Oldcastle Building Products – Tax Court of Canada finds that compensation to a corporation's research head based on a percentage of its net sales of new products was not a “bonus” for SR&ED ITC purposes

Reg. 2900(9) provides that salary and wages for SR&ED investment tax credit purposes excludes “bonuses” and “remuneration based on profits.” The taxpayer agreed to pay the head of its SR&ED program (who was not a major shareholder or other “specified employee”) a base salary plus a “bonus” (which Archambault J preferred to refer to more neutrally as “variable pay”) equal to a percentage of the net sales of new or modified products. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which his variable pay exceeded $1 million, as occurred in the years in issue.

Archambault J found that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, and also that it was not “based on profits” given that the only expenses deducted in arriving as net sales were freight and insurance. As to a Crown argument that the variable pay did not qualify as a s. 37 expense because the compensation amount referenced “the sales of products respecting which the R&D activities had been performed in prior years” Archambault J stated that “CRA is confusing the nature of the amount paid with the method of its calculation,” and that “the amounts paid did not constitute remuneration for the sale of Oldcastle products because the work of Mr. Castonguay was not the sale of products but, rather, development at the Research Centre of new products.”

Neal Armstrong. Summaries of Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183 under Reg. 2900(9)(c), Reg. 2900(9)(d) and s. 37(8)(a)(ii)(B).