Subsection 37(1) - Scientific research and experimental development
Cases
International Nickel Co. of Canada Ltd. v. MNR, 71 DTC 5332, [1971] CTC 604 (FCTD)
Before going on to find that the taxpayer's expenditures on scientific research (which were deducted in computing income under s. 72 of the pre-1972 Act) were capital expenditures and, therefore, not deductible for depletion allowance purposes, Cattanach J. stated (at p. 5347):
"The obvious purpose of section 72 is to permit the taxpayer to deduct from its income the amount spent on scientific research within the meaning of section 72 which might not otherwise be deductible either because it was barred by section 12(1)(b) as capital expenditures or because of the possibility the amount so expended might not be incurred directly in the income earning process within the meaning of section 12(1)(a)."
See Also
Rouleau c. La Reine, 2007 DTC 1619, 2007 TCC 338 (Informal Procedure)
Archambault J. found that a purported partnership of which the taxpayer was a purported member was not carrying on any business (as it was created solely to transfer R & D tax deductions to investors) so that the taxpayer was not entitled to any deductions under s. 37 in respect of alleged expenditures of the partnership.
Tigney Technology Inc. v. M.N.R., 97 DTC 414 (TCC)
The taxpayer, which was performing cancer research in Canada for a Swedish firm, incurred costs in respect of a temporary facility in Kentucky. The facility was required because in order to extract pharmaceuticals that the Swedish firm wanted, it was necessary that tobacco plants be harvested and processed within two hours. In finding that these expenditures were qualified expenditures, Bell TCJ. found that the portion of the research that physically took place in Kentucky was an isolated and relatively small part of the systematic investigation which was ongoing in Canada, and that the experiments conducted in Kentucky were not a separate and distinct systematic investigation but were part of the continuous scientific research on tobacco being carried on in Canada.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 127 - Subsection 127(9) - Qualified Expenditure | 122 |
Halak v. MNR, 89 DTC 531, [1989] 2 CTC 2273 (TCC)
Because the taxpayer had ceased to make SR&ED expenditures by 1983, he lost the ability to carry forward his pre-1983 expenditures.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 37 - Subsection 37(4) | 40 |
Power v. MNR, 89 DTC 449, [1989] 2 CTC 2233 (TCC)
The taxpayer was unsuccessful in seeking to deduct a portion of capital contributions which she made qua limited partner to a partnership engaged in basic and applied scientific research. "[A] deduction under section 37 must be made at the partnership level and not at the partner level unless expressly excluded as a partnership deduction."
Gaspet Ltd. (formerly Saga Petroleum (U.K.) Ltd.) v. Elliss, [1987] BTC 218 (C.A.)
The taxpayer's Irish affiliate ("Saga Ireland") was a member of an oil exploration syndicate whose operator ("B.P.") carried out exploration work under an operating agreement on behalf of the other members of the syndicate, including Saga Ireland. The taxpayer without the knowledge of the syndicate members agreed to provide all the funds required by Saga Ireland under the terms of the operating agreement in return for all petroleum "won" by Saga Ireland.
The payments made by the taxpayer to Saga Ireland did not constitute expenditures "directly undertaken by him or on his behalf" (s.91(1)(a), Capital Allowances Act 1986). "A close relationship between the claimant and the undertaking of the research is inherent in the language." It was noted that "on behalf of" denotes an agency relationship and that "undertaking the research" refers to "persons who have commissioned it, in a wide sense, i.e., without any direct contractual link as a necessary requirement".
Administrative Policy
23 September 1998 Internal T.I. 9809087 - DEFINITION OF CANADA FOR SR&ED
For purposes of the SR&ED deduction and ITC, the term "Canada" does not include the area of water off the coastline of Canada outside the 12-nautical mile limit. Accordingly, SR&ED performed beyond that limit will not be eligible for the SR&ED tax credit.
Application Policy SR & ED 96-04 "Payments to Third Parties for SR & ED".
93 C.R. - Q. 2
The fact that a subsidiary does not have the right to exploit the results of SR&ED that it carries out would not, in and by itself, effect its ability to deduct the SR&ED expenditures incurred by it and claim the related investment tax credits in computing its income.
23 November 1993 External T.I. 9322405 F - SR & ED
Where a non-resident company makes charges in the form of technical fees, royalties or licence fees to a Canadian taxpayer for the right to manufacture or produce a product developed as a result of SR&ED previously performed in Canada, this will not jeopardize the eligibility of the Canadian taxpayer for the ITC.
19 October 1993 External T.I. 9329815 F - Approved for Scientific Research
All Canadian universities and affiliated colleges are automatically considered by RC to be "approved" entities under s. 37(1)(a)(ii)(B). The criteria for granting written approval of other entities are discussed.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(j) | 26 |
18 May 1993 T.I. (Tax Window, No. 31, p. 8, ¶2517)
Discussion of criteria applied in determining whether an organization is approved.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(j) | 19 |
30 March 1993 T.I. (Tax Window, No. 29, p. 2 ¶2449)
An asset can be eligible for the deduction under s. 37(1)(b), in lieu of claiming capital cost allowance, if an election is made under s. 16.1.
Tax Professionals Mini Round Table - Vancouver - Q. 20 (March 1993 Acess Letter, p. 107)
If an expenditure on scientific research is on current account and for an income-producing purpose, it is deductible without reference to s. 37.
20 August 1992 External T.I. 5-921392
The phrase "entitled to exploit" in s. 37(1)(a)(ii) means that the contributor should be charged a royalty at a lower rate than that charged to non-contributors. The contributor should have the results of the SR&ED project in its possession.
7 August 1992 T.I. (Tax Window, No. 23, p. 15, ¶2131)
Where the SR&ED expenditures of a Canadian corporation are reimbursed by its U.S. parent and the Canadian corporation does not retain the right to exploit the results of the research, RC views the Canadian corporation as acting as agent for the U.S. parent, with the result that the expenditures are not eligible under s. 37(1)(a)(i).
91 C.R. - Q.32
The related business requirement generally will be satisfied when the results of the SR&ED, if successful, have a direct and beneficial application in the business.
91 CPTJ - Q.27
Where payments are made to a corporation resident in Canada to do scientific research and development work on behalf of the taxpayer and the second company subcontracts some of the work to another company in the U.S., the payments by the taxpayer will not qualify.
16 December 1991 T.I. (Tax Window, No. 11, p. 20, ¶1539)
Landscaping costs which will be deductible under s. 20(1)(aa) cannot qualify as SR&ED expenditures. However, a taxpayer whose sole business was conducting SR&ED and who incurs normal landscaping maintenance and upkeep costs will be able to deduct those costs under s. 37(1)(a)(i).
September 1991 Memorandum (Tax Window, No. 10, p. 7, ¶1477)
IT-151R3, para. 5 still largely represents RC's policy on the meaning of the phrase "related to the business".
