Tax Court of Canada rulings have made it more difficult to clearly define what constitutes “government assistance.”
How is “government assistance” defined?
The SR&ED Glossary
Government assistance is defined in the Income Tax Act (ITA)1 as assistance from a government, municipality, or other public authority, whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance, or any other form of assistance other than the federal investment tax credit (ITC).
Government assistance also includes assistance provided by a crown corporation or a foreign government.2
The Assistance and Contracts Payments Policy
“Government assistance” is defined in the ITA as assistance from a government, municipality, or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance, or any other form of assistance other than the federal investment tax credit (ITC).
Although consideration should also be given to the nature of the functions performed by an entity, a public authority is generally an entity that:
- has a duty to the public;
- is subject to a significant degree of government control; and,
- uses its profits for the benefit of the public
Government assistance also includes assistance provided by a crown corporation or a foreign government.
Paragraph 12(1)(x) of the ITA and related provisions concerning government assistance also apply to claimants who receive assistance indirectly from a government organization after February 23, 1998, unless the assistance was received before 1999 under an agreement in writing that was made before February 24, 1998. This includes assistance received from a non-profit entity that, in turn, receives its funding from a government organization.3
4.2.1 Factors used to determine whether an amount is assistance 4
Determining whether an amount received by a claimant is assistance will depend on the particular facts of the case. An analysis is required of all circumstances relating to the payment to determine if the amount is to be treated as assistance. The following describes some factors that may distinguish assistance from other types of payments. None of the following is in itself conclusive:
- The absence of firm terms of repayment on a loan could indicate that the amount received is not a loan, but is assistance. For example, if an amount received is only repayable conditionally upon the claimant meeting certain revenue expectations, then it is likely assistance, not a loan.
- A review of the facts indicates that the repayments are not mandatory and the amount given is to be used for SR&ED. An example would be the case of a grant by a government department to a claimant to purchase equipment for SR&ED.
- The absence of a business motive on the part of the payer may indicate that the claimant is in receipt of assistance. In the CCLC Technologies Inc. decision (96 DTC 6527),5
the Federal Court of Appeal allowed the Crown’s appeal and ruled that the payments made by the province of Alberta to the claimant constituted both “government assistance” (see section 4.1.1) and “any other form of assistance.” The terms of the agreement did not establish an ordinary business relationship, since the payments were not made to advance the business interest of the payer or to acquire an interest in the property.
- To the extent that a government is not making an ordinary commercial investment for the contributions that it makes to a claimant, the government would be providing assistance as per the definition of “government assistance”. In the Radio Engineering Products Limited decision (73 DTC 5071), the Federal Court held that the character of the payment from the Department of Defence Production was that of a contribution to the costs of the project, and although there were provisions for repayment and contingencies, it was not a loan or an advance in the nature of a loan of capital or a payment on a capital account.
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- Justice Laws Website. (July 1, 2017.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). (Accessed: September 3, 2017.) Retrieved from: http://laws.justice.gc.ca/eng/acts/I-3.3/. ↩
- Government of Canada. (July 15, 2015.) SR&ED Glossary. (Accessed: September 3, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#gvrnmntss. ↩
- Government of Canada. (December 18, 2014.) Assistance and Contract Payments Policy. (Accessed: September 3, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/assistance-contract-payments-policy.html#s4_1_1. ↩
- Government of Canada. (December 18, 2014.) Assistance and Contract Payments Policy. (Accessed: September 3, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/assistance-contract-payments-policy.html#s4_2_1. ↩
- Federal Court of Appeal. (September 19, 1996.) Canada v. CCLC Technologies Inc. (Accessed: September 3, 2017.) Retrieved from: http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/31544/index.do. ↩