GL-03 - Guidelines for Compliance with the Radio Authorization Condition of Licence Relating to Research and Development

Issue 2
April 2007

Spectrum Management and Telecommunications

Guideline

Contents

1. Introduction
   • 1.1 Definitions
   • 1.2 Background
     
     
2. The Condition of Licence Relating to R&D
   • 2.1 General
     
     
3. Definition of R&D
   • 3.1 The Canada Revenue Agency Definition
   • 3.2 Industry Canada and R&D
     
     
4. Reporting Process
   • 4.1 Reporting Requirements Under the Radio Authorizations
   • 4.2 Reporting Procedures
     
     
5. Transferability and Divisibility of Spectrum Licences

• Appendix A - Revenue Canada Provisions
  
  
• Endnotes
  
  

1. Introduction

1.1 Definitions

In these guidelines,

Adjusted gross revenues means total service revenues less inter-carrier payments, bad debt, third-party commissions, and provincial and goods and services taxes collected.

Audited financial statements means financial statements prepared in accordance with the standards, as amended from time to time, of the Canadian Institute of Chartered Accountants set out in the C.I.C.A. Handbook.

Auditor's report means an auditor's report prepared in accordance with the standards, as amended from time to time, of the Canadian Institute of Chartered Accountants set out in the C.I.C.A. Handbook.

College means a college that has been approved by the Minister of National Revenue for purposes of section 37 of the Income Tax Act, R.S.C. (1985) (5th supp.) c. 1, as amended. More specifically, for purposes of subparagraph 37(1)(a)(ii)(B) of the Income Tax Act, all Canadian affiliated colleges are considered to be "approved".

Licensee means a wireless telecommunications carrier who has been granted a radio authorization pursuant to the Radiocommunication Act, R.S.C., (1985) c. R-2, as amended.

Minister means the Minister of Industry.

OECD means Organization for Economic Cooperation and Development.

Radio authorization means a licence, certificate or authorization issued by the Minister under paragraph 5(1)(a) of the Radiocommunication Act, R.S.C., (1985) c. R-2, as amended.

Radiocommunication carrier means a radiocommunication carrier as defined in section 2 of the Radiocommunication Regulations.

SME means small and medium-sized enterprises. More specifically, Statistics Canada defines an SME as having fewer than 500 full-time equivalent employees and less than $50 million in annual revenue.

Spectrum licence means a spectrum licence as defined in section 2 of the Radiocommunication Act, R.S.C. (1985) c. R-2, as amended.

SR&ED means Scientific Research and Experimental Development as found in the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended, in the Income Tax Regulations, in the Interpretation Bulletin and in the Information Circular on Scientific Research and Experimental Development issued by the Canada Revenue Agency.

University means a university that has been approved by the Minister of National Revenue for purposes of section 37 of the Income Tax Act, R.S.C. (1985) (5th supp.) c. 1, as amended. More specifically, for purposes of subparagraph 37(1)(a)(ii)(B) of the Income Tax Act, all Canadian universities are considered to be "approved".

Wireless telecommunications means the emission, transmission or reception of intelligence by radio or another electromagnetic system.

1.2 Background

The policy objectives adopted by Canada with respect to telecommunications are set out in section 7 of the Telecommunications Act.(footnote 1) The Minister in exercising his authority to issue radio authorizations to wireless telecommunications carriers, as conferred on him by section 5 of the Radiocommunication Act, (footnote 2) has due regard to these objectives. (footnote 3) One of the objectives is "to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services". (footnote 4)

To help meet this objective, the Minister has issued certain radio authorizations which have, as a condition of licence, the requirement to invest a percentage of the licensees' adjusted gross revenues in wireless research and development (R&D). These licensees must provide Industry Canada with an annual report which includes an audited statement of R&D expenditures for the fiscal year covered by the report and a description of the R&D activities. Eligible R&D activities are those which meet the definition for SR&ED adopted by the Canada Revenue Agency in the Income Tax Act. (footnote 5)

The guidelines put forward in this document were developed to clearly describe the types of methods by which licensees can invest in order to satisfy their obligations under the condition of licence relating to R&D. In order to facilitate compliance and ensure consistency of reporting, these guidelines also set out the procedures to be followed by the licensees in reporting on these investments in R&D to Industry Canada.