13 June 1991 T.I. (Tax Window, No. 4, p. 24, ¶1302)
Where the receipt of government assistance depends upon expenditures actually being made, s. 37(1)(d) will only apply to government assistance which relates to expenditures made within the fiscal year.
18 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 20, ¶1018)
In order for an organization to qualify under s. 37(1)(a)(ii)(A) or (B), it must be a non-profit organization that has facilities and personnel capable of carrying out SR&ED, it must have adequate funding to ensure continued SR&ED, it must carry on activities that are unquestionably SR&ED and the general public must be the beneficiary of such activities.
5 February 1990 T.I. (July 1990 Acess Letter, ¶1318)
Where a Canadian parent makes a contribution of capital to its wholly-owned subsidiary corporation to fund capital expenditures on SR&ED, the amount received by the subsidiary will not be treated as "non-government assistance" for purposes of s. 37(1)(d).
Where a taxpayer with calendar year-ends receives assistance on June 1, 1989 for expenditures described in ss.37(1)(a) and (b) that had been a rule be made in 1989, such assistance will not be required to be added to its income for the 1988 year even though it was received prior to the June 30, 1989 tax return filing date.
31 October 89 T.I. (March 1990 Acess Letter, ¶1144)
Discussion of the criteria for granting approval of an association or an educational institution.
88 C.R. - Q.70
re distinction between capital expenditures and current expenditures.
87 C.R. - Q.20
Deductibility of financial contributions to an industry research institute.
87 C.R. - Q.21
IT-364 is applicable re whether the taxpayer has commenced to carry on a business.
87 C.R. - Q. 27
Foreign travel expenditures, including remuneration, will generally be allowed if they are directly attributable to R & D carried on in Canada.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(2) | 30 |
86 C.R. - Q.17
Carry-forwards must relate to a business carried on by the taxpayer in the current year.
85 C.R. - Q.47
Disposition of a capital property a short time after its acquisition will be considered as evidence that the property was not acquired wholly for purposes of undertaking scientific research.
84 C.R. - Q.41
An expenditure generally is "made" when it is "incurred", i.e., the accrual basis applies.
Articles
B. Cookson, K. Wensley, "Research and Development Roundtable", Summarized in 1997 Canadian Tax Journal, Vol. 45, No. 6, p. 1303.
Paragraph 37(1)(a)
Cases
Lgl Limited v. Canada, 2000 DTC 6108
The taxpayer carried on an SR&ED project relating to the environmental effects of offshore oil and gas development on whales, birds and fish. In finding that the direct cost of the data collection and allocable overhead for the work done outside Canada did not come within s. 37(1)(a)(i), the Court rejected a submission that once a project qualifies as SR&ED it must be looked at integrally and a determination made as to whether the project taken as an indivisible whole was carried on in Canada (as was argued to be the case here) or outside Canada. McDonald J.A. noted that in addition to the language of s. 37(1)(a) being clear on this issue, the suggested approach would inevitably lead to uncertainty for taxpayers whose SR&ED projects involved undertakings both inside and outside of Canada.
Canada v. Tigney Technology Inc., 2000 DTC 6112
The taxpayer, which was performing cancer research in Canada for a Swedish firm, incurred costs in respect of a temporary facility in Kentucky. The facility was required because in order to extract pharmaceuticals that the Swedish firm wanted, it was necessary that tobacco plants be harvested and processed within two hours. The Court followed the LGL case in finding that the taxpayer, which was engaged in SR&ED in Canada, was not permitted to treat the costs of its experiments in Kentucky as coming within s. 37(1)(a)(i).
Administrative Policy
17 January 2007 External T.I. 2005-0152601E5 F - Politique d'application RS & DE 1996-02
What was the impact of the LGL decision (99 DTC 675, aff’d [2000] FCA No. 166) on Case C of Application Policy 1996-02 - Testing and Studies Required to Meet Requirements in Regulated Industries, which read:
The testing or engineering is performed in Canada to meet regulatory requirements, but the project is conducted outside Canada.
Where the project is conducted outside Canada, the taxpayer has not performed SR&ED in Canada. Therefore, the testing, even if done inside Canada, is considered ordinary testing or engineering in itself and is not eligible.
In this case, it does not matter whether the activities performed outside Canada are SR&ED.
However, if the studies required to meet the regulatory requirements meet all three eligibility criteria, as in Case B, they would be considered eligible and would constitute an SR&ED project.
CRA stated:
The approach of the Federal Court of Appeal in Tigney and that of the Tax Court of Canada and the Federal Court of Appeal in LGL can be summarized as follows. The first step is to determine whether a project, as a whole, is carried on in Canada or outside Canada. If the project is carried on in Canada under subsection 248(1) of the ITA (formerly section 2900 of the Income Tax Regulations), thereby satisfying one of the criteria for the project to be considered an SR&ED project, the next analysis is to determine what portion of the expenses were incurred in Canada. Only these expenses will qualify for a deduction pursuant to subsection 37(1) and an ITC pursuant to section 127. This analysis is consistent with Justice Bowman's decision in LGL.
Consequently, we are of the view that your interpretation - as set out above - is correct and that there is no need to change Case C of our enforcement policy.
Subparagraph 37(1)(a)(i)
See Also
Concept Danat Inc. v. The Queen, 2019 TCC 32 (Informal Procedure)
The taxpayer, who had a business of embroidering clothing with lettering, reported the amount expended on three of its alleged SR&ED projects based on its estimate that its employees spent 10.2% of their time on the SR&ED activities, and applied that percentage to their salaries. In finding that this was insufficient support for SR&ED expenditures, Lafleur J stated (at para.52, TaxInterpretation translation):
Danat has not provided exact details of the hours devoted to the projects. I am of the view that an exact register of the hours worked must be provided in order to make an SR&ED claim (Hypercube … ). Similarly, the description of the tasks carried out by the different employees was not clear or sufficiently detailed enough to make the claim.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | using existing equipment in developing a new product was not R&D | 233 |
Administrative Policy
3 October 2002 External T.I. 2002-0122345 F - EN RAPPORT AVEC ENTREPRISE
Aco and Bco, a distributor in Canada of products manufactured in Canada by Aco, contract for Bco to perform SR&ED to improve Aco's products, with Aco retaining all rights arising from the SR&ED activities (Situation 1), or with Bco having certain of the rights, such as the right to use the results in a defined region (Situation 3).
Are expenditures of a current nature paid by Aco to Bco to carry out SR&ED deductible pursuant to s. 37(1)(a)(i) where SR&ED performed by Bco is "related to Bco's business," and are expenditures of a current nature incurred by Bco in performing SR&ED related to its business deductible pursuant to s. 37(1)(a)(i)?
After noting that s. 37(1)(a)(i) at that time referenced SR&ED carried on in Canada, directly or on behalf of the taxpayer, and related to a business of the taxpayer, CCRA indicated that
- Application Policy SR&ED 96-04 indicated that payments "on behalf of the taxpayer" were generally made to contractors for specific tasks or work and that, in such cases, the taxpayer, rather than the contractor, would control the actual work and retain ownership of the SR&ED.
