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Universities/Contract Research - Entitlement to SR&ED Tax Credits
Aug 1, 2001
Ask anyone who has done business with a university, either to license technology from it or contract for research, and you will find a story waiting to be told. Simply put, universities are not known as easy groups to deal with. And without a good knowledge of how they work, you could end up with less than you bargained for.
A Canadian taxpayer was introduced to software technology developed by two researchers associated with the University of Montreal. In 1998, the taxpayer licensed the software from the university for the purpose of commercializing it worldwide. One can assume that the two researchers were instrumental in facilitating the license. The license was exclusive and provided for the payment of royalties to the university.
As an aside, there is more than one model by which universities commercialize technology developed by individuals associated with them. The model in question, where the university owns the technology because of an assignment from its researchers, is a common one.
As part of their arrangement with the University of Montreal the researchers were entitled to a portion of the royalties as a contribution to their on-going research expenses. Although the taxpayer was aware of the arrangement (and we can assume that it was a condition of the license), the taxpayer was not party to the agreement with the researchers. The taxpayer expected to get a benefit of the research as a result of its exclusive license.
The taxpayer sought to allocate the portion of the royalties paid to the researchers to a claim for scientific research investment tax credits. Canada Customs and Revenue (as it is now known) refused the allocation and assessed the taxpayer. The court rejected the taxpayer's appeal, and classified the expense as royalty payments. We can assume that the taxpayer's cash flow suffered significantly as a result of this.
We will never know if the taxpayer and its advisors even discussed the intended tax consequences of the arrangement, or if they fully understood the arrangement between the university and its researchers.
Could this result have been avoided? The case suggests that it might. The implication is that the researchers should have been part of the contractual arrangement with the taxpayer, and that the nature of the payments to the researchers should have been spelled out. Careful drafting of future contracts might well overcome this unfortunate result.
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