2. The Condition of Licence Relating to R&D

2.1 General

The condition of licence relating to R&D is currently found on many spectrum licences. The exact wording varies slightly. Most of these licences require that licensees invest a minimum of 2% of their adjusted gross revenues, averaged over a number of years, on eligible R&D expenses. Licensees should refer to their conditions of licence for the specific obligations. Spectrum licences and their licence conditions can be viewed on the Spectrum Management and Telecommunication website http://strategis.ic.gc.ca/spectrum.

3. Definition of R&D

3.1 The Canada Revenue Agency Definition

SR&ED is defined in the Income Tax Act. (footnote 6) The relevant provisions of the Income Tax Act appear in Appendix A of these guidelines. This definition was derived from that adopted by the Organisation for Economic Co-operation and Development (OECD) (of which Canada is a member) to measure scientific and technical activities. The OECD defines R&D as comprising of creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications. This work may take the form of basic research, applied research or experimental development. (footnote 7)

The Canada Revenue Agency (CRA) requires that a systematic investigation or search be carried out in the field of science or technology by means of experiment or analysis. Further, the CRA provides incentives, in the form of income tax credits and income tax deductions for taxpayers to undertake SR&ED. (footnote 8)

It should be noted that Industry Canada's use of the CRA definition for purposes of its condition of licence relating to R&D is entirely without prejudice to the Agency's interpretation and application of its provisions to claims for tax deductions and/or tax credits. In accepting the licensees' reports on their R&D investments, Industry Canada is not making a determination that the Canada Revenue Agency will accept these expenditures as eligible for tax deductions and/or tax credits for SR&ED. Licensees interested in ensuring that their investments in R&D are eligible for these tax deductions and/or tax credits should consult the provisions of the Income Tax Act, (footnote 9) Income Tax Regulations, Interpretation Bulletin (footnote 10) and Information Circular (footnote 11) relating to SR&ED and Canada Revenue Agency staff.

3.2 Industry Canada and R&D

Industry Canada has stated that eligible R&D activities under the condition of licence are those which meet the definition adopted by the Canada Revenue Agency. The following sections set out the methods by which investments in these activities can be effected by the licensees in order to comply with their condition of licence relating to R&D. These methods accord with the methods recognized by the Canada Revenue Agency in its own provisions. More particularly, activities such as third-party payments to approved associations, educational institutions or organizations are accepted as meeting the requirements of the condition of licence even where the licensee does not control the R&D that is being performed and does not have the right to exploit the results of that R&D. However, Industry Canada requires that the R&D be related to telecommunications.

3.2.1 In-house R&D

The first method by which licensees may invest all or part of their required percentage of adjusted gross revenues is on in-house R&D. In-house R&D consists of eligible R&D activities, as described in Section 3.2 above, that are performed directly by the licensee. The licensee has the right to exploit the results of those activities.

3.2.2 R&D Performed Under Contract

The second method by which licensees may invest all or part of their required percentage of adjusted gross revenues is on R&D performed under contract. This R&D consists of eligible R&D activities, as described in Section 3.2 above, that are performed on behalf of the licensee by an association, educational institution, profit or non-profit corporation. The licensee has the right to exploit the results of those activities.

3.2.3 Funding for Eligible R&D Centres

The third method by which licensees may invest all or part of their required percentage of adjusted gross revenues is by providing funds to eligible non-profit research centres that conduct eligible R&D activities, described in Section 3.2 above. The licensee is not required to have the right to exploit the results of those activities.

To be deemed eligible by Industry Canada to receive funds from the licensees, the R&D centres must have the following characteristics: 

1. they must be non-profit organizations;
   
   
2. their principal mandate must be to conduct R&D including, but without being limited to, R&D into wireless telecommunications;
   
   
3. they must have a formal process in place to evaluate projects to determine if they fall within the mandate of the organization;
   
   
4. they must have a formal process in place to grant approval for projects to be undertaken; and
   
   
5. they must have a formal process in place to ensure that the funds received from the licensees are expended only on the approved R&D projects.

