Assistance and Contract Payments Policy

Source URL

http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ssstncndcntrctpymnts-eng.html

Disclaimer

We do not guarantee the accuracy of this copy of the CRA website.

Scraped Page Content

Assistance and Contract Payments Policy

Date: December 18, 2014

Changes to the Assistance and Contract Payments Policy

Revision reasons

This revision accommodates the legislative changes that have been announced.

Revision overview

The 2012 Federal budget announced a number of changes in respect of the Scientific Research and Experimental Development (SR&ED) Program:

  • Expenditure of a capital nature no longer qualifies for SR&ED tax incentives after 2013.
  • The rate at which overhead SR&ED expenditures are accounted for under the proxy method are reduced from 65% to 55% over a two year period starting with 2013.
  • Contract–SR&ED and third‑party payments for SR&ED expenditures are 80% eligible for Investment Tax Credits (ITCs) after 2012.
  • The basic 20% investment tax credit (ITC) for SR&ED qualified expenditures is reduced to 15% after 2013.

The legislation for these proposals was enacted on December 14, 2012.

A legislative amendment in Bill C-4 (received royal assent on December 12, 2013) revised the definition of non-government assistance effective December 21, 2012.

The text of this document has been revised to reflect these changes, see Appendix C.1 Explanation of changes.

Table of contents

1.0 Purpose

The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding government assistance, non-government assistance and contract payments (see sections 4.1.1, 4.1.2 and 5.2) when administering the scientific research and experimental development (SR&ED) legislation under the federal Income Tax Act and the Income Tax Regulations.

2.0 Overview

The intent of the SR&ED legislation is to provide tax incentives to businesses on the net costs of performing SR&ED in Canada.

Assistance will reduce the pool of deductible SR&ED expenditures if it is in respect of an expenditure that was claimed for SR&ED. Assistance and contract payments (see section 5.2) must be in respect of the SR&ED work performed in the year to reduce qualified SR&ED expenditures.

Government assistance, non-government assistance (see sections 4.1.1 and 4.1.2), and contract payments are recognized for tax purposes in a tax year where the claimant has “received, is entitled to receive or can reasonably be expected to receive” (see sections 3.1, 3.2, and 3.3) the assistance or contract payment. This is generally consistent with recognition of amounts on an accrual basis. As a general rule, claimants are required to use the accrual method of accounting.

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Subsection 18(9) Limitation respecting prepaid expenses
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”, paragraph (h)
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate

3.0 Meaning of terms

3.1 Amount received

Once it has been determined that an amount represents assistance, it is a question of fact whether or not the amount has actually been received. However, some difficulty could arise when trying to determine when a tax credit or a deduction from tax is considered “received”.

For the purposes of calculating the pool of deductible SR&ED expenditures and qualified SR&ED expenditures, a tax credit or a deduction from tax that is determined to be assistance is considered to be received at the earliest of:

  • when the amount is applied as a reduction of instalment payments to be paid by the claimant, if it is credited to his instalment account by a fiscal authority; or
  • when all the conditions for its receipt are met, at the earliest of:
    • when it reduces the tax payable for a tax year; or
    • when it is paid, if it allows for or increases a tax refund.

Legislative References Income Tax Act
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate

3.2 Entitled to receive

A claimant is considered to be “entitled to receive” assistance in either one of the following cases:

  • before receiving the assistance, a certain event has to occur or the claimant has to fulfill some condition and the event has occurred or the condition has been fulfilled; or
  • the claimant has an enforceable right to receive the assistance.

Legislative References Income Tax Act
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate

3.3 Reasonably be expected to receive

A claimant can “reasonably be expected to receive” assistance if, for example:

  • the claimant has applied for assistance and, based on the circumstances, it is reasonable to believe that it will be received;
  • the claimant has received information advising that assistance will be received;
  • the claimant has earned the current year's provincial / territorial research and development (R&D) tax credit and added the amount to the provincial / territorial R&D tax credit pool to be applied to future years. This situation may occur when the claimant is in a loss position and does not renounce the provincial or territorial tax credits for R&D (see section 4.5).

Legislative References Income Tax Act
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate

4.0 Government and non-government assistance

4.1 Definitions

4.1.1 Government assistance

"Government assistance" is defined in the Income Tax Act 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 Act and related provisions concerning government assistance also apply to claimants who receive assistance indirectly from a government organization (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.

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Subsection 127(9) Definition of “government assistance”

4.1.2 Non-government assistance

"Non-government assistance" is defined in the Act as an amount that would be included in a claimant's income under paragraph 12(1)(x) read without reference to subparagraphs 12(1)(x)(v) to (vii). Essentially, non-government assistance is an amount that can reasonably be considered to have been received as an inducement, reimbursement, contribution, allowance or as assistance for the cost of a property or for an outlay or expense. Non-government assistance may be in the form of a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement or assistance.

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc
Subsection 127(9) Definition of “non-government assistance”

4.2 General considerations

4.2.1 Factors used to determine whether an amount is assistance

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), 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 FCA decision suggests that the real test is, whether the payments were made "in exactly the same way for exactly the same reasons as payments made by private business, that is, for the purpose of advancing the interests of the payor." 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.

Legislative References Income Tax Act
Subparagraph 12(1)(x)(iv) Inducement, reimbursement, etc
Subsection 127(9) Definition of “government assistance”

4.2.2 The context of the assistance agreement

Determining whether an amount is assistance will depend on the substance of the agreement(s) rather than only on the words used in the agreement(s). The terms of the agreement are important in determining whether an amount received is assistance. For example, if an agreement for government assistance includes provisions for repayment only in the event of profits earned from the project and characterizes the repayments as royalties, the CRA considers the amounts to be government assistance, not a business loan. These arrangements are usually referred to as forgivable loans, since they include conditions that would exempt the borrower from repaying the whole amount or a portion of the amount.

4.2.3 Example – Forgivable loan

Under a government program, a government department makes financial contributions to the research and development (R&D) programs of corporations. The agreements under which the contributions are made contain repayment provisions, but these provisions contain certain conditions:

  • The repayments are dependent on future revenues from the developed product, and no amount is repayable until such revenues reach a certain level.
  • There is a ceiling on the amount of the periodic repayments, and the periodic repayments end on a set date whether or not the entire amount has been repaid.

