)(d) deals with the amount of government and non- government assistance (see 33 below) that, at the time of filing the return of income for the year, a taxpayer has received, is entitled to receive or can reasonably be expected to receive for a current or capital expenditure on SR&ED made after April 1988. Under paragraph 37(1)(d), the amount of such assistance decreases the pool of SR&ED expenditures. On the other hand, paragraph 37(1)(c) provides that any repayment of such assistance increases a taxpayer's expenditure pool in the year of repayment to the extent it had previously reduced the pool.


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Government and non-government assistance

33. "Government assistance" is defined in subsection 127(9). It includes assistance from a government, municipality or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax (other than an investment tax credit claimed under subsection 127(5) or (6)), investment allowance or as any other form of assistance. For example, certain provincial tax credits that are available for taxpayers performing SR&ED that reduce the amount of provincial taxes payable are considered government assistance. However, the Ontario Research and Development Super Allowance is a deduction in the calculation of income for Ontario income tax purposes and is not considered to be government assistance. Subsection 127(9) defines "non- government assistance" as an amount that would be included in the taxpayer's income under paragraph 12(1)(x) (read without reference to subparagraphs (vi) and (vii) thereof). Essentially, non-government assistance is an amount that can reasonably be considered to have been received as an inducement or as a reimbursement, contribution, allowance or as assistance for the cost of property or for an outlay or expense. Such an amount will constitute non-government assistance to the extent it was not otherwise included in calculating the taxpayer's income or deducted in calculating any balance of undeducted outlays, expenses or other amounts for the year or a preceding taxation year. Non-government assistance may be in the form of a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement or assistance.

Interest-free loans

34. The determination of whether a particular loan will constitute government or non-government assistance depends on the particular facts and circumstances concerning that loan. The fact that a loan is interest-free or is made at a lower than commercial rate of interest will generally not classify the loan as government or non-government assistance.

Effect of Investment Tax Credit

35. For taxation years ending after 1987, the amount of investment tax credit deducted or deemed to be deducted (as discussed in 67 below) by the taxpayer under subsection 127(5) in calculating taxes payable in a preceding year will, to the extent that it may reasonably be considered to relate to a qualified SR&ED expenditure of a current nature made in a preceding taxation year, reduce the taxpayer's pool of SR&ED expenditures under paragraph 37(1)(e). To the extent that an investment tax credit deducted or refunded may reasonably be considered to relate to a property acquired in a preceding year as a result of a qualified SR&ED expenditure of a capital nature, it will reduce the capital cost of the separate prescribed class of the property acquired (see 28 above) under paragraph 13(7.1)(e). For record-keeping purposes, a taxpayer should, therefore, separate investment tax credits either deducted or available that were earned for SR&ED expenditures from those earned on other qualified property. Furthermore, investment tax credits earned for current expenditures on SR&ED should be separated from those earned on capital expenditures since investment tax credits earned on current expenditures are subject to a different refund rate as discussed in 65 to 67 below.


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Expenditures Renounced for the Purposes of Part VIII Tax

36. Where a corporation issued scientific research and experimental development tax credit securities to investors before 1986, the corporation was permitted to generate a Part VIII refund if it renounced its entitlement to deduct all or a portion of its SR&ED expenditures and renounced its ability to claim an investment tax credit on these expenditures. Such renounced expenditures reduce the taxpayer's expenditure pool in accordance with the provisions of paragraph 37(1)(g).

Acquisition of Control

37. Paragraph 37(1)(h) and subsection 37(6.1) restrict the carryforward of a corporation's SR&ED expenditures where there has been an acquisition of its control by a person or group of persons at any time before the end of a taxation year. These provisions apply to acquisitions of control occurring after January 15, 1987, other than acquisitions of control occurring before 1988 where the persons acquiring the control were obliged on January 15, 1987 to acquire the control under the terms of a written agreement entered into on or before that date. Generally, these provisions (combined with the application of subsection 249(4), which deems the corporation's year to have ended immediately before the acquisition of control) operate to reduce a corporation's pool of SR&ED expenditures to nil at the time control of the corporation is acquired. Paragraph 37(1)(h) and subsection 37(6.1) provide that, in a subsequent taxation year throughout which the business to which the expenditures relate is carried on by the corporation for profit or with a reasonable expectation of profit, the corporation's pool of SR&ED expenditures may be reinstated. The pool of SR&ED expenditures will be reinstated to the extent of the income (before claiming any deduction under subsection 37(1)) earned by the corporation, after the acquisition of control, from the business to which the expenditures related. In addition, where properties were sold, leased, rented or developed or services were rendered, in the course of carrying on the corporation's business before the acquisition of control, the pool of SR&ED expenditures will be reinstated to the extent of the income for the year (before claiming any deduction under subsection 37(1)) from any other business substantially all the income of which was derived from the sale, leasing, rental or development of similar properties or the rendering of similar services.


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SR&ED OUTSIDE CANADA

General

38. Capital expenditures on SR&ED carried on outside Canada are not deductible under section 37. However, subsection 37(2) provides a deduction for current expenditures on SR&ED carried on outside Canada if it is directly undertaken by or on behalf of the taxpayer and is related to the taxpayer's business. Current expenditures made by payments to an approved association, university, college, research institute or other similar institution to be used for SR&ED carried on outside Canada that is related to the taxpayer's business are also deductible under subsection 37(2) provided that the taxpayer is entitled to exploit the results of such SR&ED. In regard to the application of the requirement that the taxpayer be entitled to exploit the results of the SR&ED, please refer to the Act for certain transitional rules that may apply to expenditures on SR&ED carried on outside Canada made after December 15, 1987 and before 1989. Current expenditures on SR&ED carried on outside Canada cannot be carried forward and must be deducted in the year the expenditure is incurred. The nature and location of the activities will indicate whether SR&ED is carried on inside or outside Canada.

Foreign Activities in Support of SR&ED

39. For the purpose of section 37, an activity such as engineering, computer programming or psychological research that is undertaken directly in support of SR&ED would qualify as SR&ED under subsection 2900(1) of the Regulations. Thus, where a taxpayer performs such an activity outside Canada that is directly in support of a particular SR&ED project, the related expenditures would only be deductible under subsection 37(2) as SR&ED carried on outside Canada.