3.2.4 Funding for University Research

The fourth method by which licensees may invest all or part of their required percentage of adjusted gross revenues is by providing funds for eligible R&D activities, as described in Section 3.2 above, to be performed at universities. The licensee is not required to have the right to exploit the results of those activities.

Under this method and for the purposes of the condition of licence relating to R&D, activities will be deemed eligible R&D activities only if they are performed at universities.

3.2.5 Partnerships With Small and Medium-sized Enterprises (SMEs)

The fifth method by which licensees may invest all or part of their required percentage of adjusted gross revenues is by entering into partnerships with SMEs that undertake eligible R&D activities, described in 3.2 above. The licensee is not required to have the right to exploit the results of those activities.

3.2.6 Eligible Investments in R&D

For purposes of compliance with Industry Canada's condition of licence relating to R&D, the type of expenditure is a material consideration but where the R&D was performed is not relevant. To be deemed an investment for the purpose of compliance with Industry Canada's condition of licence relating to R&D, an expenditure must be a current or a capital expenditure of the type that would be taken into account by the Canada Revenue Agency when assessing eligibility for a tax deduction and/or a tax credit for SR&ED. Information on SR&ED tax credits can be obtained from the Canada Revenue Agency website at: http://www.cra-arc.gc.ca/taxcredit/sred/menu-e.html.

4. Reporting Process

4.1 Reporting Requirements Under the Radio Authorizations

Reporting requirements relating to investments made in R&D apply to certain spectrum licences and can be found in the licence conditions appended to these licences. Except for satellite services (who have different reporting requirements) all spectrum licensees must submit an annual report within 120 days of their fiscal year-end, for each year of the term of their licence indicating continued compliance with all licence conditions. This annual report must include an audited Statement of R&D expenditures.

4.2 Reporting Procedures

To clarify these general reporting requirements, the following procedures have been established for each eligible method of investment in R&D. Licensees are required to follow these procedures to ensure consistency of reporting among all licensees. R&D reports should provide a break-down of R&D projects by method of investment (e.g. in-house, under contract, etc.) and an indication of how much investment was made in each category.

4.2.1 In-house R&D

For in-house R&D, licensees will provide, on an annual basis and in accordance with the reporting requirements contained in their respective radio authorizations, audited financial statements including an audited Statement of R&D Expenditures with an accompanying Auditor's Report, prepared in accordance with the same standards of reporting.

4.2.2 R&D Performed Under Contract

For R&D performed under contract, licensees will provide, on an annual basis and in accordance with the reporting requirements contained in their respective radio authorizations, audited financial statements including an audited Statement of R&D Expenditures with an accompanying Auditor's Report, prepared in accordance with the same standards of reporting.

4.2.3 Funding for Eligible R&D Centres

For funding for eligible R&D centres, licensees will provide, on an annual basis and in accordance with the reporting requirements contained in their respective radio authorizations, audited financial statements including an audited Statement of R&D Expenditures with an accompanying Auditor's Report, prepared in accordance with the same standards of reporting.

4.2.4 Funding for University and College Research

For funding for university and college research, licensees will provide, on an annual basis and in accordance with the reporting requirements contained in their respective radio authorizations, audited Financial Statements including an audited Statement of R&D Expenditures with an accompanying Auditor's Report, prepared in accordance with the same standards of reporting.

In addition, licensees will provide a statement with an attestation, signed by a duly authorized officer of the licensee, documenting the fact that the licensee has chosen to fund eligible R&D activities at a university or college.

4.2.5 Partnerships with SMEs

For partnerships with SMEs, licensees will provide, on an annual basis and in accordance with the reporting requirements contained in their respective radio authorizations, audited financial statements including an audited Statement of R&D Expenditures with an accompanying Auditor's Report, prepared in accordance with the same standards of reporting.

In addition, licensees will provide a statement with an attestation, signed by a duly authorized officer of the licensee, documenting the fact that the licensee has chosen to enter into partnerships with SMEs that undertake eligible R&D activities.