- As the amounts paid by Aco to Bco appeared to be for SR&ED performed on behalf of Aco, they would be deductible pursuant to subparagraph 37(1)(a)(i) if the SR&ED was related to Aco's business.
- Bco, which incurred expenditures of a current nature for SR&ED performed by it directly, would also have to determine whether such SR&ED related to its business in order to be entitled to an s. 37(1)(a)(i) deduction.
- 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 and the taxpayer's business, and that 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 at the time that the research expenditures were incurred.
- Furthermore, in light of s. 37(8)(b), SR&ED carried on that relates to a business carried on at the time the SR&ED expenditures includes any SR&ED that may lead to or facilitate an extension of that business.
- Here, as the SR&ED was performed to improve the products manufactured by Aco, such SR&ED would be "related to the business" of Aco.
- However, if such research resulted in a direct and beneficial application to Bco's business of distributing Aco's products or facilitated or caused an extension of that business, the s. 37(1)(a)(i) amount would include expenditures of a current nature made by Bco on SR&ED, even if Aco was otherwise entitled to a deduction for payments made to Bco (although it would be necessary to verify whether the amounts received from Aco constituted non-government assistance to be deducted pursuant to s. 37(1)(d)).
Bco being entitled to exploit the results (Situation 3) would not change the answer.
If Bco incurred the expenditures as agent (Situation 2), this situation would be analyzed on the basis that such expenditures were incurred by Aco, so that Bco could not claim an s. 37(1)(a)(i) deduction.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 37 - Subsection 37(1.1) | SR&ED performed by sub to improve products of unrelated business of parent is deemed to be related to sub’s business | 147 |
Subparagraph 37(1)(a)(ii)
Clause 37(1)(a)(ii)(A)
Administrative Policy
21 February 2013 External T.I. 2012-0442751E5 F - Non-Profit SR&ED corporation
In the course of a general discussion, CRA stated:
We list the following requirements as set out in the Canada Revenue Agency ("CRA") Third-Party Payments Policy dated December 19, 2012 (the "Policy"), which must be met in order for an organization to be approved by the Minister under clauses 37(1)(a)(ii)(A) and (B):
1. the entity must have the facilities, equipment and personnel capable of performing SR&ED as set out in the Act;
2. the entity must only engage in activities that are indisputably SR&ED;
3. the entity must meet the requirements for non-profit organizations. Thus, there should be no personal benefit to the members or control of other associations, and there must be satisfactory arrangements for the disposition of assets at the time of dissolution;
4. the general public should benefit from the results of any successful research;
5. the funding of the association or research institute must be sufficient to ensure the continuity of SR&ED activities.
However, in the absence of the Minister's approval, a corporation resident in Canada that is exempt from tax by the application of paragraph 149(1)(j) could effectively be considered a non-profit corporation for SR&ED under paragraph 149(1)(j).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(j) | various stipulated s. 149(1)(j) requirements not stipulated in articles or by-laws | 555 |
17 July 2000 External T.I. 2000-0031155 F - Approved Association
After listing conditions and documentary requirements for approval of an organization or institution pursuant to s. 37(1)(a)(ii)(A) or (B), the Agency stated:
We would also like clarification on the following points.
A. Will all SR&ED projects be invoiced to clients on the basis of the costs the organization will incur to carry out each project? Can research projects result in a surplus of income over expenses?
B. Will the funds raised be used solely for SR&ED activities?
C. Who will have the intellectual property rights to the research results?
D. How will the general public benefit from the successful research?
Clause 37(1)(a)(ii)(B)
Administrative Policy
5 January 2016 External T.I. 2013-0515771E5 F - Établissement semblable agréé
CRA declined to approve the applicant as an "approved similar institution" for purposes of s. 37(1)(a)(ii)(B), on the basis that its
activities are specifically excluded from the definition of "SR&ED" [under ss. (e) to (k)] such as XXXXXXXXXX as well as activities that do not constitute SR&ED as they do not relate to or support SR&ED activities.
9 September 2014 External T.I. 2014-0537371E5 - Approved Research Institute Status
Changes to Letters Patent in order for the "Institute" to qualify as a registered charity would not affect its status of approved research institute for purposes of s. 37(1)(a)(ii)(B). The amendments included changes to its SR&ED objects to "advance education" through SR&ED and to improve the efficiency of another registered charity through SR&ED, and to provide that on dissolution all remaining property would be distributed to other registered charities.
31 August 2000 External T.I. 2000-0035675 F - INSTITUT DE RECHERCHE AGRÉÉ
In explaining its refusal to accredit an organization, CCRA stated:
[A]n organization that provides hospital services and carries out joint scientific research and experimental development (SR&ED) will not come within clause 37(1)(a)(ii)(B) or clause 37(1)(a)(ii)(A) since … the organization does not carry on SR&ED activities only. … CCRA … requires that a hospital's research centre be a legal entity separate from the hospital … .
CCRA then provided a detailed overview of its requirements for approval under s. 37(1)(a)(ii)(B) or (A).
Clause 37(1)(a)(ii)(E)
Administrative Policy
19 March 2001 External T.I. 2001-0063345 F - RS & DE - MANDATAIRE
The applicant did not qualify under s. 37(1)(a)(ii)(E) because it disbursed amounts to other entities only as agent for taxpayers and thus did not “carry on activities that consist of receiving amounts from taxpayers, other than as an agent of the taxpayers, and redistributing those amounts to the associations, institutions or corporations referred to in clauses 37(1)(a)(ii)(A) to (C).”
Paragraph 37(1)(d)
See Also
CAE Inc. v. The Queen, 2021 TCC 57, aff'd 2022 CAF 178
CAE, which was engaged in manufacturing flight simulator systems, incurred over $700 million in R&D expenditures on further developing such systems, as to which it received “contributions” over a five-year period of $250 million from Industry Canada. Under the agreement with Industry Canada, CAE was required to repay 135% of the amounts advanced (or $337.5 million) beginning after the last advance was made and in escalating specified amounts over a 15-year period.
Were the amounts government assistance? Ouimet J agreed (at para. 123) with CAE that the arrangement was a loan. However, he then interpreted Immunovaccine as establishing that the relevant test was whether the agreement with Industry Canada was an “ordinary commercial agreement.” He found that this test was not satisfied given that the yield on the loan to Industry Canada of 2.5% was a third of the interest that CAE would have borne on an unsecured commercial loan and that the loan lacked normal commercial covenants. As the amounts were government assistance, the amounts received or receivable in each year were excluded from qualifying expenditures for investment tax credit purposes by s. 127(18), the amounts so received were not deductible in computing income by virtue of s. 37(1)(d) and (without duplication) the amounts so receivable were includible in income under s. 12(1)(x).