Unless the facts of a case warrant otherwise, generally, the CRA treats these contributions as assistance due to the conditions attached to the repayments. The assistance would reduce the pool of deductible SR&ED expenditures and qualified SR&ED expenditures accordingly.

4.3 Application of the rules

4.3.1 The pool of deductible SR&ED expenditures

The pool of deductible SR&ED expenditures is reduced by any amounts of government assistance or non-government assistance (see sections 4.1.1 and 4.1.2) that a claimant has received, is entitled to receive, or can reasonably be expected to receive (see sections 3.1, 3.2, and 3.3) on or before the income tax return filing-due date for a tax year for SR&ED current expenditures or SR&ED capital expenditures if the capital expenditure was made prior to January 1, 2014.

Government or non-government assistance reduces SR&ED expenditures on a project-by-project basis. Hence assistance for one project cannot reduce the SR&ED expenditures of another project. Also, government or non-government assistance can only reduce the SR&ED expenditures of a project to nil. In no case would the reduction result in an SR&ED project having a negative amount for SR&ED expenditures.

In cases where the amount of assistance is more than the SR&ED expenditures of a project, the excess amount will be included as income in the tax year. For more information, please refer to the Pool of Deductible SR&ED Expenditures Policy. This will also apply to cases where part of the assistance related to a project is not applied in the current year and the project is to be discontinued in the following tax year.

The amount of assistance deducted in calculating the pool balance of deductible SR&ED expenditures is the amount in respect of an SR&ED current expenditure or an SR&ED capital expenditure that is included in the pool. As a result, the assistance only reduces the pool to the extent that the expenditures for which the assistance was given have been included in the pool. If a claimant has elected to use the proxy method, there would not be any overhead expenditures included in the pool. Under the proxy method, no amount of assistance related to overhead will reduce the pool.

For each project, the amount of assistance that reduces the project's deductible SR&ED expenditures is the lesser of the following amounts:

  • the total of all amounts of assistance for current and capital expenditures that, at the claimant's filing-due date for the year, the claimant has received, is entitled to receive, or can reasonably be expected to receive; or
  • the total amount of current and capital expenditures (prior to January 1, 2014) for that project.

The amount of government assistance or non-government assistance (see sections 4.1.1 and 4.1.2) that relates to the prescribed proxy amount (PPA) will not reduce the pool of deductible SR&ED expenditures. This is because the PPA is not an expenditure that is included in the pool of SR&ED deductible expenditures. The PPA is a notional amount that is used in lieu of the actual overhead expenditures in calculating qualified SR&ED expenditures with the proxy method. The portion of assistance that relates to the PPA should be included in income in the tax year that it is received (see section 6.1). For more information on the PPA, please refer to the Prescribed Proxy Amount Policy.

To calculate the pool of deductible SR&ED expenditures, assistance should be reflected in the SR&ED claim in the tax year in which the expenditures are incurred. Assistance received, entitled to be received, or that can reasonably be expected to be received for an SR&ED expenditure incurred in a tax year will reduce the pool of deductible SR&ED expenditures in that tax year.

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance

4.3.2 Qualified SR&ED expenditures

The definition of an investment tax credit (ITC) provides for calculating the amount of ITC that is earned by a claimant at the end of a tax year. This calculation is based on the SR&ED qualified expenditure pool at the end of the tax year of the claimant. Qualified SR&ED expenditures are reduced by any amounts of government or non-government assistance and contract payments (see section 5.0) that the claimant has received, is entitled to receive, or can reasonably be expected to be received (see sections 3.1, 3.2, and 3.3) for SR&ED work performed in the tax year, on or before the income tax return filing-due date for that tax year (see section 6.2). Qualified SR&ED expenditures are reduced by any assistance and contract payments that can reasonably be considered to be in respect of the SR&ED. Therefore, assistance and contract payments in respect of non-qualifying expenditures relating to the SR&ED will also reduce the qualified SR&ED expenditures where the assistance agreement does not distinguish payments for eligible activities and costs from payments for non-eligible activities and costs.

The reduction to qualified SR&ED expenditures for assistance and contract payments is on a project-by-project basis. This means that the assistance and contract payments in respect of one project will not reduce the expenditures of another project.

For each project, the amount of assistance and contract payments that reduce the qualified SR&ED expenditures is the lesser of the following amounts:

  • the total of all amounts of assistance and contract payments in respect of the SR&ED that, at the claimant's filing-due date for the tax year, the claimant has received, is entitled to receive, or can reasonably be expected to receive, less any amounts of assistance and contract payments applied in preceding tax years; or
  • the total project costs related to that project for the tax year.

The excess assistance and contract payments that are not applied to the project in the current tax year will be carried forward to reduce qualified SR&ED expenditures of that project in a subsequent tax year.

When calculating qualified SR&ED expenditures, assistance and contract payments should be reflected in the SR&ED claim in the tax year in which the SR&ED began. Assistance and contract payments that a claimant has received, is entitled to receive, or can reasonably be expected to be received for SR&ED that began in a tax year, will reduce the qualified SR&ED expenditures in that year or a subsequent year.

The portion of the assistance that relates to the PPA will reduce the qualified SR&ED expenditures in the tax year it is earned, since it is assistance that is reasonably expected to be received for SR&ED.

The reduction of the qualified expenditures for assistance or contract payments for shared-use-equipment reduces the amount of qualified expenditures. For more information, please refer to the SR&ED Shared-Use-Equipment Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of “investment tax credit”
Subsection 127(9) Definition of “qualified expenditure”, paragraph(h)
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate

4.3.3 Example – Reduction of qualified SR&ED expenditures

Corporation A receives $30,000 of assistance for SR&ED in its 2012 tax year. It incurs $50,000 of qualified SR&ED expenditures before any reduction due to assistance. The corporation's qualified SR&ED expenditures will be reduced by the $30,000 of assistance it received. As a result, Corporation A can only claim an ITC based on the qualified SR&ED expenditures of $20,000 ($50,000 - $30,000).