Foreign travel expenditures, including salaries or wages and other related benefits of a Canadian employee undertaking foreign travel, and any other expenditures that relate to SR&ED carried on outside Canada may only qualify for a deduction under subsection 37(2). Even if a particular expenditure for SR&ED carried on outside Canada is incurred in Canada or is made through a Canadian subcontractor, or if it represents a minor portion of the project, it will not qualify for a deduction under subsection 37(1). However, expenditures including foreign travel expenditures that are incurred for other activities carried on outside Canada, that are in support of SR&ED carried on in Canada, but do not constitute SR&ED in and by themselves, may be deductible under subsection 37(1) provided the requirements of this subsection are otherwise met and the expenditures meet the requirements of subparagraph 37(7)(c)(ii).


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Expenditures for SR&ED Carried on Outside Canada

40. Subparagraph 37(7)(c)(i) provides that references in subsection 37(2) to expenditures on or in respect of SR&ED carried on outside Canada include only current expenditures that are incurred for and all or substantially all of which are attributable to the prosecution of SR&ED, or current expenditures that are directly attributable (as determined by subsection 2900(2) of the Regulations) to the prosecution of SR&ED. See 14 above for comments on the meaning of "all or substantially all attributable to." The comments relating to subsection 2900(2) of the Regulations discussed in 17 and 18 above are also relevant for the purposes of determining whether expenditures are directly attributable to the prosecution of SR&ED carried on outside Canada as required by clause 37(7)(c)(i)(B).

RECAPTURE OF SR&ED ALLOWANCE

General

41. Although the additional allowance for SR&ED was eliminated in 1983, subsection 37.1(3) still applies to require a corporation that claimed an additional allowance under section 37.1 for a research property to include an amount in income if the research property is disposed of. The recapture to be included in income is equal to the lesser of:

(a) 50% of the lesser of

(i) the fair market value of the property at the time of disposition, and

(ii) the capital cost of the property to the corporation at the time of disposition,

and

(b) the amount, if any, by which the total of the amounts deducted under section 37.1 by the corporation for any taxation year beginning before the disposition and by any associated corporations for taxation years ending in or before the year of disposition exceeds the total of amounts previously included in the corporation's and any associated corporation's income because of this subsection.

42. Where a corporation transfers a research property to an associated corporation in a transaction to which either subsection 85(1) or 88(1) applies, any recapture is deferred until the property is sold. The transferred property is deemed to be a research property of the associated corporation. If the corporation's proceeds of disposition for the property are less than its capital cost, the recipient's capital cost is deemed to be the same as that of the transferor. The allowance will be immediately recaptured when a rollover under subsection 85(1) is made to a non-associated company.


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Research Property

43. A "research property" is defined by paragraph 37.1(5)(d) to be capital property (described in subparagraph 37.1(5)(c)(ii)) that was acquired as a result of an expenditure made by a corporation after the end of its 1977 taxation year. The property must not have been used for any other purpose whatever before its acquisition and the expenditure must not be an expenditure prescribed in section 2901 of the Regulations.

INVESTMENT TAX CREDIT

General

44. The comments in 45 to 67 below discuss the investment tax credit for qualified expenditures on SR&ED. Comments on the investment tax credits of a taxpayer that is a member of a partnership are contained in 73 to 76 below. Taxpayers should also refer to form T2038, Investment Tax Credit, and to the current version of IT-331, Investment Tax Credits, for more information on investment tax credits.

45. Subsection 127(5) provides for the deduction of a taxpayer's investment tax credit from Part I tax otherwise payable. Subject to an annual investment tax credit limit, defined in subsection 127(9), investment tax credits may be applied to reduce tax in the year the expenditure is made, any of the 3 prior years or any of the 10 subsequent years. Section 127.1 provides that unused investment tax credits of certain taxpayers may be refunded in the year the expenditure is incurred (see 64 to 67 below). A corporation's annual investment tax credit limit is the total of three quarters (3/4) of its Part I tax otherwise payable for the year plus, where the corporation is a CCPC throughout the year, 3% of the least of the amounts determined under paragraphs 125(1)(a) to (c). For an individual, this limit is $24,000 plus three quarters (3/4) of the amount of tax otherwise payable under the Act, in excess of $24,000. Generally, the investment tax credit for expenditures on SR&ED is determined by applying a specified percentage (see 60 below) to the amount of the qualified expenditure incurred in the year.

Qualified Expenditures

46. A "qualified expenditure" is defined in subsection 127(9) and includes both current and capital expenditures on SR&ED carried on in Canada. To be eligible as a qualified expenditure, the expenditure must first qualify as an expenditure on SR&ED that is described in paragraph 37(1)(a) or subparagraph 37(1)(b)(i). However, an expenditure that is deductible under subsection 37(1) may not necessarily be a qualified expenditure for the purpose of the investment tax credit. A qualified expenditure does not include a prescribed expenditure described in section 2902 of the Regulations or an expenditure that has been renounced for the purposes of Part VIII tax as discussed in 36 above. The definition of "investment tax credit" in subsection 127(9) also excludes a qualified expenditure made after July 13, 1990 in the course of earning income from a business if any income from that business is exempt from Part I tax. However, such an expenditure is excepted from this rule if it was made before 1992 under a written agreement entered into on or before July 13, 1990, or if it was made for the purpose of completing the construction of property that was under construction by or on behalf of the taxpayer on or before July 13, 1990. For the purposes of sections 127 and 127.1, subsection 127(11.2) provides that an expenditure to acquire capital property described in subparagraph 37(1)(b)(i) is deemed not to have been made until the property becomes available for use by the taxpayer, determined under subsections 13(27), 13(28) and 13(29) without reference to paragraphs 13(27)(c) and 13(28)(d).


