4 December 2008 External T.I. 2008-0288041E5 - Payment made by provincial government

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a payment received by a corporate taxpayer from a provincial government to do research is taxable.

Position: Yes.

Reasons: Income from business.

2008-028804
XXXXXXXXXX André Gallant
(613) 957-8961
December 4, 2008

Dear XXXXXXXXXX :

Re: Taxability of Payment from the XXXXXXXXXX Government

This is in response to your letter of March 7, 2008, and is further to our telephone conversation and subsequent fax of November 3, 2008, regarding whether an amount received by a corporate taxpayer from the XXXXXXXXXX Government under a service contract is subject to income tax.

Our understanding of the facts is as follows:

1. On XXXXXXXXXX , a research grant agreement (the "Grant Agreement") was made between the government of XXXXXXXXXX as represented by the XXXXXXXXXX (the "provincial government"), and a corporate taxpayer, XXXXXXXXXX . (the "Taxpayer").

2. Pursuant to the Grant Agreement, the provincial government agreed to give a "grant" to the Taxpayer to perform studies on the XXXXXXXXXX (the "Project"). The term "grant" is used throughout the Grant Agreement.

3. On XXXXXXXXXX , a service contract agreement (the "Service Agreement") was made between the provincial government and the Taxpayer with respect to the Project. Under clause XXXXXXXXXX of the Service Agreement, this latter agreement was deemed to be the only agreement in existence between the Taxpayer and the provincial government (i.e., no other agreement, including the Grant Agreement, would exist between these two parties).

4. The Grant Agreement and the Service Agreement both state that the Taxpayer is not an employee of the provincial government.

5. An invoice dated XXXXXXXXXX was issued by the Taxpayer to the provincial government for the amount of $XXXXXXXXXX . This amount was paid by the provincial government to the Taxpayer in XXXXXXXXXX (the "Payment").

6. The only XXXXXXXXXX shareholders of the Taxpayer are XXXXXXXXXX As part of his employment contract with the XXXXXXXXXX is allowed one day a week to perform "outside professional activities", which include consulting work and contract work, such as the work performed under the Service Agreement.

You are asking whether the Taxpayer should pay income tax with respect to the Payment.

Your Position

You are uncertain if the Payment received from the provincial government is taxable. The Payment was included in computing the Taxpayer's income for the XXXXXXXXXX taxation year in order to avoid any late filing penalties.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). In your situation, we do no know whether the transactions are proposed or whether the particular transactions are completed. We are, however, prepared to offer the following general comments, which may be of assistance.

Depending on the nature of the payment and the arrangements or circumstances under which it is made, a payment may be considered:

(a) income from business;
(b) income from an office or employment; or
(c) a scholarship, fellowship, bursary, prize or research grant.

In the case at hand, both the Grant Agreement and the Service Agreement are agreements between the provincial government and a corporate taxpayer. Accordingly, the Payment is not considered income from an office or employment.

Since you have indicated that the Taxpayer is performing consulting work and contract work, and the final binding contract with the provincial government here is a service contract, we assume that the Payment constitutes income from a business and would be taxable as such in the Taxpayer's hands. For additional information on grants received under (b) or (c) above, we refer you to Interpretation Bulletin IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance.

The fact that XXXXXXXXXX incorporated his professional business may also raise the issues related with personal services businesses. A Canadian-controlled private corporation's income from a personal service business is not eligible for the small business deduction and, in addition, the corporation's expense deductions may be restricted under the provisions of paragraph 18(1)(p) of the Income Tax Act. Determining whether a corporation is carrying on a "personal services business" for the purposes of the Income Tax Act involves a question of fact that can only be determined after a review of all the relevant information and legal agreements. For more information on personal services businesses, you may wish to refer to Interpretation Bulletin IT-73R6, The Small Business Deduction.

All publications referred to in this letter are available on our Web Site at www.cra.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch