ARCHIVED - Expenditures on Research and for Business Expansion

What the "Archived Content" notice means for interpretation bulletins

NO: IT-475

DATE: March 31, 1981

SUBJECT: INCOME TAX ACT
Expenditures on Research and for Business Expansion

REFERENCE: Paragraphs 18(1)(a) and (b)

1. The purpose of this bulletin is to discuss the treatment of expenditures on research and expenditures made for business expansion. These expenditures include the cost of market research, applied research, feasibility studies and expenditures made to enhance the making of a business decision. The bulletin does not deal with scientific research expenditures, deductible pursuant to Section 37, which are discussed in IT-151R2 and IT-439.

2. Expenses incurred in respect of research or feasibility studies which do not qualify under the Regulations as scientific research expenditures may nevertheless be deductible if they are laid out to earn income from a business or property, they are not on account of capital and they are reasonable in the circumstances.

3. A taxpayer may carry out a continuous research program the purpose of which is to ensure that the taxpayer's business maintains or improves its position in its industry. Expenses of such a research program are treated as current expenditures deductible from income in the years in which they are incurred, notwithstanding the fact that from time to time the acquisition of capital assets may be a result of the research program.

4. A research program or feasibility study may be undertaken to determine whether a particular course of action be taken or certain capital assets acquired. The taxpayer may use his own expertise and facilities in carrying out such a program or study or he may contract to have it done by outside experts in the field. The purpose of a specific research program or feasibility study may be, for example, to determine the desirability of developing a new product or line of products, to develop a more efficient manufacturing process, to expand business operations into new territory, or to improve administrative procedures. Although the aim of such programs or studies is to create a lasting advantage for the business entity's profit-making operations, the expenses are treated as current operating expenditures.

5. Expenditures made as part of a taxpayer's ordinary business operations in respect of research to determine whether a capital asset should be created or acquired, but which themselves are not directly linked to the creation or acquisition of a capital asset, are current operating expenses which are deductible in the year incurred. However, once the commitment is made to proceed with the particular project all expenditures which are directly linked to the creation or acquisition of a capital asset form part of the capital cost of that asset unless that asset is not, in fact, created or acquired. In this latter case, architectural, engineering and other expenses relating to the proposed creation or acquisition of a specific capital asset are eligible capital expenditures (as defined in paragraph 14(5)(b)) for which an allowance is permitted by virtue of paragraph 20(1)(b) of the Act, provided that the expenses are incurred in connection with a business carried on by the taxpayer. If there is no such business at the time the expenses were incurred, no deduction for the expenses may be made.

6. Whether the asset is acquired or not, there may be some expenditures in connection therewith that are specifically deductible under the provisions of the Act. For example, in respect of a business carried on by the taxpayer, expenditures which are directly related to making representations to certain governmental bodies or agencies are deductible pursuant to paragraph 20(1)(cc) and expenditures which are directly related to investigating the suitability of a site for a building are deductible pursuant to paragraph 20(1)(dd) of the Act.

7. Where a taxpayer who is not presently carrying on any business incurs expenditures on research to determine whether a business should be started, such expenditures are not deductible. Where a taxpayer who presently carries on business incurs expenditures on research to determine whether a new and separate business should be undertaken, these expenditures also are not deductible. In either case, if the new business is in fact commenced, the expenditures will qualify as an eligible capital expenditure of that business. See IT-206R for further comments regarding separate businesses.