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Prescribed Expenditures

Current expenditures

47. Prescribed expenditures within the meaning of section 2902 of the Regulations are not qualified expenditures and, therefore, do not earn investment tax credits. Prescribed expenditures include expenditures of a current nature incurred by a taxpayer for the general administration or management of a business, including:

(a) administrative salaries or wages and related benefits for a person whose duties are not all or substantially all directed to the prosecution of SR&ED, except to the extent that such expenditures are directly attributable to the prosecution of SR&ED as determined by subsection 2900(2) or (3) of the Regulations (see 17 to 20 above);

(b) a legal or accounting fee;

(c) interest and other financing costs described in any of paragraphs 20(1)(c) to (g) of the Act;

(d) an entertainment expense;

(e) an advertising or selling expense;

(f) a convention expense;

(g) a due or fee for membership in a scientific or technical society or organization; and

(h) a fine or penalty.

Prescribed expenditures also include current expenditures for the maintenance and upkeep of premises, facilities or equipment to the extent that such expenditures are not attributable to the prosecution of SR&ED.


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48. A particular expenditure described in 47 above will not be a prescribed expenditure if it is incurred by a taxpayer that derives all or substantially all of its revenue from the prosecution of SR&ED (see 8 above). For example, under clause 2902(a)(i)(C) of the Regulations, an expenditure for interest made by a taxpayer will normally not be a qualified expenditure for the purposes of subsection 127(5) even if the expenditure is included in the SR&ED expenditure pool under subsection 37(1). However, if a taxpayer derives all or substantially all of its revenue from the prosecution of SR&ED, such an expenditure will not be prescribed and the taxpayer may be entitled to an investment tax credit. A taxpayer whose revenue is derived all or substantially all from the prosecution of SR&ED or from the sale of rights in or arising out of SR&ED carried on by the taxpayer is hereinafter referred to as a sole-purpose SR&ED performer.

Sole-purpose SR&ED performer

49. In determining whether a particular taxpayer is a sole-purpose SR&ED performer consideration is given not only to the taxpayer's revenue in a particular taxation year but also to the pattern established over a number of taxation years. However, such pattern may not be relevant where the taxpayer's operations have changed significantly. In addition, for a start-up operation, the manner in which the taxpayer is proposing to derive its income will be taken into account. Consequently, if a taxpayer intends to manufacture, process and sell a product, or otherwise plans to actively exploit any technology developed, other than through the sale of rights to the product or technology, the taxpayer would not be considered a sole- purpose SR&ED performer.

50. A taxpayer that qualifies as a sole-purpose SR&ED performer may compromise its status as such if the taxpayer receives significant other income that is not derived from the prosecution of SR&ED or the sale of rights in or arising out of SR&ED. For example, interest income that represents a significant portion of a taxpayer's revenues may result in the loss of the taxpayer's status as a sole-purpose SR&ED performer. However, when the interest income is derived from the temporary investment of funds that are to be used in SR&ED activities and the funds are spent on qualifying research within a reasonable time, the interest income will generally not result in a loss of such status.

51. Income from the performance of SR&ED carried out on behalf of another taxpayer is generally considered to be revenue from the prosecution of SR&ED. Royalties earned from licensing the results of SR&ED or from the sale of such results (for example, a patent) are also generally considered to be revenue derived from the prosecution of SR&ED. However, income from a transaction that involves a licence but is in substance a sale of a finished product (for example, application software) is not considered to be revenue derived from the prosecution of SR&ED.


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52. The expenses of a sole-purpose SR&ED performer are not necessarily all qualified SR&ED expenditures. As indicated in 46 above, a qualified expenditure as defined in subsection 127(9) must first be deductible under subsection 37(1). Consequently, expenditures incurred by a sole- purpose SR&ED performer for activities that do not constitute SR&ED, such as market research or sales promotion, are not qualified expenditures because they are not expenditures on SR&ED.

Capital expenditures

53. Prescribed expenditures also include certain expenditures of a capital nature. An expenditure to acquire property that was neither incurred for nor was not all or substantially all attributable to the prosecution, or to the provision of premises, facilities or equipment for the prosecution, of SR&ED (see 29 above) is a prescribed expenditure. Expenditures for the acquisition of qualified property, within the meaning assigned by subsection 127(9), are also prescribed expenditures. Furthermore, expenditures for the acquisition of property that has been used or acquired for use or lease, for any purpose whatever before the taxpayer acquired it are prescribed expenditures. To be considered not to have been used, the property must not only be new when the taxpayer acquired it but it must not have been acquired for use or lease or for any purpose whatever by any previous owner. As a result of these requirements, if a property that has been used or was acquired for a use (even though unused) is transferred to a new owner, eligibility for the investment tax credit is not transferable. The cost of a piece of equipment that is used regularly for demonstration purposes is considered to be a prescribed expenditure; however, new equipment that is demonstrated for or tested by a prospective purchaser of that particular piece of equipment would not normally be considered to have been used for a purpose.

Other prescribed expenditures

54. Expenditures made to acquire rights in or arising out of SR&ED and SR&ED expenditures that are deductible under section 110 are also prescribed expenditures under paragraphs 2902(c) and 2902(d), respectively, of the Regulations.


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55. Under paragraph 2902(e) of the Regulations, a current or capital expenditure is a prescribed expenditure to the extent the taxpayer making the expenditure has received or is entitled to receive a reimbursement for the expenditure from a person resident in Canada other than:

(a) Her Majesty in right of Canada or a province, or an agent thereof;

(b) a corporation, commission or association that is controlled, directly or indirectly in any manner whatever, by a person described in (a); or

(c) a municipality in Canada or a municipal or public body performing a function of government in Canada.

In addition, an expenditure for which a taxpayer has received or is entitled to receive a reimbursement from a person that is not resident in Canada will also constitute a prescribed expenditure to the extent that the reimbursement is deductible by the non-resident in computing the non-resident's taxable income earned in Canada for any taxation year. Accordingly, where the non-resident cannot deduct the reimbursement the related expenditure of the taxpayer is not a prescribed expenditure. Although the determination of whether a taxpayer has received or is entitled to receive a reimbursement is generally a question of fact dependent on the contractual arrangements that exist between the parties, a payment a taxpayer has received or is entitled to receive under a "fixed-fee" or similar contractual arrangement would not normally constitute a reimbursement. However, a payment under an arrangement that specifically provides for the repayment of a taxpayer's expenditures will generally be a reimbursement.