5. Transferability and Divisibility of Spectrum Licences

Many spectrum licences are transferable and divisible. For further information consult Industry Canada's policy document relating to the band in question.

When a spectrum licence is transferred or divided, the condition of licence relating to R&D continues to apply for the remainder of the term of the licence. Licensees should refer to the conditions of licence for the specific obligations relating to transferability and divisibility.

Appendix A - Revenue Canada Provisions

Definition

Pursuant to section 37 of the Income Tax Act, R.S.C. (1985) (5th supp.), c. 1, as amended, the Canada Revenue Agency provides incentives, in the form of income tax credits and income tax deductions for taxpayers to undertake SR&ED. SR&ED is defined in subsection 248(1) as follows:

• ...scientific research and experimental development means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is
  
  

1. basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
2. applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
3. experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,
   
   

• and, in applying this definition in respect of a taxpayer, includes

4. work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research where the work is commensurate with the needs, and directly in support, of the work described in paragraph (a), (b) or (c) that is undertaken in Canada by or on behalf of the taxpayer,
   
   

• but does not include work with respect to

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

• ...

Eligible SR&ED Activities

According to subsection 248(1) of the Income Tax Act, basic research, applied research and experimental development as defined are considered activities that are eligible for tax deductions and/or tax credits since they are SR&ED. Ancillary activities such as engineering and design which support these activities are also eligible for these tax incentives. However, activities such as market research or sales promotion are not eligible for these tax incentives.

The CRA has developed technical guidelines that reflect its interpretation of these provisions. For precise information on this interpretation and to determine eligibility for tax deductions and/or tax credits consult the CRA's, Information Circular 86-4R3 dated May 24, 1994 and entitled Scientific Research and Experimental Development and Interpretation Bulletin IT-151R5 dated October 17, 2000 and entitled Scientific Research and Experimental Development Expenditures.

Eligible Methods of Investment in SR&ED

Paragraph 37(1)(a) of the Income Tax Act, R.S.C. (1985, c.1) (5th supp.) as amended, sets out how eligible expenditures for tax deductions and/or credits can be effected.

• ...

1. on scientific research and experimental development carried on in Canada, directly undertaken by or on behalf of the taxpayer, and related to a business of the taxpayer,
   (i.1) by payments to a corporation resident in Canada to be used for scientific research and experimental development carried on in Canada that is related to a business of the taxpayer, but only where the taxpayer is entitled to exploit the results of that scientific research and experimental development,
2. by payments to
   1. an approved association that undertakes scientific research and experimental development,
   2. an approved university, college, research institute or other similar institution,
   3. a corporation resident in Canada and exempt from tax under paragraph 149(1)(j), or
   4. (as repealed)
   5. an approved organization that makes payments to an association, institution or corporation described in any of clauses (a) to (c) to be used for scientific research and experimental development carried on in Canada that is related to a business of the taxpayer, but only where the taxpayer is entitled to exploit the results of that scientific research and experimental development, or
3. where the taxpayer is a corporation, by payments to a corporation resident in Canada and exempt from tax because of paragraph 149(1)(j), for scientific research and experimental development that is basic research or applied research carried on in Canada
   1. the primary purpose of which is the use of results therefrom by the taxpayer in conjunction with other scientific research and experimental development activities undertaken or to be undertaken by or on behalf of the taxpayer that relate to a business of the taxpayer, and
   2. that has the technological potential for application to other businesses of a type unrelated to that carried on by the taxpayer

• ...

This is only a short review of the CRA provisions dealing with the methods of investment in SR&ED that are eligible for tax incentives. For more detailed information and directives on these provisions, the CRA should be consulted.

Endnotes

1. The Telecommunications Act, 1993 c. 38, as amended

   7. It is hereby affirmed that telecommunications performs an essential role in the maintenance of Canada's identity and sovereignty and that the Canadian telecommunications policy has as its objectives

   1. to facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions;
   2. to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada;
   3. to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;
   4. to promote the ownership and control of Canadian carriers by Canadians;
   5. to promote the use of Canadian transmission facilities for telecommunications within Canada and between Canada and points outside Canada;
   6. to foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective;
   7. to stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services;
   8. to respond to the economic and social requirements of users of telecommunications services; and
   9. to contribute to the protection of the privacy of persons.
   