Legislative Reference Income Tax Act
Subsection 127(18) Reduction of qualified expenditures

4.4 Assistance received or receivable by a non-arm's length party

In certain cases, assistance and contract payments (see section 5.0) received or receivable by a non-arm’s length (NAL) party may also reduce the qualified SR&ED expenditures of the claimant. This applies when the assistance or contract payments is greater than the total qualified SR&ED expenditures that the recipient and the NAL party incurred in the year for the SR&ED. The assistance or contract payments received must be subtracted by all amounts of assistance and contract payments relating to a previous year to reduce the qualified SR&ED expenditures of the recipient and the NAL party. When the amount of assistance and contract payments relating to a project is greater than the SR&ED expenditures of the project, qualified SR&ED expenditures of the claimant and the NAL party are reduced to nil.

Legislative Reference Income Tax Act
Subsection 127(19) Reduction of qualified expenditures

4.4.1 Allocation of assistance

Assistance and contract payments (see section 5.0) that were not applied to the recipient's qualified SR&ED expenditures must be allocated among the members of a non-arm's length group if:

  • each member of the group performs the SR&ED when the member is not dealing at arm’s length with the recipient of the assistance; and
  • the amount of the assistance is less than the total qualified SR&ED expenditures of the non-arm's length members of the group on the SR&ED in respect of which the assistance was received.

There are requirements for filing an agreement to allocate assistance — the agreement will only be valid if:

Where the parties to the agreement are corporations, the agreement will not be valid unless a resolution of the corporation’s directors or a directors' resolution delegating authority to an authorized officer is provided, authorizing the agreement.

The Act provides consequences for the non-allocation of assistance and contract payments (see example in section 4.4.2).

Legislative References Income Tax Act
Subsection 127(20) Agreement to allocate
Subsection 127(21) Failure to allocate
Subsection 127(22) Invalid agreements

4.4.2 Example – Allocation of assistance

Corporations A, B, and C are related corporations that have the same December 31 year-end. Corporation A contracts out its SR&ED to corporations B and C. Those corporations will perform half of the SR&ED, and each of them will receive $50,000.

In June 2012, Corporation A received government assistance (see section 4.1.1) of $40,000 for the SR&ED. Corporations B and C each had $15,000 of qualified expenditures (QEs) for the 2012 tax year and $33,000 for the 2013 tax year. All expenditures in respect of qualified SR&ED expenditures are paid in full in the year they are incurred.

The rule for assistance received by a non-arm's length (NAL) party (see section 4.4) applies to the government assistance in respect of Corporation A's 2012 tax year. As a result, the $15,000 QEs that Corporations B and C each had in 2012 were reduced to nil. Since there remained $10,000 of government assistance that had not been applied to reduce the 2012 QEs, that amount will reduce the QEs the corporations have for 2013.

In 2013, the rule for assistance received by a NAL party (see section 4.4) does not apply for Corporation A's 2013 tax year, since the amount of government assistance ($40,000) is less than the sum of the total amounts already applied ($30,000) and the total QEs ($66,000) that corporations B and C otherwise incurred in their tax years that end in Corporation A's 2013 tax year.

In this case the corporations should allocate the rest of the assistance among themselves. The Act permits the three corporations to file an agreement to allocate the remaining $10,000 of assistance to reduce the QEs of Corporations B and C, or both, which they incurred in 2013.

Corporation A and Corporation B can file an agreement, Form T1145, with the CRA specifying that the $10,000 remaining assistance should be applied to reduce Corporation B's $33,000 of QEs to $23,000. Consequently, the amount of QEs that Corporation C incurred in 2013 would still be $33,000.

In year 2012:

Corporation QEs before assistance Assistance QEs after assistance Reference
B $15,000 $40,000 Nil 127(19)
C $15,000 $25,000
($40,000‑$15,000)		 Nil 127(19)

In year 2013:

Corporation QEs before assistance Assistance QEs after assistance Reference
B $33,000 $10,000
($40,000‑$15,000‑$15,000)		 $23,000 127(20)
C $33,000 $0 $33,000 127(20)

In year 2013, if they do not file an agreement to allocate the remaining $10,000 of assistance, the Act will operate to reduce the QEs of both corporations B and C.

Corporation QEs before assistance Assistance QEs after assistance Reference
B $33,000 $10,000
($40,000‑$15,000‑$15,000)		 $23,000 127(21)
C $33,000 $10,000
($40,000‑$15,000‑$15,000)		 $23,000 127(21)

4.5 Provincial and territorial research and development tax credits

R&D tax credits are offered by the Yukon Territory and the provinces of Newfoundland and Labrador, Nova Scotia, New Brunswick, Quebec, Ontario, Manitoba, Alberta, Saskatchewan, and British Columbia. With the exception of Quebec, a claimant must have a permanent establishment in the province or territory where they perform the R&D to claim a respective tax credit.

With the exception of the Quebec R&D program (see section 4.5.3), the provincial and territorial R&D programs generally follow the same expenditure rules used under the federal SR&ED program. Provincial and territorial R&D tax credits are calculated as a percentage of the federal qualified SR&ED expenditures incurred in the year.

Claimants should carefully review the R&D program that applies in their province or territory to determine the effect that claiming provincial or territorial R&D tax credits may have on their SR&ED claim under the federal program. A provincial or territorial R&D tax credit is government assistance and it will reduce a claimant's pool of deductible SR&ED expenditures and the qualified SR&ED expenditures. In certain circumstances, a claimant may decide not to claim provincial or territorial R&D tax credits. Please refer to the Summary of Provincial and Territorial Research and Development Tax Credits.

In circumstances where the claimant renounces the provincial R&D tax credits, the pool of deductible SR&ED expenditures and the qualified SR&ED expenditures would not be reduced by the provincial or territorial R&D tax credit if renounced by the filing-due date of the income tax return.