Government Assistance, Non-government Assistance and Contract Payments

56. For purposes of calculating a taxpayer's investment tax credit, paragraph 127(11.1)(c) specifies that the amount of a qualified expenditure made by a taxpayer must be determined without reference to subsections 13(7.1) and 13(7.4). However, the qualified expenditure must be reduced by the amount of any government assistance, non- government assistance (see 33 above), or contract payment in respect of the qualified expenditure that, at the time of filing the taxpayer's tax return for the year in which the expenditure was made, the taxpayer has received, is entitled to receive or can reasonably be expected to receive.


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57. A "contract payment" as defined under subsection 127(9) includes the following amounts:

(a) an amount (other than a prescribed amount) payable by a Canadian government, municipality or other Canadian public authority or by a person exempt from Part I tax under section 149 for SR&ED to be performed for it or on its behalf,

(b) an amount payable after December 20, 1991, for SR&ED to the extent that it can reasonably be considered to have been performed for, or on behalf of, a person entitled to a deduction in respect of the amount because of subparagraph 37(1)(a)(i) or clause 37(1)(a)(ii)(D), or

(c) an amount payable before December 21, 1991

(i) by a person resident in Canada for SR&ED related to the business of that person, or

(ii) by a person that is not resident in Canada if the non-resident payer is entitled to a deduction under clause 37(1)(a)(ii)(D) in respect of the amount payable.

For the purposes of (a) above, a prescribed amount is described in section 4606 of the Regulations as an amount received from the Canadian Commercial Corporation in respect of an amount received by that Corporation from a foreign government, foreign municipality or other foreign public authority. The situation described in (ii) above could occur when a non-resident operates a branch in Canada and the amount of the payment is deductible in computing the income from a business the non-resident carried on in Canada.

58. Paragraph (e.1) of the definition of investment tax credit in subsection 127(9) provides that a taxpayer who repays government assistance, non-government assistance or a contract payment will be entitled to an investment tax credit for the repayment to the extent that the assistance repaid had previously reduced the amount of the taxpayer's qualified expenditures, as discussed in 56 above. In addition, after 1990, the amount of assistance that was applied to reduce the amount of a qualified expenditure (by reason of paragraph 127(11.1)(c)) that was not received by the taxpayer in a taxation year and ceased to be an amount that the taxpayer may reasonably expect to receive, is deemed by subsection 127(10.8) to be an amount of assistance repaid by the taxpayer in the year.


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Acquisition of Control

59. If control of a corporation has been acquired by a person or group of persons, subsections 127(9.1) and (9.2) and paragraphs (j) and (k) of the definition of investment tax credit in subsection 127(9) may apply to restrict the availability of the corporation's investment tax credits. In general, these provisions limit the application of investment tax credits to the tax on the income from a particular business carried on by the corporation before the acquisition of control or any other business substantially all the income of which is from the sale, leasing, rental, or development of properties or the rendering of services similar to those of the particular business carried on by the corporation before the acquisition of control.

Rates

Specified percentage

60. The investment tax credit for qualified expenditures on SR&ED is initially determined by applying a specified percentage to the amount of the qualified expenditure that is incurred in the year. The specified percentage applied to a qualified expenditure on SR&ED varies depending on the location in Canada the SR&ED project is carried out. Generally, subparagraph (e)(iv) of the definition of specified percentage in subsection 127(9) provides for a rate of 20%. However, if the SR&ED is carried out in Newfoundland, Prince Edward Island, Nova Scotia, New Brunswick or the Gasp‚ Peninsula such subparagraph provides for a specified percentage of 30%.

Additional amount for certain corporations

61. Under subsection 127(10.1) certain corporations may be entitled to an additional amount of investment tax credit for qualified expenditures up to a yearly expenditure limit of $2 million. The additional amount provided by subsection 127(10.1) increases the effective rate of investment tax credit on such expenditures to 35%. To qualify for this additional amount, a corporation must meet the following conditions. For a particular year, the corporation must be a Canadian controlled private corporation (CCPC) throughout the taxation year. Its taxable income for its immediately preceding taxation year, together with the taxable incomes of all corporations with which it is associated in the particular year for their taxation years that ended in the preceding calendar year, cannot exceed the total of the CCPC's and the associated corporations' business limits (as determined under section 125) for those preceding years. A corporation will not be prevented from qualifying for the additional amount in its first taxation year simply because it did not have an "immediately preceding taxation year."

Short taxation year

62. In the event a taxpayer's taxation year is less than 51 weeks, paragraph 127(10.6)(b) provides that the $2 million expenditure limit will be prorated on the basis of the number of days in the taxation year. Also, subsections 127(10.2) and 127(10.3) provide that the $2 million expenditure limit must be shared among associated corporations. Where a CCPC has more than one taxation year in the same calendar year and is associated with another CCPC in two or more of these taxation years, paragraph 127(10.6)(a) provides that the expenditure limit of the CCPC for each taxation year in that calendar year in which it is associated with the other CCPC will be the amount that would have been the CCPC's share of the expenditure limit for the first such taxation year (had there been only one taxation year in that calendar year) prorated on the basis of the number of days in each short taxation year.


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Repayments of assistance

63. Paragraph (e.1) of the definition of investment tax credit in subsection 127(9) provides that a taxpayer making a repayment of government assistance, non-government assistance or a contract payment in a particular year will be entitled to an amount of investment tax credit (calculated at the rate described in paragraph (f) of the definition of "specified percentage" in subsection 127(9)) in the particular year to the extent that the repayment had reduced the amount of the taxpayer's qualified expenditures in a preceding year, as described in 58 above. Under subsection 127(10.7), a taxpayer making such a repayment may be entitled to an additional amount of investment tax credit. The additional amount of investment tax credit added in the year of repayment is equal to the amount to which the taxpayer would have been entitled under subsection 127(10.1) in the preceding year (if the assistance repaid had not reduced the amount of qualified expenditures) less the amount determined under subsection 127(10.1) for the preceding year.

Refundable Investment Tax Credits

General

64. Section 127.1 provides that a taxpayer, other than a person exempt from tax under section 149, having filed form T2038 containing prescribed information, is deemed to have paid, on account of the taxpayer's Part I tax for the year, the lesser of the taxpayer's refundable investment tax credit for the year and the amount designated by the taxpayer on form T2038.

65. The refundable investment tax credit for a taxation year is defined by subsection 127.1(2). Generally, for a "qualifying corporation" (described in 66 below), an individual other than a trust and a trust each beneficiary of which is either a qualifying corporation or an individual other than a trust, the refundable investment tax credit is 40% of the unclaimed balance of the investment tax credit earned in the current year for qualified expenditures on SR&ED. In addition, a qualifying corporation, other than an "excluded corporation" (described in 66 below), may be refunded any portion of the unclaimed balance of the investment tax credit earned in the year at the effective rate of 35% (see 61 above) for its SR&ED expenditures of a current nature. Investment tax credits earned by other taxpayers are no longer refundable for expenditures made after 1987.


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Qualifying corporation and excluded corporation

66. A "qualifying corporation" is a corporation that is a Canadian- controlled private corporation (CCPC) throughout the taxation year whose taxable income for the immediately preceding taxation year, together with the taxable incomes of all corporations with which it was associated in the particular year for their taxation years that ended in the preceding calendar year, does not exceed the total of the CCPC's and the associated corporations' business limits (as determined under section 125) for those preceding years. A corporation is an "excluded corporation" if, at any time during the year, it is a corporation that is either controlled (directly or indirectly, in any manner whatever) by, or is related to:

(a) one or more persons exempt from Part I tax under section 149,

(b) Her Majesty in right of a province, a Canadian municipality or any other public authority, or

(c) any combination of the above.

Reduction of available investment tax credits

67. Amounts deemed by subsection 127.1(1) to be paid on account of a taxpayer's Part I tax are deemed by subsection 127.1(3) to be amounts deducted under subsection 127(5). Consequently, such amounts reduce the taxpayer's investment tax credits available for carryback or carryforward.

AMALGAMATION AND WINDING-UP

Continuation of Predecessor Corporations

68. Where there has been an amalgamation of two or more corporations, as defined in section 87 (see the current version of IT-474, Amalgamations of Canadian Corporations), paragraph 87(2)(l) provides that the new corporation is deemed, for the purposes of section 37 and Part VIII, to be the same corporation as, and a continuation of, each predecessor corporation. Similarly, where there has been a winding-up of a taxable Canadian corporation to which subsection 88(1) applies (see the current version of IT-488, Winding-up of 90% Owned Taxable Canadian Corporations), paragraph 88(1)(e.2) causes paragraph 87(2)(l) to apply so that the parent corporation is deemed for the purposes of section 37 and Part VIII to be the same corporation and a continuation of its subsidiary.


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Capital Cost of Research Property

69. For the purpose of section 37.1, where there has been an amalgamation of two or more corporations, the new corporation's capital cost of a research property acquired from a predecessor corporation is deemed to be equal to the capital cost to the predecessor corporation under subparagraph 87(2)(l.1)(iii). This, together with subparagraph 87(2)(l.1)(iv), has the effect of deferring any potential recapture of SR&ED allowance as described in 41 above. For this purpose, a predecessor corporation includes any corporation that was itself an amalgamated corporation. Where a subsidiary's research property was acquired by its parent as a result of a winding-up to which subsection 88(1) applies, subsection 37.1(4) deems the property to be research property of the parent and, if the capital cost of the property to the subsidiary exceeds the subsidiary's proceeds of disposition, the capital cost to the parent will be deemed to be the subsidiary's capital cost so that any potential recapture of SR&ED allowance is deferred.

Availability of Investment Tax Credits

70. Paragraph 87(2)(qq) provides that, for the purposes of calculating the investment tax credit of a newly amalgamated corporation at the end of any particular taxation year, the amalgamated corporation is deemed to be the same corporation as, and a continuation of, any predecessor corporation. For windings-up to which subsection 88(1) applies, paragraph 88(1)(e.3) provides for the flow-through of investment tax credits from a subsidiary corporation to a parent corporation. These provisions allow the amalgamated or parent corporation to claim any unused investment tax credit of predecessor or wound-up subsidiary corporations. Such claims are subject to the time limits described in the definition of investment tax credit in subsection 127(9).

PARTNERSHIPS

SR&ED Expenditures

71. In calculating a partner's share of the income or loss of a partnership for a taxation year under subsection 96(1), paragraph 96(1)(e.1) requires that the partnership income for the year be calculated as if the amounts available under subsection 37(1) in its SR&ED expenditure pool were deducted. Consequently, a partnership is unable to carry forward SR&ED expenditures for deduction in a subsequent year. In addition, paragraph 96(1)(g) provides that, in calculating the share of a partnership loss that is deductible by a "specified member" of the partnership for a taxation year, a loss from any source or sources in a particular place must be reduced by any amounts deducted under section 37 in calculating the partnership income from that source or sources in a particular place. For the purposes of paragraph 96(1)(g), the term "specified member" of a partnership is restricted to any member of the partnership who is a "limited partner" as defined in subsection 96(2.4). In regard to the application of paragraphs 96(1)(e.1) and 96(1)(g), please refer to the Act for certain transitional rules that may apply, for taxation years of partnerships ending after December 15, 1987, to expenditures made by the partnership after December 15, 1987 and before 1989.


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72. In circumstances where paragraph 96(1)(g) restricts the amount of a partnership loss that a limited partner can deduct, the amount that is not deductible is not allowable to other members of the partnership, does not constitute a "limited partnership loss" (within the meaning of subsection 96(2.1)) for the purposes of subsection 111(1), and does not reduce the amount of the adjusted cost base of the taxpayer's partnership interest.

Allocation of Investment Tax Credits

73. Subsection 127(8) provides for the allocation of the amount that may reasonably be considered to be a partner's share of the investment tax credits of the partnership to a taxpayer that is a partner at the end of the fiscal period of the partnership. An allocation of investment tax credits is generally considered to be the partner's reasonable share of the investment tax credits if it is made in the same proportion in which the partners have agreed to share any income or loss and if section 103 of the Act is not applicable for the agreement to share any income or loss.