In rejecting a CAE submission that the amounts had not been received because they were repayable and CAE thus had not acquired a property interest in the amounts, Ouimet J noted that dictionary definitions referred to “received” as being “to come into possession, and stated (at para. 140, TaxInterpretations translation) that “this definition makes no reference to a transfer of property.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 127 - Subsection 127(9) - Government Assistance | an unconditionally repayable loan with a 2.5% yield was government assistance | 312 |
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(11) - Investment Contract | advance labelled by government as a "contribution" but unconditionally repayable was a loan | 97 |
Borealis Geopower Inc. v. The Queen, 2018 TCC 189 (Informal Procedure)
The taxpayer, a privately owned Canadian corporation involved in geothermal power exploration, development and utilization in Canada, was paid $528,560 in 2014 as a first advance, as assistance towards its SR&ED project, from Sustainable Development Technology Canada (“SDTC” – a government foundation) notwithstanding that one of the conditions for receipt of this payment under the Contribution Agreement between it and SDTC (the “first Milestone”) was never satisfied. In finding that the taxpayer had thereby “received” government assistance in 2014 as described in s. 37(1)(d), Campbell J stated (at paras 26, 28):
The Appellant had sole access to the funds in this trust account. It had the authority to deposit and withdraw. There was no trust agreement between SDTC and the Appellant. There may have been an informal agreement respecting those funds but there was no obligation for the Appellant to notify SDTC when it transferred amounts from the trust account to another account. …
In accordance with the ordinary dictionary meaning of “receive”, the Appellant physically acquired and accepted an advance of funds by way of a cheque from SDTC. The advance was given prior to the completion of the first Milestone and no conditions were superimposed on the transfer. … It was the Appellant’s decision to open a trust account and deposit those funds to that account. It exercised control over the funds in relation to expenditures in the work project, when to withdraw and how much to withdraw.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | taxpayer had "physically" received govenment assistance funds with freedom to transfer | 109 |
| Tax Topics - Income Tax Act - Section 162 - Subsection 162(11) | loss carryback did not reduce late-filing penalty or interest | 278 |
Subsection 37(1.1)
Administrative Policy
3 October 2002 External T.I. 2002-0122345 F - EN RAPPORT AVEC ENTREPRISE
Aco contracted with its wholly-owned subsidiary, Bco, for Bco (which carries on a completely different business in Canada from that of the Canadian manufacturing business of Aco) to perform qualifying SR&ED to improve Aco's products. Bco does not retain any rights in relation to the SR&ED.
Regarding the application of s. 37(1.1), CCRA stated:
[T]he SR&ED is considered to be related to Bco's business since Aco is related to Bco, the SR&ED is related to Aco's business and Aco is actively engaged in Aco's business. Consequently, the amount provided for in subparagraph 37(1)(a)(i) will include expenditures of a current nature incurred by Bco in the course of its direct SR&ED activities, even though Aco would otherwise be entitled to a deduction in respect of payments made to Bco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(a) - Subparagraph 37(1)(a)(i) | related-business requirement will generally be satisfied where the results of the SR&ED, if successful, have a direct and beneficial application in the taxpayer’s business | 584 |
Subsection 37(2) - Research outside Canada
Cases
Romar v. Canada, 2010 DTC 5076 [at at 6816], 2009 FCA 48
Two Ontario partnerships of which the taxpayers were members paid for research to be carried out on their behalf by a Brazilian research corporation, in part, by issuing notes to the research corporation denominated in Brazilian currency and payable in annual installments commencing seven years hence.
The amount of the expenditures made by the partnerships should be determined, in light of generally accepted accounting principles on the basis of substantially discounting the value of the notes given that the interest rates borne by the notes were substantially lower than prevailing Brazilian interest rates (which, in turn, reflected high rates of inflation).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Accounting Principles | 105 |
Beaudry v. The Queen, 2010 DTC 1266 [at at 3853], 2008 TCC 17, aff'd Romar v. The Queen, 2010 DTC 5076 [at 6816], 2009 FCA 48
The "research" the taxpayer contracted for with a Brazilian firm did not qualify as scientific research & experimental development under s. 248(1): it was not scientifically noteworthy, considering such factors as the lack of a novel scientific question, and the lack of rigour in the hypotheses, experiments, and records.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 67 | 88 | |
| Tax Topics - Income Tax Act - Section 9 - Computation of Profit | 139 |
Administrative Policy
93 C.R. - Q. 2 (File 932765)
"Testing and data collection that is directly in support of and commensurate with the needs of basic research, applied research and experimental development is SR&ED as contemplated by subsection 2900(1) of the Income Tax Regulations. Consequently, the wage and travel costs of Canadian employees sojourning outside Canada during such testing and data collection taking place outside Canada only qualifies under subsection 37(2)."
Subsection 37(3) - Minister may obtain advice
Cases
Stromotich v. The Queen, 88 DTC 6172, [1988] 1 CTC 252 (FCTD)
"There is not mandatory duty on the Minister to obtain advice. There is no legal right in the plaintiff to require him to do so."
Subsection 37(4) - Where no deduction allowed under section
See Also
Halak v. MNR, 89 DTC 531, [1989] 2 CTC 2273 (TCC)
Because a patent accords the investor the exclusive right to exploit his invention for profit, and is only granted after the invention is created, expenses incurred by the taxpayer with respect to a patent application did not qualify.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) | 24 |
Administrative Policy
84 C.R. - Q.11
S.37(4) will not normally apply to deny a deduction for expenditures made to acquire computer software required to support the taxpayer's research efforts.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Pension Fund or Plan | 6 |
Subsection 37(6) - Expenditures of a capital nature
Administrative Policy
1996 Ontario Tax Conference Round Table, "Purchase and Sale of Computer Software, Q. 5", 1997 Canadian Tax Journal, Vol. 45, No. 1, at p. 221
Where the development costs of computer software were claimed as a deduction under s. 37(1)(b), proceeds of disposition of the software will be on income account by virtue of s. 37(6).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Patents and Know-How | 32 |
Subsection 37(7) - Definitions
Approved
Administrative Policy
29 November 2013 External T.I. 2013-0505451E5 - "Approved" Status
Approval of a not-for profit corporation (with any remaining property on dissolution being distributed to one or more Canadian organizations referred to in s. 37(1)(a)(ii)(A), (B), (C) or (E) carrying on similar activities) which will carry on non-domain SR&ED integrated into the XX facilities, will receive private as well as public grants, and will employ basic researchers after interviewing them and subjecting their proposals for an SR&ED eligibility review through a committee.
5 December 1994 Ministerial Letter 942198A - XXXXXXXXXX
Discussion of distinction between an approved research institute (s.37)(1)(a)(ii)(B)) and a non-profit corporation described in s. 149(j).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(j) | 22 |
19 January 1994 External T.I. 9315595 F - Approved Status
Discussion of criteria for an organization to be an "approved association".
Paragraph 37(7)(f)
Cases
Mailloux v. Canada (Minister of National Revenue), docket A-390-98 (FCA)
Because a hair dryer was a large building, expenditures for its acquisition did not qualify notwithstanding that it was an experimental prototype. In response to a submission that it was a structure not a building, Létourneau noted that it met the (French) dictionary definition of a building as "any construction intended to serve as shelter and protection" or "construction, generally of large dimensions, ... used to accommodate humans, animals or things".
