In the SR&ED (Scientific Research and Experimental Development) program, qualified expenditures form the basis of calculating investment tax credits (ITCs) for R&D activities. These expenditures are determined at the end of the tax year and include specific costs directly related to SR&ED projects. This article outlines the types of expenditures that qualify, how assistance affects claims, and key considerations for businesses in managing and maximizing their SR&ED expenditures.
What Are Qualified SR&ED Expenditures?
Qualified expenditures refer to costs incurred within the tax year that are necessary for conducting SR&ED. They include:
Current Expenditures: Allowable expenses directly associated with carrying out SR&ED, including wages, materials, and overhead costs, minus specific exclusions for capital property or contract payments beyond 2014.
Capital Expenditures (Pre-2014): Capital assets such as machinery, equipment, software, and hardware used substantially in SR&ED activities, acquired before 2014, are eligible. Exclusions apply to buildings, land, and leasehold interests.
Shared-Use Equipment: Expenditures on first-term and second-term shared-use equipment allocated to SR&ED purposes.
Third-Party and Contract Payments: Only 80% of payments made for SR&ED contracts or third-party expenditures incurred post-2012 qualify.
Prescribed Proxy Amount: A calculated amount representing indirect expenditures that can be included in the qualified expenditure pool.
Exclusions from Qualified Expenditures
The following are excluded from SR&ED qualified expenditures:
Prescribed expenditures, such as those incurred for non-eligible activities.
SR&ED expenses paid to non-arm’s length parties unless related to employee salaries.
Payments made to non-taxable suppliers, unless for SR&ED work directly undertaken by the claimant.
In addition, expenses unpaid within 180 days after the end of the tax year are excluded from the qualified expenditure pool for that year but can be included in the year when payment is made.
Adjustments for Government and Non-Government Assistance
Qualified expenditures must be reduced by government or non-government assistance and contract payments received or expected to be received. This policy prevents the “stacking” of benefits by disallowing the layering of tax credits on top of other forms of financial support. Only one party can claim ITCs for SR&ED work conducted under a contract, ensuring that both payer and performer cannot claim credits for the same work.
Government Assistance: This includes grants, subsidies, forgivable loans, or tax allowances from government bodies, municipalities, or public authorities. The CRA views contingently repayable loans as government assistance if repayment is based on conditions like production or sales volume.
Non-Government Assistance: This refers to similar types of inducements or subsidies from non-governmental sources. Legislation broadly defines this to capture any contributions that lower the economic burden of SR&ED work on the taxpayer.
If assistance or contract payments are received for one SR&ED project, only that project’s qualified expenditures are reduced—other projects remain unaffected.
Important Considerations and Court Interpretations
Several court cases underscore the importance of correctly categorizing and documenting assistance to prevent reductions in SR&ED claims. For instance, in Immunovaccine Technologies Inc. v. The Queen, advances provided under a government program were classified as “government assistance” despite being repayable, as they provided indirect financial support for SR&ED activities. This case, among others, highlights the CRA’s broad interpretation of government assistance.
Documentation and Compliance
To ensure compliance, businesses must track and document all expenditures, assistance, and repayments accurately, as these impact the qualified expenditure pool and ITC eligibility. The CRA requires that these amounts are documented and filed according to SR&ED deadlines. Proper records enable taxpayers to claim eligible SR&ED credits and minimize potential reductions due to assistance.
Qualified expenditures are central to determining SR&ED investment tax credits, but understanding how various forms of assistance impact these claims is essential. By carefully managing expenses, documenting support received, and understanding assistance provisions, businesses can optimize their SR&ED claims while maintaining CRA compliance. At Viewin Advisory, we help clients navigate the complexities of SR&ED qualified expenditures, ensuring maximum claim potential and strategic management of SR&ED finances. Contact us for expert guidance tailored to your SR&ED needs.