4.5.1 Treatment of assistance related to the prescribed proxy amount and impact on the pool of deductible SR&ED expenditures

The amount of provincial or territorial tax credits that relates to the PPA is not included in determining the amount of assistance to be applied against the pool of deductible SR&ED expenditures. This is because the PPA is not an expenditure included in the pool of deductible SR&ED expenditures. The PPA is a notional amount that is used in place of the actual overhead expenditures in calculating qualified SR&ED expenditures for ITC purposes. Under the proxy method, the portion of the provincial or territorial R&D tax credits that relates to the PPA should be included in income in the year that it is received (see section 6.1).

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance

4.5.2 Treatment of assistance related to the prescribed proxy amount with respect to qualified SR&ED expenditures

Provincial and territorial assistance will reduce qualified SR&ED expenditures regardless of which method the claimant uses—the proxy method or the traditional method (for an example, see section 6.1). Under the proxy method, the portion of the provincial or territorial tax credit that relates to the PPA reduces the qualified SR&ED expenditures since it is assistance in respect of SR&ED regardless of whether the credit is refundable or non-refundable.

Legislative Reference Income Tax Act
Subsection 127(18) Reduction of qualified expenditures

4.5.3 Quebec's R&D tax credits

The Province of Quebec has a variety of R&D tax credits. At the time of writing this document, the CRA considers only the following four Quebec R&D tax credits to be assistance for the purposes of the pool of deductible SR&ED expenditures and qualified SR&ED expenditures:

  • tax credit for salaries and wages (R&D);
  • tax credit for university research or research carried out by a public research centre or a research consortium;
  • tax credit for private partnership precompetitive research; and
  • tax credit for fees or dues paid to a research consortium.

Generally, the tax legislation of the Province of Quebec is designed to prevent a claimant from receiving tax assistance for an expenditure that may give rise to more than one tax credit. An expenditure may qualify for two different Quebec tax credits, and the facts may show that a claimant chose to earn credit under a program that is not a Quebec R&D program. In such a case, the amount of assistance in respect of that expenditure will not be considered to be government assistance (see section 4.1.1) for SR&ED purposes. (Note that the CRA does not administer the Quebec legislation.)

The Quebec R&D salaries tax credit program includes in its calculation the salaries and the portion of a subcontract that is attributable to salaries, for work that assists the R&D. The cost for such work does not qualify as allowable SR&ED expenditures under the federal SR&ED program if the claimant has elected to use the proxy method. The portion of the provincial tax credit earned on these salaries and the portion of the subcontract that is attributable such salaries is not government assistance for the purposes of calculating the pool of deductible SR&ED expenditures, but should be included in income in the tax year it is received.

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(18) Reduction of qualified expenditures

4.5.4 Ontario's R&D tax credits

The Province of Ontario has three R&D tax credits:

  • Ontario Innovation Tax Credit (OITC);
  • Ontario Business Research Institute Tax Credit (OBRITC); and
  • Ontario Research and Development Tax Credit (ORDTC).

Appendices A.1 and A.2, illustrate the application of the OITC in two situations—when the total expenditures are either less than or greater than the $3,000,000 expenditure limit. The example of Appendix A.3 shows the application of the ORDTC.

Legislative Reference Income Tax Act
Subsection 127(10.2) Expenditure limit determined

4.5.5 Super-allowance benefit amount

Any super-allowance benefit amount provided by a province for R&D is treated as government assistance. The legislation applies to tax years that begin after February 2000. However, if a claimant's first tax year begins after February 2000 and ends before 2001, the super-allowance benefit amount will not be treated as government assistance because the legislation applies to tax years that begin after 2000.

Before March 2000, this type of advantage was not considered as government assistance.

Legislative References Income Tax Act
Subsection 37(1)(d.1) Pool of deductible SR&ED expenditures – super-allowance benefit
Subsection 127(9) Definition of “super-allowance benefit amount”

4.6 Repayment of assistance

Generally, if a claimant repays government assistance or non-government assistance (see sections 4.1.1 and 4.1.2), the pool of deductible SR&ED expenditures increases to the extent that the assistance repaid had previously reduced the pool. Repayments of assistance are expenditures pursuant to the Income Tax Act.

Repaying government or non-government assistance and contract payments (see section 5.0) will generally increase the amount of the ITC earned in the year. In the case of repayments, the ITC is determined based on the ITC rate in the year that the assistance was originally applied. Since the repayments are not qualified SR&ED expenditures as defined in the Act, the ITC earned on them will not be refundable (in the year the repayment is made or deemed to be made) but can be applied to reduce taxes payable, carried back 3 years or forward 20 years.

Legislative References Income Tax Act
Paragraph 37(1)(c) Pool of deductible SR&ED expenditures – repayment of government or non-government assistance
Subsection 127(9) Definition of “investment tax credit”, paragraphs (e.1) and (e.2)
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(10.7) Further additions to investment tax credit
Subsection 127(10.8) Further additions to investment tax credit

5.0 Contract payments

5.1 Overview

Where a Canadian claimant contracts to have SR&ED carried out on its behalf by another party, the amount payable under the contract may be a qualified SR&ED expenditure for investment tax credit (ITC) purposes. For more information on this subject, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For the Canadian party performing the contract (the contractor), the contract payment (see section 5.2) reduces the qualified SR&ED expenditures for ITC purposes. In this way duplication of the ITC is avoided. A contract payment received by the performer does not reduce its pool of deductible SR&ED expenditures. When considering contract payments, one should also read sections 4.3.2, 4.4 and 4.6.

The key element for determining an amount as a contract payment is whether the payer requested the contractor to perform SR&ED for or on behalf of the payer under the terms of the contract. This determination can only be made on the basis of the terms of the contract read as a whole and by reviewing all the facts surrounding the particular situation.

5.2 Definition of a contract payment

A contract payment is:

  • an amount paid or payable to a claimant by a taxable supplier in respect of the amount for SR&ED:
    • for, or on behalf of, a person or partnership entitled to a deduction for the amount as a current expenditure or as a third-party payment to a corporation; and
    • at a time when the claimant and the person or partnership (the taxable supplier) are dealing at arm’s length; or
  • an amount for an expenditure of a current nature (other than a prescribed amount) payable by a Canadian government, municipality or other Canadian public authority (see section 4.1.1) or by a person exempt from Part I tax under section 149 of the Income Tax Act for SR&ED to be performed for it or on its behalf.

In this context, a prescribed amount is an amount received from the Canadian Commercial Corporation in respect of an amount received by that corporation from a foreign government, foreign municipality or other foreign public authority.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Subsection 127(9) Definition of “contract payment”
Subsection 127(9) Definition of “taxable supplier”

Legislative Reference Income Tax Regulations
Section 4606 Prescribed amount

5.3 Differences between assistance and contract payments

Some essential features that distinguish assistance from a contract payment (see section 5.2) are:

  • Assistance involves predominantly a donative intent, rather than a business motive. An assistance agreement between the grantor and the recipient of the assistance will show that the main purpose of the agreement from the grantor's point of view was something other than profit. Contract payments are payments for SR&ED that is performed on behalf of the payer.
  • Any repayment provisions in an assistance agreement are not strictly enforceable. A contract is a commercial arrangement between two or more parties, subject to legal liabilities and enforceable in the case of default.
  • A contract arrangement implies authority of the payer over the deliverables and sometimes over the whole work process. Assistance does not generally extend such implications. However, some assistance agreements could include restrictions in respect of such things as how the work is to be done or where a product can be sold.

5.4 Who is entitled to an investment tax credit?

Based on the terms of a contract, it may be difficult to determine whether it is the person who paid the amount (the payer) or the contractor (the performer) who is entitled to an ITC . This question can arise when a contract does not specify whether an amount paid to the contractor who performed the SR&ED work is a contract payment (see section 5.2) for the purpose of calculating an ITC. Even though a contract states that a payment is, or is not, a contract payment, this may not be conclusive. This could be the case if the substance of a contract is different from what is stated.

There is no unique test or jurisprudence that will determine if an amount paid is a contract payment.

Legislative Reference Income Tax Act
Subsection 127(9) Definition of “contract payment”

5.5 Criteria to consider

The criteria discussed in sections 5.5.1 through 5.5.4 are applicable to all claimants regardless of whether the contract payment (see section 5.2) is from a payer that is:

  • a person or partnership; or
  • a Canadian government, municipality, or other Canadian public authority (see section 4.1.1) or a person exempt from Part I tax.

These criteria should be considered in assessing the nature of the payment. The key element to consider is whether the payer is requesting the contractor to perform SR&ED on behalf of the payer under the terms of the contract. An analysis is required of all circumstances relating to the payment to determine if the amount is to be treated as a contract payment.

None of the criteria are, in themselves, conclusive.

5.5.1 Contractor performance requirements

Does the contract state that the contractor was required to perform specific SR&ED work (for example, "The contractor shall design, integrate, test, and 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.

Are there specifications that the contractor had to comply with in performing the contractor's tasks?

These two elements may indicate that the contractor had to perform SR&ED on behalf of the payer, meaning that the amount paid is a contract payment.

5.5.2 Pricing vs. risks assumed

Is there a ceiling price beyond which the contractor would not have been paid? If yes, it may indicate that the contractor had to assume risks under the contract because the contractor would be responsible for costs above the ceiling price.

A ceiling price clause may raise doubts as to whether the contractor had to perform SR&ED on behalf of the payer. If the contractor agreed to absorb extra costs related to the project, this may indicate that the SR&ED was being carried out by, and at the risk of, the contractor and not on behalf of the payer.

Would the contractor have been entitled to payments if the work did not meet the requirements of work to be performed under the contract? If yes, it may indicate that the risks taken by the contractor were limited, that is, risks rested with the payer, even if there was a ceiling price clause. This would support the position that the SR&ED work was carried out on behalf of the payer.

Note
A repayment because the work stopped or the other obligations of the contractor were not fulfilled should not be considered in making the determination.

5.5.3 Intellectual property

If the rights to the intellectual property (IP) of the SR&ED work belong to the contractor, this may indicate that the contractor was not required to perform SR&ED for or on behalf of the payer since the results of the SR&ED remain with the contractor.

The payer may have a conditional right to use the results of the SR&ED. However, the existence of a conditional right suggests that the SR&ED was not performed on behalf of the payer, since the payer is not permitted to use the results of the SR&ED as desired.

A distinction can be made in the case of a contract with the Crown. The fact that the IP rests with the contractor rather than the Crown does not necessarily have a notable effect on the qualification of a payment as a contract payment. As with the other criteria, the ownership of the IP is only one factor that will help in the global analysis of the payments.

There are two particular situations requiring clarification with respect to the IP criteria:

  1. For contracts with the Crown, it is Treasury Board of Canada Secretariat policy* that IP developed by a contractor during the course of a crown procurement contract stay with the contractor.
  2. For contracts with universities, the university usually owns the rights to the IP. Consider the following questions:
    • Does the university have the capacity or intent to exploit the results of the SR&ED done by the performer?
    • Is the SR&ED that was performed within the scope of research that would normally be done by the university?

Answering yes to these questions would indicate that the SR&ED was performed on behalf of the university.

* Policy on title to intellectual property arising under crown procurement contracts

5.5.4 Contract for services vs. contract for the sale of goods

Where a definite conclusion cannot be made using the other criteria, determining whether a contract is a contract for service or a contract for the sale of a good (based on the substance of the contract) may provide some guidance.

A contract for service may indicate that the SR&ED work was being performed on behalf of the payer. However, a contract for the sale of a good does not necessarily mean that the SR&ED work was not being performed on behalf of the payer.

5.6 Example – contract payment received or receivable by a non-arm's length party

Corporation D receives a contract payment (see section 5.2) of $120,000 for SR&ED from an arm's length party in its 2012 tax year. Corporation D contracts out part of this SR&ED to its subsidiary, Corporation E, which has the same December 31 year-end. Corporation E completes its part of the SR&ED in its 2012 tax year. It has $48,000 of qualified SR&ED expenditures (QEs) relating to the SR&ED before any reduction due to the contract payment. Corporation D has QEs of $20,000 for the SR&ED in its 2012 tax year and $40,000 for the SR&ED in its 2013 tax year before any reduction for contract payments. All of the SR&ED is completed by the end of 2013 tax year.

The QEs that Corporation D otherwise incurred in its 2012 tax year of $20,000 are reduced to nil as a result of the contract payment from the arm's length party. The $48,000 of QEs that Corporation E, otherwise incurred in 2012, is also reduced to nil because of the contract payment received by Corporation D (see section 4.4).

In 2013, the difference between $120,000 and $68,000 (the sum of $20,000 and $48,000 that reduced the QEs of corporations D and E for their 2012 tax year) will reduce to nil the QEs that Corporation D had in 2013 for the SR&ED.

In year 2012:

Corporation QEs before CP Contract Payment (CP) QEs after CP References
D $20,000 $120,000 Nil 127(18)
E $48,000 $100,000 ($120,000‑$20,000) Nil 127(19)(c)(ii)

In year 2013:

Corporation QEs before CP Contract Payment (CP) QEs after CP References
D $40,000 $52,000 ($120,000-$20,000-$48,000) Nil 127(18)

Since Corporation D has only $40,000 more of QEs in 2013 before completing the SR&ED, it would have no QEs for the SR&ED in 2013 after applying the contract payment amount. The unapplied amount of the contract payment, $12,000 ($120,000 – $68,000 – $40,000), would not affect the amount of QEs that Corporation D or Corporation E had for other SR&ED.

Legislative References Income Tax Act
Subsection 127(18) Reduction of qualified expenditures
Subparagraph 127(19)(c)(ii) Reduction of qualified expenditures

5.7 Deemed contract payment

An amount is deemed to be a contract payment (see section 5.2) when there is an arrangement between a claimant (SR&ED performer) and a person or partnership with whom the performer is dealing at arm’s length, and one of the main purposes of the arrangement is to cause the amount paid under the arrangement not to be a contract payment to the performer, by having:

  • the amount paid under the arrangement to another person or partnership who is a taxable supplier, and
  • the amount received by the performer from a person or partnership who is not a taxable supplier.

Legislative Reference Income Tax Act
Subsection 127(25) Deemed contract payment

6.0 Examples

6.1 Provincial / territorial R&D tax credit – Traditional and proxy methods

(This example does not apply to the R&D tax credits offered by the Province of Quebec.)

Given:

  • This is a Canadian-controlled private corporation (CCPC) throughout the year with a permanent establishment in the province / territory.
  • The expenditures are for SR&ED performed in Canada.
  • The prior-year's taxable income is less than $400,000.
  • The assumed provincial / territorial tax credit rate is 10%.
  • Assume a tax year end after 2014 (the prescribed proxy amount (PPA) rate is 55%)
  • The federal and provincial / territorial SR&ED expenditures are the same.

Federal SR&ED expenditures

Type of expenditure Traditional method Proxy method
Salaries $100,000 $100,000
Overhead (actual) 50,000 0
Total federal SR&ED expenditures $150,000 $100,000

Provincial / territorial R&D tax credit calculation

A) Assistance for SR&ED: Provincial / Territorial tax credit

Elements Traditional method Proxy method

10% of federal expenditures

 $15,000 N/A

10% of expenditures and the prescribed proxy amount (PPA) ($100,000 × 55%)
(($100,000 + $55,000) × 10%)

 N/A $15,500

B) Federal SR&ED expenditures

Elements Traditional method Proxy method

Salaries

$100,000

 $100,000

Overhead

 50,000 0
Total current expenditures (T661 line 380) $150,000 $100,000
Provincial / territorial tax credit (10% of line 380) $15,000 $10,000
Part of provincial / territorial tax credit related to the PPA N/A * $5,500

* This part ($5,500) of the provincial / territorial tax credit relates to the PPA and does not reduce the pool of deductible SR&ED expenditures. This part should be included in income in the year it is received. However, the $5,500 will reduce the qualified SR&ED expenditures.

Federal pool of deductible SR&ED expenditures

Expenditure pool Traditional method Proxy method References
Current year's expenditures $150,000 $100,000 37(1)
Minus: government assistance (15,000) (10,000) 37(1)(d)
Add: prior-year expenditure pool balance 0 0 37(1)(a)&(b)
Amount available for deduction (T661 line 455) $135,000 $90,000 37(1)

Federal qualified SR&ED expenditures for ITC purposes

Elements Traditional method Proxy method References
Current expenditures $150,000 $100,000 37(1)
Add: PPA 0 55,000 2900(4)
Minus: government assistance (according to the calculation in A) above) (15,000) (15,500) 127(18)
Qualified expenditures for investment tax credit (ITC) purposes (T661 line 570) $135,000 $139,500 127(9)

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(18) Reduction of qualified expenditures

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

6.2 Grant from a government department

Given:

ABC Corporation has a tax year-end of December 31, 2014. The filing-due date of their tax return is June 30, 2015. A government department approves an assistance grant of $375,000 to ABC Corporation. The agreement is signed on October 1, 2014. The provisions of the agreement were effective on October 1, 2014, and will end on September 30, 2015. For the 2014 tax year, the corporation had a net loss. The grant agreement provides that assistance will be paid after the R&D is performed and a claim outlining the expenses is sent to the government department.

The expenses and the amounts received as per the grant agreement are as follows:

Claim No. Period Expenditures incurred Grant amount received Date received
1 October 1, 2014 – October 31, 2014 $35,000 $35,000 November 30, 2014
2 November 1, 2014 – December 31, 2014 $77,500 $77,500 February 10, 2015
3 January 1, 2015 – March 31, 2015 $100,800 $100,800 April 2, 2015
4 April 1, 2015 – July 31, 2015 $50,000 $50,000 November 2, 2015*

* The claim was filed with the granting government department on August 1, 2015.

The last claim for the remaining expenses has not yet been filed.

The calculation of assistance with respect to the pool of deductible SR&ED expenditures and qualified SR&ED expenditures are shown below.

For the December 31, 2014 tax year, claim number 1 amount would be treated as being received (see section 3.1)(November 30, 2014) and claim number 2 amount as being reasonably be expected to be received (see section 3.2)(February 10, 2015). The other claims (3&4) would be made in the 2015 tax year.

Federal SR&ED expenditures for year 2014

Type of expenditure Claim 1 + Claim 2 Traditional method Proxy method
Salaries $10,000 + $40,000 $50,000 $50,000
Materials $10,000 + $25,000 35,000 35,000
Overhead $15,000 + $12,500 (actual) 27,500 0
Total current expenditures (T661 line 380) $35,000 + $77,500 $112,500 $85,000

Calculating assistance

Type of expenditure Traditional method Proxy method
Relating to: Salaries $50,000 $50,000
Materials 35,000 35,000
*Overhead 27,500 N/A
Total assistance for the purpose of calculating the pool of deductible SR&ED expenditures $112,500 $85,000
Total assistance for the purpose of calculating qualified SR&ED expenditures **$112,500 **$112,500

* Under the proxy method, $27,500 (using a PPA rate of 55%) for the tax year ending in 2014 of the assistance relates to the PPA and does not reduce the pool of deductible SR&ED expenditures. It should be included in income in the year it is received ($5,500 in 2014 and $22,000 in 2015). However, for a claimant using the traditional method, the amount of $27,500 representing assistance on overhead, will be included in the total amount of assistance that will reduce the pool of deductible SR&ED expenditures.

** This amount will reduce the qualified SR&ED expenditures. The assistance of $27,500 relating to the PPA is considered to be assistance for the purpose of calculating qualified expenditures.

Federal pool of deductible SR&ED expenditures

Expenditure pool Traditional method Proxy method References
Current year's expenditures $112,500 *$85,000 37(1)(a)&(b)
Minus: Government assistance ($35,000 + $77,500)
(112,500)
(85,000)
37(1)(d)
Add: Prior-year expenditure pool balance 0 0 37(1)(a)&(b)
Amount available for deduction (T661 line 455)
$0
$0
37(1)

* The SR&ED overhead expenses represented by the PPA are ordinary business expenses.

Federal qualified SR&ED expenditures for ITC purposes

Elements Traditional method Proxy method Reference
Current expenditures $112,500 $85,000 127(9)*
Add: PPA 0 27,500 127(9)*
Minus: government assistance (per 127(18)) (112,500) (112,500) 127(9)*
Qualified expenditures for ITC purposes (T661 line 570) $0 $0 127(9)*

*Definition of "qualified expenditure"

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(18) Reduction of qualified expenditures

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

Appendix A – Examples for Ontario

A.1 Ontario innovation tax credit – Expenditures less than $3,000,000

Given:

  • This is a Canadian-controlled private corporation (CCPC) throughout the year with a permanent establishment in Ontario.
  • The tax year begins January 1, 2014 and ends December 31, 2014 (PPA rate is 55%).
  • Expenditures were incurred for SR&ED performed in Canada.
  • Prior year's taxable income is less than $400,000.
  • Ontario Innovation Tax Credit (OITC) rate is 10% of qualifying expenditures.
  • Federal and provincial SR&ED expenditures are the same.
  • Federal investment tax credit (ITC) rate is 35%.
  • Qualifying expenditures are 100% of current expenditures.
  • The claimant is using the proxy method

Calculating the OITC

Type of expenditure Amount × refundable rate × OITC rate Amount
Current expenditures $800,000 × 100% × 10% $80,000 (A)
PPA $440,000 × 100% × 10% 44,000 *
Total OITC N/A $124,000

OITC is applied in a pecking order by type of expenditures (current, PPA, then capital if acquired prior to 2014).

* The OITC amount ($44,000) related to the PPA should be added to income under paragraph 12(1)(x) of the Income Tax Act on Schedule 1 of the federal corporate income tax return in the year it is received.

Federal pool of deductible SR&ED expenditures

Expenditure pool Amount Reference
Current year's expenditures $800,000 37(1)(a)
Minus: government assistance (OITC) (A) (80,000) 37(1)(d)
Add: Prior-year expenditure pool 0 37(1)(a)&(b)
Amount available for deduction (T661 line 455) $720,000 37(1)

Federal qualified SR&ED expenditures for ITC purposes

The provincial tax credits are applied in the same order (a prorated allocation is not used).

Elements Calculation Amount Reference
Current expenditures $800,000 - $80,000 $720,000 127(9)*
PPA $440,000 - $44,000 396,000 127(9)*
Qualified expenditures for ITC purposes (T661 line 570) N/A $1,116,000 127(9)*

*Definition of "qualified expenditure"

Federal ITC: $1,116,000 × 35% = $390,600

Legislative References Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(18) Reduction of qualified expenditures

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

A.2 Ontario innovation tax credit – Expenditures greater than $3,000,000

Given:

Same conditions as in example A.1, with the following variations:

Calculating the OITC

Calculation: Amount × refundable rate × OITC rate Amount
Current SR&ED expenditures ($3,100,000) or maximum limit ($3,000,000), the lesser of the two × 100% × 10% $300,000
Capital SR&ED expenditures (nil since after 2013) 0
Total OITC $300,000

Federal pool of deductible SR&ED expenditures

Expenditure pool Amount Reference
Current year's expenditures (proxy not included) $3,100,000 37(1)(a)
Minus: government assistance (OITC) (300,000) 37(1)(d)
Add: Prior-year expenditure pool 0 37(1)(a)&(b)
Amount available for deduction (T661 line 455) $2,800,000 37(1)

Federal qualified SR&ED expenditures for ITC purposes

Since the expenditures are more than the maximum allowed ($3,000,000), the provincial tax credit is applied in the following order:

Elements Amount Reference
Salaries ($3,100,000 - $300,000 (OITC)) $2,800,000 127(9)*
PPA 1,705,000 127(9)*
Qualified expenditures for ITC purposes (T661 line 570) $4,505,000 127(9)*

*Definition of "qualified expenditure"

Federal ITC

Elements Calculation: Amount × rate Amount
Current expenditures $2,800,000 × 35% $980,000
PPA (part) $200,000 × 35% 70,000
PPA (balance) $1,505,000 × 20% 225,750
Total ITC N/A $1,275,750

Legislative References Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(18) Reduction of qualified expenditures

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

A.3 Ontario research and development tax credit and Ontario innovation tax credit

Given:

The conditions are the same as in example A.1.

Calculating the Ontario research and development tax credit (ORDTC)

Type of expenditure Calculation: Amount minus OITC × ORDTC rate Amount
Current expenditures ($800,000 – $80,000) × 4.5% $32,400(B)
PPA ($440,000 – $44,000) × 4.5% 17,820*
ORDTC N/A $50,220

* The ORDTC amount ($17,820) related to the PPA should be added to income on T2SCH1, Net Income (Loss) for Income Tax Purposes of the federal corporation income tax return in the year it is applied to reduce Ontario taxes.

Federal pool of deductible SR&ED expenditures

Expenditure pool Amount References
Current year's expenditures $800,000 37(1)(a)
Minus: government assistance ($80,000 + $32,400)
OITC (A) see Example A.1: $80,000
ORDTC (B): $32,400		 (112,400) 37(1)(d)
Add: prior-year expenditure pool 0 37(1)(a)&(b)
Amount available for deduction (T661 line 455) $687,600 37(1)

Federal qualified SR&ED expenditures for ITC purposes

The provincial tax credits are applied in the same pecking order (a prorated allocation is not used).

Elements Calculation: Amount minus OITC and ORDTC Amount Reference
Current expenditures $800,000‑$80,000‑$32,400 $687,600 127(9)*
PPA $440,000– $44,000– $17,820 378,180 127(9)*
Qualified expenditures for ITC purposes (T661 line 570) N/A $1,065,780 127(9)*

*Definition of "qualified expenditure"

Federal ITC: $1,065,780 × 35% = $373,023

Legislative References Income Tax Act
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(18) Reduction of qualified expenditures

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

Appendix B – References

B.1 Legislative references

List of provisions
Income Tax Act Description
Paragraph 12(1)(x) Inducement, reimbursement, etc.
Subparagraph 12(1)(x)(iv) Inducement, reimbursement, etc.
Subsection 18(9) Limitation respecting prepaid expenses
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Subparagraph 37(1)(a)(i) Pool of deductible SR&ED expenditures – current expenditures
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subparagraph 37(1)(a)(i.1) Pool of deductible SR&ED expenditures – third-party payments to a corporation
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Paragraph 37(1)(c) Pool of deductible SR&ED expenditures – repayment of government or non-government assistance
Paragraph 37(1)(d) Pool of deductible SR&ED expenditures – government or non-government assistance
Paragraph 37(1)(d.1) Pool of deductible SR&ED expenditures – super-allowance benefit
Subsection 127(9) Definition of “contract payment”
Subsection 127(9) Definition of “government assistance”
Subsection 127(9) Definition of “investment tax credit”
Subsection 127(9) Definition of “investment tax credit”, paragraphs (e.1) and (e.2)
Subsection 127(9) Definition of “non-government assistance”
Subsection 127(9) Definition of “qualified expenditure”
Subsection 127(9) Definition of “qualified expenditure”, paragraph (h)
Subsection 127(9) Definition of “super-allowance benefit amount”
Subsection 127(9) Definition of “taxable supplier”
Subsection 127(10.2) Expenditure limit determined
Subsection 127(10.7) Further additions to investment tax credit
Subsection 127(10.8) Further additions to investment tax credit
Subsection 127(18) Reduction of qualified expenditures
Subsection 127(19) Reduction of qualified expenditures
Subparagraph 127(19)(c)(ii) Reduction of qualified expenditures
Subsection 127(20) Agreement to allocate
Subsection 127(21) Failure to allocate
Subsection 127(25) Deemed contract payment
List of regulations
Income Tax Regulations Description
Subsection 2900(4) Calculation of the prescribed proxy amount
Section 4606 Prescribed amount

B.2 Jurisprudence

List of court cases
Case number Case name
2014 FCA 196 Immunovaccine Technologies Inc. v. Canada
2013 TCC 103 Immunovaccine Technologies Inc. v. The Queen
2009 DTC 1032 PSC Elstow Research Farm Inc. v. The Queen
99 DTC 775 Com Dev Ltd v. The Queen
96 DTC 6527 The Queen v. CCLC Technologies Inc.
95 DTC 5685 CCLC Technologies Inc. v. The Queen
93 DTC 1499 Tioxide Canada Inc. v. The Queen
85 DTC 5577 The Queen v. British Columbia Forest Products Ltd.
73 DTC 5071 Radio Engineering Products v. The Queen

Appendix C – Revisions

C.1 Explanation of changes

The following are the explanation of changes to the Assistance and Contract Payment Policy as part of the revision of December 18, 2014:

Section 1.0 has been revised to delete the first sentence of the previous policy which mentioned that this policy document was a consolidation of the CRA publications with respect to government assistance, non-government assistance and contract payments and its impact on the deductible expenditures for SR&ED carried on in Canada and on the qualified SR&ED expenditures for the purposes of calculating the SR&ED ITC.

Section 2.0 has been revised to reflect the legislative changes resulting from the 2012 Federal budget measures with respect to capital SR&ED expenditures.

Section 4.1.2 has been revised to reflect the revised definition of non-government assistance found in 127(9) of the Act, which is effective December 21, 2012. Previously, "non-government assistance" was defined in the Act as an amount that would be included in a claimant's income under paragraph 12(1)(x) read without reference to subparagraphs 12(1)(x)(vi) and (vii).

Section 4.2.1 has been revised to clarify the CRA's position in the absence of a business motive in view of jurisprudence since the original publication date.

Section 4.3.1 has been revised to reflect the legislative changes resulting from the 2012 Federal budget measures with respect to capital SR&ED expenditures.

Section 4.4.1 has been revised to elaborate on the requirements for filing an agreement to allocate assistance.

Examples 6.0 have been revised to reflect the legislative changes resulting from the 2012 Federal budget measures with respect to the prescribed proxy rate.

Appendix A – Examples have been revised to reflect the legislative changes resulting from the 2012 Federal budget measures with respect to the prescribed proxy rate and capital SR&ED expenditures.

Appendix B.3 "CRA publications" has been removed.

Appendix B.4 "Other references" has been removed.

Other minor formatting and editing corrections were made throughout the document.

Date modified:
2014-12-18