Subsection 37(8) - Interpretation
See Also
CalAmp Wireless Networks Inc. v. The Queen, 2013 TCC 201, 2013 DTC 1172 [at at 939], 2013 DTC 201
A taxation year of "Dataradio" (a predecessor, by amalgamation, of the taxpayer) commenced on 1 May 2006 and ended on 9 May 2006 by virtue of the purchase of all its shares by the newly-incorporated Canadian subsidiary of a U.S.-resident corporation. Dataradio had elected to use the proxy method under s. 37(8)(a)(ii)(B). Bonuses of $1,999,036 paid by the taxpayer to its employees were treated as expenditures incurred by Dataradio on SR&ED in such short taxation year.
In finding that these expenditures did not qualify under s. 37(8)(a)(ii)(B)(IV) as having been incurred in that year for salary or wages of employees "directly engaged" in SR&ED, Bédard J found that the expenditures were not connected with SR&ED activities carried on in that year because they instead represented a sharing in the financial success represented by the sale of Dataradio at a premium price and also were intended create conditions that would favour employee retention at the successor corporation following that taxation year.
Waxman v. R., 97 DTC 705, [1997] 2 CTC 2723 (TCC)
A partnership that carried out R&D projects respecting the diet and sheltering of steers was entitled to treat substantially all its expenditures as qualified expenditures, including issue expenses and interest expenses. In finding that the purchase price of the steers qualified notwithstanding that they ultimately were sold for meat, Archambault TCJ. accepted evidence that the large size of the herd was justified by the greater reliability of results that would be generated by broader sampling in a commercial farm setting, and that the dictates of the research program required substantially greater expenditures of manpower and feed than would have been the case in a normal commercial operation.
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business | 67 |
Dew Engineering & Development Ltd. v. The Queen, 96 DTC 1765 (TCC)
A portable laboratory composed of five modules connected to one another by bolts (and that were almost identical to the components of the walkways used at the Ottawa International Airport) was found (at p. 1770) not to be a building given that it was "not installed and intended to remain in a particular location".
Administrative Policy
29 November 1993 Administrative Letter 9324456 F - RS&DE
Discussion of the meaning of "bonus" and "remuneration based on profits" in three contexts.
Articles
Katiya, "Proposed Changes to the SR&ED Program under the Income Tax Act", 1994 Canadian Tax Journal, No. 42, No. 2, p. 309.
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| Tax Topics - Income Tax Regulations - Regulation 2902 | 0 |
Paragraph 37(8)(a)
Cases
Alcatel Canada Inc. v. The Queen, 2005 DTC 387, 2005 TCC 149
S.7 employment benefits under an employee stock option program realized by employees engaged in qualifying scientific research activities constituted qualified expenditures of the taxpayer and expenditures made in respect of expenses incurred for salary or wages for purposes of s. 37(8)(a)(ii)(B)(iv), given that the word "expenditure" did not require that there be a disbursement of cash as opposed to a disbursement of other assets, and that "a very real expenditure is accomplished when shares having an established market value are sold for less than [their] value in the context of a scheme for the compensation of the employees who buy them". Furthermore, given that the primary purpose of the stock option program was to compensate employees for their services and to encourage future effort, and the taxpayer did not engage in the stock option program to increase or otherwise alter its capital structure, these expenditures were of a current nature.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 127 - Subsection 127(9) - Qualified Expenditure | 155 |
Imapro Corp. v. The Queen, 92 DTC 6487, [1992] 2 CTC 298 (FCTD)
47.3% of a multi-purpose building which was constructed for a computer graphics corporation was used exclusively by it for scientific research. The corporation was unsuccessful in deducting 47.3% of the construction costs that related to common and administrative areas that were not used solely for scientific research purposes and in the deduction of 47.3% of expenses of a current nature that related to the common areas. McGillis J. stated (p. 6494):
"Even assuming that some leeway is permitted from the 90% rule adopted by the Department ... a 47.3% portion of expenditures incurred in relation to SR&ED would not fall within the meaning of the words 'all or substantially all'."
See Also
VLN Advanced Technologies Inc. v. The Queen, 2018 TCC 33
The taxpayer (“VLN”) sold to a U.S. manufacturer (“Pratt”) its patent for coating removal and its intellectual property related to high-frequency forced pulse water technology, and acquired from Pratt equipment (the “System”) to send pulses of water to remove coatings or treat materials. In consideration for the System, VLN was to provide to Pratt research and development (“R&D”) and engineering services (involving design, manufacture and testing) over three years.
Lyons J confirmed the Minister’s position that VLN’s expenditure on the System did not qualify under s. 37(8)(a)(ii)(A)(III). First, removing the hours spent on work for three third parties substantially reduced the percentage of activities of the System on SR&ED. In this regard, she stated (at para. 55) respecting the University of Ottawa (one of the third parties):
…[T]he fact that UO personnel collaborated with the appellant on tasks involving the System and the appellant’s ability to utilize data and findings, does not alter the fact that the research represented the activities of UO researchers on its projects. I find these activities do not amount to the System being used for the appellant’s SRED.
Furthermore (para. 60):
No evidence was proffered to show that the System was used in a systematic way for a particular purpose.
Blue Wave Seafoods Inc. v. The Queen, 2004 DTC 3066, 2004 TCC 553, aff'd 2006 DTC 6155, 2006 FCA 81
The taxpayer, which in its 1995 and 1996 taxation years was acknowledged by the Minister to be engaged in SR&ED in connection with its efforts in developing new products (surimi and tempura) out of silver hake, was found not to be consuming silver hake in SR&ED activities to the extent that the silver hake represented excess fish purchased by it, i.e., fish that was resold at a loss - notwithstanding that the taxpayer effectively was required to purchase all such silver hake in order to encourage the fishing of the silver hake in the first place.
Data Kinetics Ltd. v. The Queen, 98 DTC 1877, [1998] 4 CTC 2618 (TCC)
The taxpayer, which was engaged in researching and developing advanced data management and memory management software systems for large mainframe computers, and which had adopted the proxy method for calculating SR&ED expenditures, was able to include in s. 37(8)(a)(ii)(B)(I) the cost of a dedicated telephone line that was used to pass instructions and data from the taxpayer's employees in Ottawa (none of whom left Canada) to the staff of an independent company in Birmingham, Alabama whose mainframe computer the taxpayer was leasing for testing purposes. In finding that the testing was performed in respect of SR&ED in Canada, Lamarre TCJ. stated (at p. 1884) that "the leasing expenditures made in the U.S. merely facilitate a mechanical testing process that is part and in support of the whole SR&ED project carried on in Canada".
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | 136 |
Consoltex Inc. v. R., 97 DTC 724, [1997] 2 CTC 2846 (TCC)
The cost of yarn that the taxpayer expended in the course of an R&D project qualified under both s. 37(7)(c)(ii)(A) and Regulation 2900(2)(c), notwithstanding that the yarn subsequently was sold. Bowman TCJ. stated (at p. 736) that "the word 'expenditures' is a reasonably comprehensible English word ... . It is something one spends, an outlay. No meaning of which I am aware, either in ordinary parlance or in decided cases, would justify adding after it 'net of sales proceeds'".
He went on to note in light of former s. 4(4) that as the expenditures qualified under s. 37, they could not also be deducted as the cost of sales under s. 9.
Administrative Policy
Guidance: How the Canada emergency wage subsidy affects SR&ED claims 19 February 2021 CRA Webpage
Distinction between directly engaged and directly attributable
SR&ED salary and wages
There are two types of salary and wages that can be claimed for SR&ED:
- Directly engaged salary or wages are paid to employees doing hands-on SR&ED work based on the time spent. They are claimable under the traditional method or the proxy method.
- Directly attributable salary or wages are paid to employees directly undertaking, supervising, or supporting SR&ED work and to employees whose salary or wages are directly related and incremental to SR&ED work, such as the wages of clerical and administrative staff, based on the time spent. Directly attributable is a broader type than directly engaged. Salary and wages not directly engaged are reported as overhead and other expenditures on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, and can only be claimed using the traditional method.
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| Tax Topics - Income Tax Act - Section 127 - Subsection 127(19) | 230 |
Application Policy SR & ED 96-06 "Directly Undertaking, Supervising or Supporting v. 'Directly Engaged' SR & ED Salary and Wages".
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| Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(2) | 0 |
30 May 1990 T.I. (October 1990 Acess Letter, ¶1459)
General discussion.
12 December 1989 Memorandum (May 1990 Acess Letter, ¶1211)
It is not sufficient that an expenditure was intended to be used substantially for research; it must have actually been used in that manner.
Subparagraph 37(8)(a)(ii)
Clause 37(8)(a)(ii)(A)
See Also
Inflection Analytics Ltd. v. The Queen, 2015 DTC 1126 [at at 786], 2015 TCC 129 (Informal Procedure)
The taxpayer, a developer of market analysis software, paid fees to purchase or license historical securities data in order to simulate market conditions in testing. Boyle J agreed with the Minister that this agreement could not be considered a licence of "equipment" for the purpose of the taxpayer's claims for SR&ED credits. The taxpayer merely had the right to access information via a website rather than "any rights in equipment of the vendor that can be used by the Appellant as it wishes, as was the case [with a US mainframe and a dedicated line to access it] in Datakinetics." (Para. 10.)
Administrative Policy
30 July 2004 External T.I. 2004-0063811E5 F - Soutien administratif à une filiale
A subsidiary, which carries out SR&ED work on its own behalf and on behalf of its parent, uses the proxy method under s. 37(8)(a)(ii)(B. Can the parent (whose employees performed administrative support tasks directly related to the SR&ED performed by the subsidiary) deduct, pursuant to s. 37(1)(a), the expenditures for such administrative support using the traditional method under s. 37(8)(a)(ii)(A)? CRA responded:
[A] taxpayer may use the traditional method provided for in clause 37(8)(a)(ii)(A) even if another taxpayer, related to the taxpayer, elects to use the alternative method provided for in clause 37(8)(a)(ii)(B). It should be noted that expenses related to administrative support are generally not included in the expenses described in clause 37(8)(a)(ii)(B) of the Act (proxy method), whereas they could possibly be included, depending on the facts of a particular situation, in those described in clause 37(8)(a)(ii)(A) (traditional method).
After referring to s. 37(13), CRA stated:
[A]dministrative support tasks in respect of the activities of a subsidiary of a taxpayer would not be considered to be SR&ED of the taxpayer because the condition in paragraph 37(13)(b) is not satisfied since the administrative support tasks would not be SR&ED of the subsidiary … .
[Here] the administrative support expenditures related to the subsidiary's operations would not be SR&ED expenditures under subsection 37(1) of the parent. With respect to the administrative support expenditures related to the parent's own operations, we do not have sufficient facts to determine whether these expenditures would be deductible pursuant to paragraph 37(1)(a).
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Act - Section 37 - Subsection 37(13) | administrative support tasks of the parent respecting SR&ED activities of its subsidiary would not be considered SR&ED of the parent | 209 |
Clause 37(8)(a)(ii)(B)
See Also
AG Shield Ltd. v. The Queen, 2017 TCC 68
The two 50% shareholders of a small business corporation, that followed the proxy method for SR&ED purposes, decided at year end that their draws during the year would be treated as wages to the extent of the number of hours (multiplied by an hourly rate of $30) spent by them on SR&ED, and that the balance of their draws represented dividends. CRA reassessed on the basis that a pro rata portion of the wages should be treated as having been paid for non-SR&ED activities based on the percentage (of well over 50%) of their aggregate hours which was not spent on SR&ED.
In allowing the corporation’s appeal, D’Arcy J stated:
[T]he Respondent argued that… [they] did not receive any compensation for the significant time they spent “performing director or management activities”.... As the controlling shareholders and managing directors of the Appellant, they chose to receive dividends in lieu of salary and/or bonuses. This was their choice and did not require a formal agreement.
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| Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(2) - Paragraph 2900(2)(b) | individual shareholders entitled to find that their non-dividend draws were solely wages for SR&ED prosecution | 314 |
Oldcastle Building Products Canada Inc. v. The Queen, 2016 TCC 183
The taxpayer (“Oldcastle”), which was a leading producer of concrete building products, entered into an employment contract in 2004, with a former shareholder and principal of the business (“Castonguay”) who now was no longer a “specified employee,” for Castonguay to direct a research centre (with a staff of over 25) for the development of new and improved building products. The contract stipulated a base salary, plus a “bonus” (which Archambault J stated he would instead term “variable pay”) calculated as a sliding percentage of the sales (net of shipping and insurance expenses) of new and modified products developed by the research centre. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which Castonguay’s variable pay exceeded $1 million, which was the case in the taxation years in issue (2010 and 2011). Oldcastle took the variable pay into account under Reg. 2900(4) for purposes of computing its prescribed proxy amount having regard to s. 37(8)(a)(ii)(B)(IV).
Before finding that 55% and 40% of the variable pay of Castonguay for 2010 and 2011, respectively (being the respective percentages of Castonguay’s time conceded by the Crown to relate directly to his R&D activities), should be included in computing Oldcastle’s prescribed proxy amount under Reg. 2900(4), Archambault J found (under Reg. 2900(9)(c)) that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, and also that it was not “based on profits” (Reg. 2900(9)(d)) given that the only expenses deducted in arriving as net sales were freight and insurance.
Respecting the Crown position that the variable pay did not qualify as an expense contemplated under s. 37 because “the amount of this compensation references the sales of products respecting which the R&D activities had been performed in prior years” (TaxInterpretations translation, para. 29), Archambault J stated (at paras. 30, 32, 34):
[T]he CRA is confusing the nature of the amount paid with the method of its calculation… .