   
   
2. The Radiocommunication Act, R.S., 1985 c. R-2, as amended

   5.(1) Subject to any regulations made under section 6, the Minister may, taking into account all matters that the Minister considers relevant for ensuring the orderly establishment or modification of radio stations and the orderly development and efficient operation of radiocommunication in Canada,

   1. issue
      1. radio licences in respect of radio apparatus,
         i.1) spectrum licences in respect of the utilization of specified radio frequencies within a defined geographic area,
      2. broadcasting certificates in respect of radio apparatus that form part of a broadcasting undertaking,
      3. radio operator certificates,
      4. technical acceptance certificates in respect of radio apparatus, interference-causing equipment and radio-sensitive equipment, and
      5. any other authorization relating to radiocommunication that the Minister considers appropriate,

      and may fix the terms and conditions of any such licence, certificate or authorization including, in the case of a radio licence and a spectrum licence, terms and conditions as to the services that may be provided by the holder thereof;

   2. amend the terms and conditions of any licence, certificate or authorization issued under paragraph (a);
   3. make available to the public any information set out in radio licences or broadcasting certificates;
   4. establish technical requirements and technical standards in relation to
      1. radio apparatus,
      2. interference-causing equipment, and
      3. radio-sensitive equipment,

      or any class thereof;

   5. plan the allocation and use of the spectrum;
   6. approve each site on which radio apparatus, including antenna systems, may be located, and approve the erection of all masts, towers and other antenna-supporting structures;
   7. test radio apparatus for compliance with technical standards established under this Act;
   8. require holders of, and applicants for, radio authorizations to disclose to the Minister such information as the Minister considers appropriate respecting the present and proposed use of the radio apparatus in question and the cost of installing or maintaining it;
   9. require holders of radio authorizations to inform the Minister of any material changes in information disclosed pursuant to paragraph (h);
   10. appoint inspectors for the purposes of this Act;
   11. take such action as may be necessary to secure, by international regulation or otherwise, the rights of Her Majesty in right of Canada in telecommunication matters, and consult the Canadian Radio-television and Telecommunications Commission with respect to any matter that the Minister deems appropriate;
   12. make determinations as to the existence of harmful interference and issue orders to persons in possession or control of radio apparatus, interference-causing equipment or radio-sensitive equipment that the Minister determines to be responsible for the harmful interference to cease or modify operation of the apparatus or equipment until such time as it can be operated without causing or being affected by harmful interference;
   13. undertake, sponsor, promote or assist in research relating to radiocommunication, including the technical aspects of broadcasting; and
   14. do any other thing necessary for the effective administration of this Act.
       
       
3. 5 (1.1) of the Radiocommunication Act allows the Minister of Industry to take into account Canada's telecommunication policy:
   In exercising the powers conferred by subsection (1), the Minister may have regard to the objectives of the Canadian telecommunications policy set out in section 7 of the Telecommunications Act.
   
   
4. Ibid., endnote 1 at paragraph 7(g).
   
   
5. Income Tax Act, R.S.C. (1985, c.1) (5^th supp.) as amended.
   
   
6. Income Tax Act, R.S.C. (1985, c.1) (5^th supp.) subsection 248(1), as amended by the Income Tax Amendments Act, 1997, S.C., c. 19, ss. 239(1).
   
   
7. Organization for Economic Co-operation and Development, Frascati Manual 2002: The Measurement of Scientific and Technological Activities: Proposed Standard Practice for Surveys on Research and Experimental Development, Sixth Edition, Paris, at chap. 2.
   
   
8. Ibid., endnote 6 at s. 37.
   
   
9. Ibid., endnote 6.
   
   
10. Canada Customs and Revenue Agency Interpretation Bulletin IT-151R5, Scientific Research and Experimental Development Expenditures, October 17, 2000.
    
    
11. Revenue Canada Information Circular IC86-4R3, Scientific Research and Experimental Development, May 24, 1994.