74. Under paragraph 127(8)(b), an investment tax credit earned by a partnership for a SR&ED expenditure, and for a repayment of government assistance, non-government assistance or a contract payment that reduced the cost of a qualified expenditure under paragraph 127(11.1)(c), cannot be allocated to a taxpayer that is a "specified member" of the partnership within the meaning assigned by subsection 248(1). A specified member of a partnership in a fiscal period or taxation year is a member who is a limited partner as defined in subsection 96(2.4) of the partnership at any time in the period or year. A specified member can also be any member of the partnership other than a member who on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which he or she is a member of the partnership is:

(a) actively engaged in those activities of the partnership business other than its financing, or

(b) carrying on a similar business as that carried on by the partnership in its taxation year, otherwise than as a member of a partnership.


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To be considered actively engaged in the activities of a partnership a partner would normally be expected to contribute time, labour and attention to the business of the partnership to a sufficient extent that such contributions would be a determinant in the successful operation of the business. In regard to the application of subsection 127(8), please refer to the Act for certain transitional provisions that may apply to expenditures made after December 15, 1987 and before 1989.

75. Subsection 127(8.3) provides that the amount by which certain of the partnership investment tax credits exceeds the total of the amounts determined under subsections 127(8) and (8.1) to be a limited partner's share of those investment tax credits will be reallocated to partners who were members of the partnership throughout its fiscal period and who were not limited partners during that fiscal period. The investment tax credits that may be reallocated under subsection 127(8.3) include those earned for SR&ED expenditures and for repayments of government assistance, non-government assistance or contract payments that reduced the amount of an expenditure under paragraph 127(11.1)(c). The amount that may be reallocated to a particular partner that was not a limited partner is the portion that is reasonable in the circumstances considering the partner's investment in the partnership, including debt obligations of the partnership. The provisions of paragraph 127(8)(b) will apply to prevent a specified member that is not a limited partner from adding, in computing that member's investment tax credit for the year under subsection 127(8), any investment tax credits reallocated under subsection 127(8.3) for SR&ED expenditures and for repayments of government assistance, non-government assistance or contract payments that reduced the amount of an expenditure under paragraph 127(11.1)(c). Furthermore, investment tax credits that, because of paragraph 127(8)(b), cannot be allocated to a partner described in paragraph (b) of the definition "specified member" in subsection 248(1) cannot be reallocated to other partners. As a result, those investment tax credits are not otherwise available for carryforward or carryback. Where subsections 127(8) and 127(8.3) would require an amount to be included in calculating a partner's investment tax credit for a taxation year, the partner may elect under subsection 127(8.4), in the partner's return of income under Part I for the year, to have any portion of that amount deemed not to have been added in calculating the partner's investment tax credit at the end of the year.


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76. Under subsection 127(12), investment tax credits allocated to a partner under subsection 127(8) that may reasonably be considered to relate to depreciable property are deemed, for the purposes of subsection 13(7.1), to have been received by the partnership, at the end of its fiscal period in which the allocation was made, as assistance from a government for the acquisition of depreciable property. Similarly, under subsection 127(12.1), investment tax credits allocated to a partner under subsection 127(8) that may reasonably be regarded as relating to current expenditures on SR&ED will reduce the total of the current expenditures on SR&ED that may be claimed by the partnership at the end of the fiscal period in which the allocation was made. In circumstances as described in 75 above, where a partner elects, under subsection 127(8.4) (that a portion of the investment tax credits that would have otherwise been allocated to that partner be deemed not to have been required under subsection 127(8) to be included in calculating the partner's investment tax credit), the elected portion of the investment tax credit will not reduce the capital cost of depreciable property acquired or the amount of SR&ED expenditures that may be deducted under subsection 37(1) in calculating the partnership income.

If you have any comments regarding the matters discussed in this bulletin, please send them to:

Director, Technical Publications Division Legislative and Intergovernmental Affairs Branch Revenue Canada - Customs, Excise and Taxation 875 Heron Road Ottawa, Ontario K1A 0L8


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Explanation of Changes for Interpretation Bulletin IT-151R4: Scientific Research and Experimental Development Expenditures

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions we have made as a result of changes to the law, as well as changes reflecting new or revised departmental positions.

Overview

Interpretation bulletin IT-151R4 explains the provisions of section 37 that permit taxpayers who perform scientific research and experimental development (SR&ED) to deduct expenditures incurred for SR&ED carried on in Canada when calculating their income from a business. It explains how the SR&ED expenditure pool is calculated and describes both current and capital expenditures on SR&ED. The bulletin also describes the deductibility of expenditures for SR&ED carried on outside Canada. In addition, the bulletin now includes a description of the investment tax credit provisions related to SR&ED and the tax consequences to partnerships incurring SR&ED expenditures. We have undertaken the current revision to incorporate the changes to the SR&ED provisions enacted in 1988 by Bill C-139, in 1991 by Bill C-18, and in 1993 by Bill C-92.

Generally, the bulletin does not reflect the proposed Amendments to the Income Tax Act and Regulations announced by the Department of Finance on December 2, 1992. However, the positions set out in paragraphs 17 to 20 of the bulletin are based on certain of the proposed amendments to the income tax regulations that are effective for taxation years ending after 1989.

Legislative and other changes Generally, we have rewritten the bulletin to improve clarity, and have revised the order of the paragraphs to improve the bulletin's cohesiveness.


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New 1 has been added to provide readers with an index.

New 2 was added to define SR&ED.

New 3 (former 1) was revised to reflect the amendments to subsection 37(1) that eliminate the requirement for SR&ED expenditures to be made in Canada. It was also revised to reflect the amendment to subsection 37(1) that allows SR&ED expenditures not only to be deducted from the income of the business to which the expenditures on SR&ED relate but to be deducted from the income from any other business carried on by the taxpayer. This paragraph was also revised to reflect the amendment to section 37 eliminating the expression "class of business," which prevents a SR&ED expenditure from being deductible under subsection 37(1) if it does not specifically relate to a business of the taxpayer. In addition, as a result of the repeal of paragraph 20(1)(t), the reference to that paragraph has been eliminated from the revised bulletin.