Linking the remuneration of Mr. Castonguay to the sales of products produced by virtue of the work carried out at the Research Centre ensured that the R&D work was relevant to the mission of Oldcastle, being the realization of profits from goods fulfilling market needs.
The amounts paid did not constitute remuneration for the sale of Oldcastle products because the work of Mr. Castonguay was not the sale of products but, rather, development at the Research Centre of new products, the improvement of products and the discovery of new processes.
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(9) - Paragraph 2900(9)(c) | sales-based remuneration was not bonus | 320 |
| Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(9) - Paragraph 2900(9)(d) | percentage of net sales was not based on profits | 345 |
Feedlot Health Management Services Ltd. v. The Queen, 2015 TCC 32
The taxpayer, a veterinary consulting firm, undertook four research projects to test new diets, supplements, and vaccines on cattle, and paid feedlot operators to perform these protocols. The 7000 cattle used in testing by the operators were, apart from the test protocols, raised for commercial production on behalf of their owners. The Minister disallowed scientific research and experimental development credits respecting over $1.6 million paid by the taxpayer to one of the farms ("Jim Farms"), for costs incurred by Jim Farms for feeding the cattle, on the basis that Jim Farms was not engaged in SRED and none of the "proxy" provisions in s. 37(8)(a)(ii)(B) applied.
Woods J allowed the taxpayer's appeal, finding that the amounts paid to Jim Farms were "in respect of" the prosecution of research undertaken on the taxpayer's behalf, bringing them within s. 37(8)(a)(ii)(B)(II). Jim Farms' work was not SRED because it was performed "with respect to" the commercial use of a new process (i.e. the feeding protocols), and therefore was caught by the exclusion in para. (i) of s. 248(1) - "scientific research and experimental development," an exception which also applies to work by third parties (para. 80). However, although the work was not for SRED, the words "in respect of" also import the meaning "in relation to" (para. 62, citing Savage), and the work related to the taxpayer's own SRED.
Subclause (I) did not apply. The contracts between the taxpayer and Jim Farms gave the taxpayer considerable control over the cattle, including transporting and marketing decisions (so as to ensure that testing was not disrupted), but they were not "leases" of the cattle, as they did not confer an exclusive right of possession (paras. 43-44).
Woods J also rejected the taxpayer's argument that subclause (II) could apply even where there is no contract for third-party SRED (para. 68).
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | feed for cattle to be used for beef after SR&ED testing was excluded | 220 |
Subclause (8)(a)(ii)(B)(IV)
See Also
Béton mobile du Québec Inc. v. The Queen, 2019 TCC 278
The taxpayer (BMQ) used mobile concrete mixers to provide concrete at the site of construction or major repair projects. BMQ, which had made a proxy election under s. 37(8)(a)(ii)(B), included the payroll costs of the supervisor, manager and persons analyzing the results of the R&D projects as employees “directly engaged” in the SR&ED for purposes of s. 37(8)(a)(ii)(B)(IV). In accepting this approach, Lafleur J stated (at para. 70, TaxInterpretations translation):
[T]he manager or supervisor who manages the conduct of the SR&ED and the employee who analyzes the results will be considered to be directly engaged in SR&ED. The same will be true for such a manager or supervisor with respect to the time he or she devotes to various tasks that have a direct impact on the SR&ED activities, such as planning the experiment, as well as researching the information required for the proper conduct of the SR&ED project. However, more general supervisory or management activities, as well as second or third level management or supervision, will generally not be considered in this regard.
And (at para. 304, respecting one of the projects):
[T]he hours spent in discussions with a customer or supplier to conduct tests or to attempt to formulate a mixture to be related to arranging the tests or modifying the mixtures; these are activities that directly affect the conduct of the SR&ED.
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | there can be reasonable certainty as to a successful outcome if the means of achieving it are uncertain | 463 |
Paragraph 37(8)(c)
See Also
PSC Elstow Research Farm Inc v. The Queen, 2009 DTC 168, 2008 TCC 694
The taxpayer, which engaged in research as to techniques for maximizing the yield from pig farming operations and, consequently, derived significant revenues from the sale of pigs, deducted such revenues from its expenses in its financial statements.
The only business of the taxpayer was its research business (so that it did not have another business of a commercial pig farm). Furthermore, even if the proceeds of sale of pigs should be taken into account (rather than their deduction from expenses being accepted), such proceeds of sale would still be derived from the taxpayer's research activities, so that it satisfied the "substantially all of its revenue" test in s. 37(8)(c).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) | amounts for unrelated projects were not "received" | 62 |
| Tax Topics - Income Tax Act - Section 127 - Subsection 127(19) | 53 |
Administrative Policy
7 May 1991 T.I. (Tax Window, No. 3, p. 30, ¶1244)
Where a corporate partnership is conducting scientific research and experimental development, s. 37(7)(e) will be applied at the partnership level rather than at the level of the corporate partners.
28 December 1989 Memorandum (May 1990 Acess Letter, ¶1213)
Royalties earned by a taxpayer whose business consists of carrying out SR&ED on its own behalf and licensing the results, meets the revenue test in s. 37(7)(e).
18 December 1989 Memorandum (May 1990 Acess Letter, ¶1212)
Each expenditure made by a single-purpose corporation must still meet the requirements of being incurred for scientific research and experimental development as set out in ss.37(1)(a) or 37(1)(b)(i).
Paragraph 37(8)(d)
Administrative Policy
5 June 2000 External T.I. 2000-0010615 F - Developpement d'un equipement - RS&DE
A Canadian corporation, carrying on business in Canada and incurring expenses related to SR&ED activities, incurred expenses related to those activities to develop equipment for internal use by it.
After noting that the corporation would be required to allocate the costs of the equipment between SR&ED and commercial activities, the Agency went on to indicate that labour, subcontracting, and materials expenses of a current nature relating to SR&ED activities that were "expenditures on or in respect of scientific research and exterior experimental development" as defined in s. 37(8)(a) to develop equipment that would be used 90% or more in the research laboratory and for equipment considered to be multi-purpose equipment, would qualify as current expenses for the purposes of s. 37 and for the calculation of the investment tax credit.
26 September 1991 T.I. (Tax Window, No. 10, p. 8, ¶1481)
S.37(7)(f)(iii)(B) does not have the effect of excluding payments made to a corporation described in s. 149(1)(j) which deals at arm's length with the taxpayer.
90 C.P.T.J. - Q.16
Additions and alterations to an existing building come within the exclusion in s. 37(7)(f)(i) because "building" includes any additional alteration to an existing building.
1990 Answers of the Scarborough District Office (May 1990 Acess Letter, ¶1200, Q. 7)
Capital expenditures made in respect of refurbishing or renovating a pre-existing building are considered non-qualifying expenditures in respect of "the acquisition of a building" for purposes of s. 37(7)(f)(i).
