Regulation 2900

Subsection 2900(2)

See Also

Armada Equipment Corporation v. The Queen, 2007 DTC 879, 2007 TCC 260 (Informal Procedure)

In finding that fees paid to an accounting firm to file claims for investment tax credits did not qualify as "directly related" to the prosecution of scientific research and experimental development, Mogan D.J. stated (at para. 15) that:

"In order to be 'directly related'', an expenditure must be incurred in the research itself or in the development itself. The amount paid to Deacur & Co. was a consequence of research and development which would already taken place."

Words and Phrases
directly related
Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2902 83

Consoltex Inc. v. The Queen, 97 DTC 724 (TCC)

The cost of yarn that the taxpayer expended in the course of R&D project qualified under both s. 37(7)(c)(ii)(A) and Regulation 2900(2)(c), notwithstanding that the yarn subsequently was sold. Bowman TCJ. stated (at p. 736) that "the word 'expenditures' is a reasonably comprehensible English word ... . It is something one spends, an outlay. No meaning of which I am aware, either in ordinarily parlance or in decided cases, would justify adding after it 'net of sales proceeds'".

He went on to note in light of former s. 4(4) that as the expenditures qualified under s. 37, they could not also be deducted as cost of sales under s. 9.

Administrative Policy

Application Policy SR & ED 96-06 "Directly Undertaking, Supervising or Supporting v. 'Directly Engaged' SR & ED Salary and Wages".

28 July 1992 Memorandum 921859 (April 1993 Access Letter, p. 151, ¶C180-136)

Use of the term "paid" in s. 2900(2)(b) was intended to deny deductions for accruals of salaries, wages and bonuses. However, in order to assist District Offices in processing refundable investment tax credit claims, RCT will consider normal year-end accruals which are systematically provided for in a payroll system to have been paid in the year accrued, provided that they are paid shortly after the year-end.

23 April 1990 Memorandum (September 1990 Access Letter, ¶1412)

The concession in IT-151R3, para. 11 (that normal year-end accruals would be considered to have been "paid") is a practical but minor concession made to assist district offices in processing refundable investment tax credit claims.

18 December 1989 Memorandum (May 1990 Access Letter, ¶1212)

Cost associated with bidding for a contract, do not satisfy the requirements of s. 2900(1)(c) because the bidding costs would have been incurred even if the bid were unsuccessful and no scientific research had occurred.

87 C.R. - Q. 27

Each employee's employment duties must be examined and a determination made as to whether his duties directly relate to the undertaking, supervision or support of R & D.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(1) 21

IT-151R4 "Scientific Research and Experimental Development Expenditures"

Paragraph 2900(2)(b)

See Also

AG Shield Ltd. v. The Queen, 2017 TCC 68

individual shareholders entitled to find that their non-dividend draws were solely wages for SR&ED prosecution

The taxpayer was a Canadian corporation, owned equally by two brothers, that carried on a small-scale business of designing and manufacturing agricultural implements, and which used the proxy method in computing its SR&ED claims. Tom and Gary each worked 3,000 hours in 2010, of which Tom and Gary spent 1094.5 and 201.5 hours, respectively, on SR&ED activities. The taxpayer at year end determined that their draws would be treated in aggregate as comprising (i) wages equal to $30 per hour spent on SR&ED (for an aggregate of $38,880, but with $11,940 of this allocated to Gary, so that he effectively received more than $30 per hour), and (ii) (as to the balance of their “compensation," or $31,200 each) as dividends. CRA reassessed on the basis that a pro rata portion of each brother's wages should be treated as having been paid for non-SR&ED activities, based on his non-SR&ED hours as a percentage of his 3,000 hour total, so that the eligible Reg. 2900(2)(b) amounts were reduced pro tanto.

In allowing the taxpayer’s appeal, D’Arcy J stated (at paras 31, 32, and 33):

… [T]he Appellant paid Gary McCrea and Tom McCrea wages of $38,880 solely for the work Gary McCrea and Tom McCrea performed conducting SR&ED. As a result, 100% of those wages can reasonably be considered to relate to SR&ED and they represent an expenditure on or in respect of SR&ED.

Counsel for the Respondent argued that… Gary McCrea and Tom McCrea did not receive any compensation for the significant time they spent “performing director or management activities” for the Appellant.

… As the controlling shareholders and managing directors of the Appellant, they chose to receive dividends in lieu of salary and/or bonuses. This was their choice and did not require a formal agreement.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B) individual shareholders could allocate all of their non-dividend earnings to SR&ED wages 168

Subsection 2900(4)

Administrative Policy

Prescribed Proxy Amount Policy 19 December 2012

The objective of the overall cap is to ensure that the total qualified SR&ED expenditures and PPA and other deductions specifically allowed under the Regulations are not greater than the total business expenditures made in the year. Generally, the overall cap on the PPA should not apply to claimants carrying on a diversified business (that includes, for example, production, marketing, and research and development). Specifically, the overall cap will usually not restrict the calculated PPA if the claimant has deducted more than $65 of non-SR&ED expenses (excluding the deductions specifically identified by the Regulations as mentioned below) for each $100 of eligible salary included in the salary base.