New 4 (former 6) has not been changed.

New 5 (former 2) has been revised to incorporate the amendment to subsection 37(1) eliminating the requirement for a taxpayer to have incurred the SR&ED expenditures in the year in which the deduction from the SR&ED expenditure pool was claimed. The amendments allowing SR&ED expenditures to be deducted from the income of another business carried on by the taxpayer and eliminating the expression class of business as discussed in new 3 are also reflected in this paragraph. In addition, former 2 has been revised to reflect the amendments to paragraphs 37(1)(d) and (e) which require the SR&ED expenditure pool to be reduced by the amount of any government or non-government assistance received for SR&ED expenditures, and by the amount of investment tax credits (ITCs) claimed for preceding years on current expenditures on SR&ED. Before these amendments, the pool would have been reduced, under paragraph 37(1)(d), only by the amounts of assistance received under an Appropriation Act and, under paragraph 37(1)(e), by the amount of ITC claimed in the current and preceding years.

New 6 (former 3) has been revised to reflect the amendment discussed in new 3 eliminating the expression "class of business."

New 7 (former 4) has been slightly reworded.


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New 8 (former 5) has been substantially revised because of the enactment of paragraph 37(7)(e). An explanation of this new provision has been incorporated into this paragraph to indicate that, in and by itself, SR&ED is not a business of a taxpayer unless all or substantially all of the taxpayer's revenue is derived from the prosecution of SR&ED. Also, the wording in this paragrapg concerning the "all or substantially all" test has been revised to reflect the comments made in the decision in Douglas Wood v. MNR, 87 DTC 312, (1987) 1 C.T.C. 2391. As a result, new 8 now indicates that the test for something to be "all or substantially all" will be met if 90% or more of whatever is being measured is met.

New 9 was added to the bulletin to explain that subsection 37(1.1) allows a corporation's expenditures on SR&ED to be "related to a business of the taxpayer" if the SR&ED relates to a business in which a related corporation is actively engaged.

New 10 (former 9) was revised to reflect the renumbering of subparagraphs 37(1)(a)(ii) to (vi), and the amendments to new subparagraph 37(1)(a)(ii). These amendments require that a taxpayer making a payment described in that subparagraph must be entitled to exploit the results of the SR&ED for the payment to be included in the SR&ED expenditure pool. This paragraph has also been revised to reflect the amendment discussed in new 3 eliminating the expression class of business.

New 11 (former 9) explains the term "approved" as it is used in section 37. We have added to this paragraph the address where organizations should write to obtain the "approved" status. Former 9 also contained a position that suggested that contributions to organizations described in former subparagraphs 37(1)(a)(ii) and (iii) (now clauses 37(1)(a)(ii)(A) and (B)) should be expended by a certain time. This position was intended to provide guidelines to organizations described in clauses 37(1)(a)(ii)(A) and (B) that were granted "approval" on the stipulation that they would spend the funds they received on SR&ED within a reasonable time frame, and that two years from the date they received the funds would be considered reasonable. However, since this position could be misinterpreted to mean approved organizations identified in clauses 37(1)(a)(ii)(A) and (B) were subject to constraints to which other organizations described in subsection 37(1)(a)(ii) were not subjected regarding the spending of funds received from taxpayers seeking a deduction under that subparagraph, the position has been deleted.


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New 12 was added to describe situations when a taxpayer is considered to be entitled to exploit the results of SR&ED.

New 13 was added to explain subparagraph 37(1)(a)(iii) that deals with payments made to non-profit research corporations for pre- competitive basic research made on behalf of corporate members.

New 14 (former 10) was changed to reflect the comments made in Douglas Wood v. MNR as previously discussed in new 8. We have also added an example describing wages that are all or substantially all attributable to SR&ED.

Former 15 contained an administrative position that indicated that if a taxpayer intends to sell experimental production, and the taxpayer applies the income derived from the sale to reduce the amount of current SR&ED expenditures, the direct production costs and the current SR&ED expenditures which result in that production are considered to be all or substantially all attributable to SR&ED. This administrative position was originally intended to provide relief to taxpayers at a time when expenditures had to be wholly attributable to SR&ED. The introduction of clause 37(7)(c)(ii)(B) relaxed the "wholly attributable" rule, and allows expenditures that are directly attributable to SR&ED to qualify for the subsection 37(1) deduction. As a result, the relief this position was originally intended to provide is no longer required. In addition, a recent decision by the Tax Court of Canada (Cultures Laflamme (1984) Inc. c. MRN) does not support this administrative position. Accordingly, former 15 was deleted.

New 15 (former 7) describes current expenditures on SR&ED carried on in Canada, and has been revised to reflect the amendment to subsection 37(1), outlined in new 3, that eliminated the requirement for such expenditures to be made in Canada. Also, as a result of amendments to paragraph 37(1)(b) described in new 26, the position in former 7 that explains the distinction between current and capital expenditures on SR&ED was revised.

New 16 (former 8) has been slightly reworded.

New 17 to 20 (former 11 to 14 ) describe expenditures that are directly attributable to SR&ED carried on in Canada. For purposes of clause 37(7)(c)(ii)(B), expenditures that are directly attributable to SR&ED are described in subsections 2900(2) and 2900(3) of the Regulations, subject to subsection 2900(4) thereof. However, these three subsection of the Regulations caused significant administrative difficulties when determining expenditures directly attributable to SR&ED. First, paragraph 2900(2)(b) required that an expenditure for salaries had to have been paid before it could be directly attributable to SR&ED. Secondly, the wording of paragraphs 2900(2)(c) and 2900(3)(b) could be interpreted to prevent portions of expenditures from being directly attributable to SR&ED. Furthermore, subsection 2900(4) could be interpreted to prevent remuneration based on profits paid to arm's length employees, who were not specified shareholders of the payer, from being directly attributable to SR&ED.


