CRA Changes Method in Processing SR&ED Tax Credit Claims
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All companies who are claiming SR&ED projects that are linked to a financial arrangement with a Canadian customer should review the written agreements to determine if a contract payment arises. When Does a Payment Under a Customer Contract Have to be Netted Against SR&ED Expenditures? All companies who are claiming SR&ED projects that are linked to a financial arrangement with a Canadian customer should review the written agreements to determine if a contract payment arises. Where a Canadian company receives government assistance, non-governmen
t assistance or a contract payment, in respect of SR&ED activities being carried out, such payments and assistance must be applied to reduce any SR&ED expenditures claimed. The terms government assistance, non-government assistance and contract payment are defined terms under the Income Tax Act (“Act”). Recently, CRA is focusing on contract arrangements between two Canadian companies to determine if such contract arrangements meet the definition of “contract payment” as that term is defined in the Act. The purpose of the rule is to avoid “double dipping”. In other words, where one Canadian company (“the payer”) engages another Canadian company (“the performer”) to carry out, in part, R&D, the question becomes which company is permitted to claim for the SR&ED tax credits? One specific area where CRA is investigating this issue is with respect to software and IT development. In many instances, SR&ED activities may be performed by a company which is contracted to carry out some work for a customer. The question becomes do any or all of the payments under the contract with the customer have to be netted against the performer’s SR&ED tax credit claim? CRA has defined the terms “contract payment” by the following criteria: - Does the contract indicate that the contractor was required to perform specific SR&ED work (e.g. “the contractor shall design, integrate, test, verify performance”)? The question is not whether SR&ED work was carried out but whether SR&ED was carried out because it was required under the contract.
- Is there a ceiling price beyond which the contractor would not have been paid? Would the contractor have been entitled to payments even if the work had not met the requirements of the contract as to the work to be performed? If the answer is yes, this may be an indication that the risks taken by the contractor were limited and would support the position that SR&ED work was carried out on behalf of the payer.
- If the rights to the IP of the SR&ED work belong to the contractor, this may be an indication that the contractor was not required to perform SR&ED on behalf of the payer since the results of the SR&ED remain with the contractor.
- A contract for services may be an indication that the SR&ED work was being performed on behalf of the payer, however a contract for a sale of goods would indicate otherwise.
However, if a performer enters into an arrangement with a Canadian company,(i.e. the payer), a determination needs to be made as to whether any payments received by the performer, constitute contract payments. Usually, this determination requires assistance of a specialist in this particular area. To discuss this matter in more detail or any other SR&ED tax credit related matter please contact Chris Bodnar at 416-368-9341 ex 247.
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