The overall cap is calculated based on the total expenditures for tax purposes minus certain deductions allowed under other sections of the Income Tax Act (ITA). These latter deductions are specifically identified by the Regulations, for example capital cost allowance (CCA), SR&ED deduction as per line 411 of Schedule T2SCh1, building rent, interest, etc.

Table 2 illustrates the calculation of the overall cap on the PPA.

Table 2 Overall cap on the prescribed proxy amount

Enter the total amounts deducted when calculating the net income for tax purposes from the business for the year (including the cost of goods sold). 1) ______________
Enter the deductions claimed in the year under sections 20 (for example, capital cost allowance, interest, bad debts), 24 (if you cease to carry on a business), 26 (for a bank), 30 (improving land for farming), 32 (if your business is that of an insurance agent or broker), 37 (for SR&ED expenditures), 66 to 66.8 (for example, exploration and development expenditures), and 104 (for a trust). 2) ______________
Enter the amount of expenditures incurred for the use of, or the right to use, a building (other than a prescribed special-purpose building). 3) ______________
Enter the amount from line 1, minus the amounts on line 2 and line 3. This is the amount of the overall cap on the PPA. 4) ______________

If a claimant carries on more than one business, the claimant should add the amounts specified under the Regulations that were deducted when calculating the claimant's income for the year from all businesses.

Subsection 2900(9)

Paragraph 2900(9)(c)

See Also

Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183

sales-based remuneration was not bonus

The taxpayer (“Oldcastle”), which was a leading producer of concrete building products, entered into an employment contract in 2004, with a former shareholder and principal of the business (“Castonguay”) who now was no longer a “specified employee,” for Castonguay to direct a research centre (with a staff of over 25) for the development of new and improved building products. The contract stipulated a base salary, plus a “bonus” (which Archambault J stated he would instead term “variable pay”) calculated as a sliding percentage of the sales (net of shipping and insurance expenses) of new and modified products developed by the research centre. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which Castonguay’s variable pay exceeded $1 million, which was the case in the taxation years in issue (2010 and 2011). Oldcastle took the variable pay into account under Reg. 2900(4) for purposes of computing its prescribed proxy amount having regard to s. 37(8)(a)(ii)(B)(IV).

Before finding that 55% and 40% of the variable pay of Castonguay for 2010 and 2011, respectively (being the respective percentages of Castonguay’s time conceded by the Crown to relate directly to his R&D activities), should be included in computing Oldcastle’s prescribed proxy amount under Reg. 2900(4), Archambault J turned first to the Reg. 2900(9)(c) exclusion of “bonuses,” and stated (TaxInterpretations translation, paras. 25, 27):

This variable pay is quite similar to the remuneration of employees working for intermediaries, such as sales persons, commercial representatives and brokers… .

Oldcastle had no discretion as to paying the variable pay. It was payable in accordance with the terms of the employment contract. … [T]he sole remuneration which was paid to Mr. Castonguay in 2010 or 2011 was not an “amount paid in addition that which is due.” We are not dealing here with a bonus for purposes of the Act and Regulation.

Words and Phrases
bonus
Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2900 - Subsection 2900(9) - Paragraph 2900(9)(d) percentage of net sales was not based on profits 334
Tax Topics - Income Tax Act - Section 37 - Subsection 37(8) - Paragraph 37(8)(a) - Subparagraph 37(8)(a)(ii) - Clause 37(8)(a)(ii)(B) sales-based comepensation nonetheless directly related to SR&ED 422

Paragraph 2900(9)(d)

See Also

Oldcastle Building Products Canada Inc. v. The Queen, 2016 CCI 183

percentage of net sales was not based on profits

The taxpayer (“Oldcastle”), which was a leading producer of concrete building products, entered into an employment contract in 2004, with a former shareholder and principal of the business (“Castonguay”) who now was no longer a “specified employee,” for Castonguay to direct a research centre (with a staff of over 25) for the development of new and improved building products. The contract stipulated a base salary, plus a “bonus” (which Archambault J stated he would instead term “variable pay”) calculated as a sliding percentage of the sales (net of shipping and insurance expenses) of new and modified products developed by the research centre. However, the base salary eroded based on the variable pay level, so that no base salary would be payable in any year in which Castonguay’s variable pay exceeded $1 million, which was the case in the taxation years in issue (2010 and 2011). Oldcastle took the variable pay into account under Reg. 2900(4) for purposes of computing its prescribed proxy amount having regard to s. 37(8)(a)(ii)(B)(IV).

Before finding that 55% and 40% of the variable pay of Castonguay for 2010 and 2011, respectively (being the respective percentages of Castonguay’s time conceded by the Crown to relate directly to his R&D activities), should be included in computing Oldcastle’s prescribed proxy amount under Reg. 2900(4), and after finding that the variable pay was not a “bonus” given inter alia that the taxpayer had no discretion as to how much it paid, Archambault J turned to Reg. 2900(9)(d) and stated (TaxInterpretations translation, para. 28):

[T]he formula set out in the employment contract provided for remuneration based on the computed sales revenues for products developed by the Research Centre, reduced by two expenses, namely, shipping and insurance expenses. … Too many of the expenses incurred in making the sales were missing for it to be possible to state that Oldcastle realized a profit on the sale… . At the end of the day, the expression “variable pay” appears to me to be most appropriate for describing the remuneration paid to Mr. Castonguay.