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Among other changes to the SR&ED incentive program, draft amendments to the Regulations released by the Department of Finance on December 2, 1992 proposed to amend paragraphs 2900(2)(b), 2900(2)(c) and 2900(3)(b) so that, for 1990 and subsequent taxation years, accrued salaries and portions of expenditures are not prevented from being directly attributable to SR&ED. 17 to 20 of the bulletin have been revised to reflect these proposed amendments. 17 and 20 reflect the amendment to paragraph 2900(2)(b) that permits accrued salaries to be expenditures that are directly attributable to SR&ED. The administrative position contained in former 11 that allowed certain accrued remuneration at year end to be considered paid is no longer necessary and has been deleted. New 18 and 19 now provide a more generous position concerning factory overheads and general and administrative expenses, and emphasize that the method used to allocate such expenditures must be reasonable.

With the proposed repeal of subsection 2900(4), and the proposed introduction of new subsection 37(8), the draft legislation released on December 2, 1992 clarifies that all remuneration based on profits is not prevented from being directly attributable to SR&ED. Because proposed subsection 37(8) also reflects a change in policy which is to come into effect after December 2, 1992, this clarification also comes into effect at that time. However, 20 has been revised to include an administrative position that reflects the Department of Finance's intention that subsection 2900(4) not prevent remuneration based on profits from being directly attributable to SR&ED when it is paid to employees who deal at arm's length with the payer and who are not specified shareholders of the payer.

Since the bulletin generally applies to expenditures incurred after December 15, 1987, the application statement has been changed to indicate that 17 to 20 apply to the 1990 and subsequent taxation years because these paragraphs reflect the retroactive amendments to paragraphs 2900(2)(b), 2900(2)(c) and 2900(3)(b) of the Regulations. Former 11 to 14 of IT-151R3 will continue to reflect our position until new 17 to 20 apply.

Former 20 dealt with the requirement that a capital expenditure had to be made in Canada to qualify as an SR&ED expenditure. As discussed in new 26, the amendment to paragraph 37(1)(b) eliminated this requirement. Former 20 also referred to IT-50 which lists the criteria used to determine when the expenditure was made. The enactment of subsection 37(1.2), which deems expenditures not to have been made until the property is available for use, also eliminates the need to refer to that bulletin. As a result, former 20 is no longer required and has been deleted.

New 21 and 22 were added to describe the restriction on rental expenses and certain other similar payments contained in new subparagraphs 37(7)(f)(ii) and (iii).

Former 22 dealt with the deductibility of expenditures for buildings used partly for SR&ED. The introduction of paragraph 37(7)(f) generally prevents expenditures for leasing or acquiring buildings from being deductible under section 37. As a result, former 22 is no longer required and has been deleted.

New 23 and 24 (former 31 and 16) have been slightly reworded.

Former 25 listed some of the programs providing assistance under an Appropriation Act. This information is no longer necessary because of the amendment to paragraph 37(1)(d) as discussed in new 5. As a result, former 25 has been deleted.

New 25 (former 17) was revised to reflect the amendment to subsection 37(5) by replacing the references to section 110 therein with references to sections 110.1 and 118.1.


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New 26 (former 18) was revised to reflect the amendments to paragraph 37(1)(b) eliminating the requirement for capital expenditures on SR&ED to be made in Canada, and permitting only those expenditures for property, that would otherwise have been depreciable property to the taxpayer, to be included in the SR&ED expenditure pool.

New 27 describes new subsection 37(1.2) that deems that expenditures for property are not made until the property is available for use by the taxpayer.

New 28 (former 19) was revised to reflect the amendments to paragraphs 13(7.1)(a) and 13(7.1)(e) that require the separate prescribed class for capital expenditures on SR&ED to be reduced by the amount of any government or non-government assistance received for these capital expenditures. Before these amendments, the class would have only been reduced by certain payments received under an Appropriation Act. This paragraph was also revised to reflect the amendment to paragraph 37(1)(e) discussed in new 5.

New 29 (former 21) was revised to reflect the comments made in Douglas Wood v. MNR as previously discussed under new 8. This paragraph was also changed to emphasize that the initial intention is determinative in establishing whether an expenditure is all or substantially all attributable to SR&ED. The subsequent use of the property will generally not override the initial intention, but it is an indicator of the original intention.

New 30 was added to describe subparagraph 37(7)(f)(i) that prevents expenditures for buildings (other than prescribed special-purpose buildings) from qualifying for a deduction under section 37. It also outlines the definition of a prescribed special purpose building.

New 31 (former 23) was revised to clarify that, for projects involving SR&ED and commercial production, the taxpayer should determine the eligible expenditures on SR&ED by segregating the eligible SR&ED activities and ineligible production activities, and identifying the expenditures related to each.

New 32 (former 24) was revised to reflect the amendment to paragraph 37(1)(d) discussed in new 5.


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New 33 was added to describe the definitions of government and non- government assistance. This was necessary because of the amendment to paragraph 37(1)(d) described in new 5.

New 34 was added to clarify whether interest-free loans from a government will constitute government assistance.

New 35 (former 26) was revised to reflect the amendment to paragraph 37(1)(e) discussed in new 5.

New 36 (former 27) explains that expenditures renounced to generate a Part VIII tax refund reduce the pool of SR&ED expenditures. Because Part VIII tax refunds are no longer available, the explanation of the refund calculation in former 27 is no longer relevant and was eliminated from new 36.

New 38 (former 29) has been revised to reflect the amendment to subsection 37(2). A taxpayer making a payment to an approved association for SR&ED carried on outside Canada must be entitled to exploit the results of the SR&ED for the payment to be deductible under that subsection.

New 44 to 67 were added to describe investment tax credits that may be available for qualified SR&ED expenditures. These describe which SR&ED expenditures qualify for an ITC, how a taxpayer may use an ITC to reduce taxes payable, and the circumstances when an ITC may be refunded. These paragraphs also describe the conditions certain taxpayers have to meet to be entitled to the enhanced ITC rate and for certain of their ITC's to be fully refundable.

68 to 70 (former 34 and 35) that describe the impact an amalgamation has on the SR&ED expenditure pool and investment tax credit pool have been expanded to address the impact a winding-up will have on these pools.

New 71 to 76 have been added to explain certain provisions of the Act specific to partnerships incurring SR&ED expenditures.

Date Modified: 1995-01-01

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Important Notices