Application Policy

NUMBER: SR&ED 95-05
DATE: September 19, 1995
SUBJECT: SR&ED Capital Expenditures - Retroactive deductions under subsection 37(1)

Issue

The purpose of this application policy is to clarify the Department's position when a retroactive deduction under subsection 37(1) of the Income Tax Act (Act) is requested in respect of a capital expenditure.

Background

Such retroactive deductions are requested where a taxpayer is seeking an increase in investment tax credits (ITCs) in respect of a SR&ED capital expenditure incurred in a statute-barred year to offset federal taxes otherwise payable in an open year. In these situations, the taxpayer requests that either the full cost, or a portion of the cost represented by the undepreciated balance of the asset, be included in the subsection 37(1) pool.

Before February 22, 1994, a taxpayer had to file a T661 form with the return of income for a taxation year in order to make a deduction under subsection 37(1) for that year in respect of SR&ED expenditures incurred at any time. Therefore, a capital expenditure that met certain requirements could be deducted under the subsection 37(1) pool even if it was acquired several years before the deduction was made.

Prior to February 22, 1994, where it was concluded that ITC could be earned in respect of a capital expenditure, that expenditure would also be eligible for inclusion in the subsection 37(1) pool. However, subsection 4(4) precludes a deduction in respect of an amount that was previously deducted. Consequently, the taxpayer would only be allowed to deduct a capital expenditure, or a portion thereof , under subsection 37(1) to extent that the amount of the expenditure was not previously deducted via capital cost allowance (CCA).

Application Policy

The determination of the portion of the amount of capital expenditure, if any, previously deducted may present numerous administrative problems since other assets purchased over several years can be included in the CCA class, the full amount of CCA in each year may not have been deducted, etc. Therefore, the Department is only prepared to accept that portion of the amount of capital expenditure which the taxpayer can clearly demonstrate was not previously deducted as CCA for purposes of subsection 37(1). Prorations of CCA deducted to assets in a class on a reasonable basis should be accepted.

Bill C-59, tabled on November 24, 1994, introduced changes to subsection 37(1). These changes placed a restriction on the length of time a taxpayer has to identify expenditures on the T661 form for purposes of making a deduction under subsection 37(1). After February 21, 1994, a taxpayer has from the later of:

• the date the tax return for the subsequent taxation year following the year in which the expenditure was incurred is required to be filed (i.e. 18 months for corporations that do not have short taxation years); and
• June 25, 1995.

These changes will effectively eliminate any issues regarding retroactive deductions under subsection 37(1) in respect of capital expenditures, since any taxation years that could be affected by a retroactive deduction will be open to reassessment (i.e., not statute-barred).

This Directive cancels the procedure in paragraph 3. (b) in the October 22, 1990 memorandum entitled "Processing of Incomplete Scientific Research &Experimental Development (SR&ED) Claims - Refundable Program".

Marcel Clément
Interim Director/Directeur intérimaire
Specialized Compliance Enhancement Division
/Division du renforcement de l'observation dans des secteurs spécialisés

Issued by: Tax Incentive Audit Section and Scientific Research Section