Subsection 37(10) - Time for election
Cases
Advanced Agricultural Testing Inc. v. The Queen, 2009 DTC 687, 2009 TCC 190
The taxpayer was precluded from revoking his election to use the proxy method for his 1995 to 1998 taxation years. Subsection 37(1) was not referred to in Regulation 600.
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Scientific Research & Experimental Development | 50 |
Subsection 37(11) - Filing requirement
Cases
Westsource Group Holdings Inc. v. Canada, 2018 FCA 57
The Minister denied SR&ED tax credits claimed by the taxpayer (“Westsource”) for a project for the failure of Westsource to comply with ss. 37(11) and s. (12) on the basis that boxes 240, 242 and 244 of the prescribed form (T661) filed by it were left blank, and those boxes addressed the key legislative requirements of technological advancement and uncertainty, and systematic investigation.
Woods JA dismissed the appeal, finding that “the legislation is clear that prescribed information includes information necessary to determine whether the activity qualifies as SR&ED” (para 7). Woods JA further found that while there is a “legislative objective of encouraging research and development activities … another objective is to facilitate tax administration by denying the tax incentives if the filing requirement has not been satisfied.” (para 8).
In rejecting the taxpayers argument that the Minister was already in possession of the relevant information as a corporation related to Westsource had participated in the same project, and that its claims for this project had been accepted by the Minister (and the taxpayer, Woods JA stated that “[t]he information must be provided by the taxpayer on the prescribed form (para 11).”
AFD Petroleum Ltd. v. Canada (Attorney General), 2016 FC 547
On December 31 2013, the Applicant requested that its 2012 corporate income tax return be amended to include a claim for SR&ED expenditures, but submitted only 2 pages of the 7 page Form T661. CRA denied the request since the prescribed information was not filed within 12 months after the due date for filing the T2 tax return: lines 244 and 242 were missing which dealt with the technological obstacles and uncertainties the Applicant faced and what work was performed to overcome them to achieve the technological advancements described in line 240.
Boswell J denied the Applicant’s application for judicial review of CRA’s rejection of its SR&ED claim for its 2012 tax year, stating (at paras. 26-7):
The Applicant mischaracterizes the missing information as being just “two missing lines.” The questions at lines 242 and 244 of Part 2 of Form T661 contemplate responses of up to a maximum of 350 and 700 words, respectively. ...
As to the Applicant's argument that the missing information was already filed with CRA in connection with its 2013 SR&ED claim and should have been utilized for purposes of its 2012 claim… [i]t is significant that Form T661 specifically requests information in relation to only the one tax year for which the SR&ED claim is made. …[T]echnological obstacles and uncertainties … could readily change from one year to the next.
The CRA rejection occurred after the period for the Applicant to object to as assessment of its 2012 taxation year had expired; it effectively had no recourse to the rejection. Boswell J accepted the Crown’s submission (at para. 31) that “the Applicant's SR&ED claim for its 2012 taxation year was made by way of an amendment to its T2, and that the Minister cannot be compelled to consider such a request,” and concluded (at para 33) that the CRA had not been procedurally unfair because the Applicant could have filed the Form some 12 months earlier than it did when it filed its income tax return for 2012 and thus still have had time to appeal (so that CRA had not deprived the Applicant of any procedural rights).
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|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) | CRA cannot be compelled to consider a request to amend a return | 163 |
See Also
Toronto Dominion Bank v. B.C. (Commissioner of Income Tax), 2017 BCCA 159
The taxpayer (TD) made an unsuccessful submission that because a taxation year ends on the very last instant of the year, a B.C. provision requiring TD to file a return “within 18 months after the end of [its] taxation year” ending on October 31, 2012 was satisfied by delivering its return on May 1, 2014 rather than the previous day.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Interpretation Act - Section 27 - Subsection 27(4) | filing deadline period started being counted from the day following the year end | 271 |
| Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2) | Commissioner improperly restricted herself to applying only the published guidelines on extending a return-filing deadline | 293 |
1373744 Ontario Inc. o/a One Source Metal v. The Queen, 2009 DTC 1884, 2009 TCC 511 (Informal Procedure)
Although the taxpayer filed its form T-661 on a timely basis for its 2005 taxation year (i.e. by March 31, 2007), on balance of probabilities it appeared that a technical report was not filed by it or its representative until shortly after April 10, 2007, with the result that the taxpayer's claim was denied.
Administrative Policy
3 March 2008 External T.I. 2007-0226201E5 F - RS&DE - Formulaires et renseignements prescrits
A parent corporation ("XYZ") performs work on behalf of its wholly-owned subsidiary ("ABC"). Since XYZ applied s. 37(13) regarding this work, it is deemed to be SR&ED work of XYZ that entitles XYZ to claim a deduction pursuant to s. 37(1) and investment tax credits pursuant to s. 127(5). ABC either failed to include in the prescribed forms (being Form T661, as well as Form T1263 and either Schedule T2SCH31 or Form T2038(IND)) certain information relating to the SR&ED performed by XYZ on its behalf, or failed to file those forms within the prescribed time.
CRA stated:
For ABC, those deficiencies mean that an expenditure that would otherwise be deductible pursuant to subsection 37(1) generally remains deductible as a current expense pursuant to subsection 9(1), whereas capital expenditures are included in a depreciation class. Based on the facts you have submitted to us, ABC could not claim ITCs in respect of those activities. However, ABC's failures would not necessarily invalidate XYZ's claim, either for the deduction of expenses under section 37 or for ITCs under subsection 127(5). Indeed, the Canada Revenue Agency could accept XYZ's claim if, from information provided by ABC or XYZ in the prescribed forms, it can conclude that the work performed by XYZ on behalf of ABC relates to work performed by ABC that falls within paragraphs (a), (b) or (c) of the definition of "SR&ED".
Subsection 37(13)
Administrative Policy
30 July 2004 External T.I. 2004-0063811E5 F - Soutien administratif à une filiale
A subsidiary, which carries out SR&ED work on its own behalf and on behalf of its parent, uses the proxy method under s. 37(8)(a)(ii)(B. Before discussing whether the parent (whose employees performed administrative support tasks directly related to the SR&ED performed by the subsidiary) deduct, pursuant to s. 37(1)(a), the expenditures for such administrative support using the traditional method under s. 37(8)(a)(ii)(A), CRA stated:
[E]ven if tasks are not SR&ED of a taxpayer, they may qualify as SR&ED of the taxpayer pursuant to subsection 37(13) if the taxpayer performs those tasks for a person or partnership, at a time when they are not dealing with each other at arm's length, as long as those tasks would be SR&ED if they were performed by the person or partnership. For example, administrative support tasks in respect of the activities of a subsidiary of a taxpayer would not be considered to be SR&ED of the taxpayer because the condition in paragraph 37(13)(b) is not satisfied since the administrative support tasks would not be SR&ED of the subsidiary (as defined in subsection 248(1)) if they were performed by the subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(A) | parent can use traditional method while subsidiary uses proxy method | 280 |