Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
The difference in calculating SR&ED salary and wage expence when using the proxy method as opposed to the traditional method.
Position TAKEN:
Under the traditional method the salary and wages must be in respect of an employee who "directly undertakes, supervises or supports" the prosecution of SR&ED which is much broader than "directly engaged", the criteria under the traditional method.
Reasons FOR POSITION TAKEN:
SR&ED Backgrounder accompanying the Department of Finance New's Release dated June 30, 1994.
Paragraph 17 & 18 of IT-154R4
January 12, 1995
J. P. Lavigne Merchandising, Manufacturing
Director and Partnerships Section
Audit Programs Division Franklyn S. Gillman
Audit Directorate 957-9768
Attention: Mara Praulins
7-941641Scientific Research and Experimental Development: Salary and Wages
This is in reply to your memorandum of June 24, 1994 wherein you requested our comments as to the difference in calculating scientific research and experimental development ("SR&ED") salary and wage expenditures in situations where a taxpayer uses the proxy method as opposed to the traditional method in calculating the SR&ED expenditures and more specifically you requested our views on what constitutes the basic difference between the expressions "directly engaged" and "directly undertakes, supervises or supports" as those two expressions pertain to salary and wage expenditures for SR&ED purposes. We apologize for the delay in our reply.
Proxy Method
It is your understanding that under the proxy method where the expression "directly engaged" is used to identify salary and wage expense connected to the SR&ED activity, the expression pertains to allowable SR&ED salary or wages for:
employees conducting experimentation and analysis;
employees performing technical support activities; and
managers and supervisors carrying out technical activities or supervising the ongoing SR&ED activities if, and to the extent, they are directing the course of the ongoing SR&ED or providing direct technical input into the SR&ED activities.
You further contend that employees performing clerical support activities are not considered to be directly engaged in SR&ED, that their salary and wages are included in the overhead expenditures of the calculation.
Traditional Method
In calculating salary and wages that pertain to the SR&ED activity when the traditional method is being used, paragraph 2900(2)(b) of the Income Tax Regulations (the "Regulations") allows as SR&ED salary and wages that are in respect of an employee who "directly undertakes, supervises or supports" the prosecution of SR&ED. In your opinion SR&ED salary and wages are allowable if they are all or substantially all attributable to the prosecution of SR&ED, or if they are directly attributable to such prosecution.
You have informed us that in practice you treat other salary and wages (e.g. clerical support employees) as an overhead expenditure provided they meet the conditions of paragraph 2900(2)(c) or 2900(3)(a) of the Regulations.
We agree with your interpretation of the two expressions and accordingly the methods you use in calculating SR&ED salary and wages under both the proxy and traditional method.
As stated in the SR&ED Backgrounder which accompanied the Department of Finance's News Release date June 30, 1994, the expression "...directly engaged...is a question of fact based on the duties performed by the employee and not on the employee's job title. Generally, we consider employees conducting experimentation and analysis in the performance of basic research, applied research, or experimental development to be directly engaged in SR&ED. In addition, we consider employees to be engaged in SR&ED when they are performing technical support activities such as engineering, design, operations research, mathematical analysis, computer programming, (non-routine) data collection, testing or psychological research that are commensurate with the needs and directly in support of the basic or applied research or experimental development activities."
The Backgrounder goes on to say, "Managers and supervisors are considered to be directly engaged in SR&ED when they are performing experimentation and analysis in the performance of basic research, applied research or experimental development and when they are carrying out technical activities in support of basic or applied research or experimental development activities. We also consider managers and supervisors who supervise the ongoing SR&ED activities to be directly engaged in SR&ED if, and to the extent, they are directing the course of the ongoing SR&ED or providing direct technical input into the SR&ED activities. However, any time spent by a manager or supervisor performing non-technological management activities or decision-making functions that do not directly influence the course of the SR&ED, even if it relates to the SR&ED, is not considered to be time the manager or supervisor is directly engaged in SR&ED."
In our view, the expression "directly engaged" should therefore be given a very narrow interpretation and will thus limit the inclusion of SR&ED salary and wages for those employees whose activities are directly attributable to the prosecution of SR&ED.
Paragraph 17 of Interpretation Bulletin IT-154R4 entitled Scientific Research and Experimental Development Expenditures discusses expenditures directly attributable to SR&ED and states: "...Paragraph 2900(2)(b) provides that certain expenditures for employee remuneration are directly attributable to the prosecution of SR&ED. These expenditures are considered to include the portion of salaries, wages or related benefits incurred for an employee who directly undertakes, supervises or supports the prosecution of SR&ED to the extent the amount incurred can reasonably be considered to relate to such prosecution."
Paragraph 18 of Interpretation Bulletin IT-154R4 further states that "Paragraph 2900(2)(c) of the Regulations provides that certain other expenditures are also directly attributable to the prosecution of SR&ED. These other expenditures are considered to include any expenditure, or portion thereof, other than an expenditure referred to in paragraph 2900(2)(a) or (b) ..., that is directly related to the prosecution of SR&ED and that would not have been incurred if such prosecution had not occurred."
In our view, the expression "directly undertakes, supervises or supports" is much broader in application than "directly engaged" and therefore will include salary and wages which would be considered to be of a supervisory and/or support capacity but are not directly related to the prosecution of SR&ED.
Acting Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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