SR&ED claims made by physicians and Medical Professional Corporations - Information for claimants

Terms used

Physician: refers to any regulated medical professional who practices a health care profession, whose activities may include medical research, and who is a member of the appropriate body regulating his or her profession.

MPC: refers to a corporation that one or more physicians established to carry on the practice of a regulated health care profession according to applicable provincial or territorial laws.

HCE: refers to one or many persons or entities (for example, universities, hospitals, health care networks, research institutes, and health care agencies) that provide medical services to the public, directly or indirectly through contractual agreements with physicians.

SR&ED and the medical sector

The Scientific Research and Experimental Development (SR&ED) program provides tax incentives to encourage Canadian businesses of all sizes and sectors to conduct research and experimental development to advance scientific knowledge or technology.

The Canada Revenue Agency (CRA) recognizes that work involving medical research generally meets the eligibility criteria of the SR&ED program as it contributes to new discoveries and advancements of medical knowledge. However, determining who can claim the work is sometimes difficult because of the collaboration between parties, for example, physicians, medical professional corporations (MPC), health care entities (HCE), etc.

This webpage gives physicians and MPCs information to help them prepare their SR&ED claim.

Each claim is to be determined based on its own facts, and the CRA recommends physicians and MPCs get advice from legal and accounting experts.

Claiming SR&ED

To claim SR&ED tax incentives, the Income Tax Act requires that the SR&ED work must be directly undertaken by the taxpayer or undertaken on behalf of another party and have resulted in expenditures.

Claimants can either perform the work directly (payer and performer) or pay for a contractor (performer) to do the SR&ED work on their (payer) behalf.

In many cases, physicians are required to participate in research as part of their appointment with an HCE. As several parties can collaborate to carry out the medical research, determining the payer and performer can be challenging. Physicians and corporations (MPCs, HCEs, etc.) are distinct legal entities for tax purposes.

As well, some HCEs (for example, universities and hospitals) are publicly funded. As non-taxable entities, they are not eligible to claim the SR&ED investment tax credit (ITC). However, performers doing eligible research work on behalf of these non-taxable HCEs can submit a SR&ED claim if they incurred their own eligible expenses and after reducing the qualified SR&ED expenditures for ITC purposes by compensation received or receivable.

Assistance and contract payments: Claimants should reduce the amount of SR&ED expenditures by any amounts of government assistance or non-government assistance received, receivable, or reasonably expected to be received. The contractor (performer) should reduce qualified expenditures for ITC purposes by the amount of the contract payments received, receivable, or reasonably expected to be received. This includes compensation for SR&ED performed for or on behalf of a government-funded entity.

Common scenarios

Below are two common scenarios where physicians or MPCs are making SR&ED claims for work they are directly undertaking (payer and performer) or directly undertaking on behalf of another party (performer only). The CRA recognizes that these scenarios will not address the complexities in all situations and will continue to examine specific areas of concern, such as the application of the government assistance and contract payment rules.

Scenario 1: Physicians as independent contractors (unincorporated business)

Physicians can operate their medical practice as independent contractors. They may directly undertake medical research for themselves or undertake research on behalf of another party. They can claim salaries and benefits payable to their employees as part of SR&ED ITCs but salaries or drawings paid or payable to sole proprietors or their partners are not deductible.

  1. If physicians are directly undertaking the research for themselves and they or their employees are performing the work, they may submit SR&ED claims as individuals if they meet all other program requirements.
  2. If physicians are performing research on behalf of another party as independent contractors, they may make a SR&ED claim as individuals if they meet all other program requirements. They must have incurred and paid for the SR&ED expenditures. The qualified expenditures may be reduced by assistance and contract payments.
  3. If physicians are performing research on behalf of another party as independent contractors, but are also directly undertaking additional SR&ED work (and funding) for themselves, they may submit SR&ED claims as individuals if they meet all other program requirements. They must have incurred and paid for the SR&ED expenditures. The qualified expenditures may be reduced by assistance and contract payments.

Scenario 2: MPCs and their physician-employees (incorporated business)

MPCs are typically incorporated by one or more physicians to operate the business of a medical practice. They may directly undertake medical research for themselves or undertake medical research on behalf of another party.

  1. If an MPC is directly undertaking (and funding) the SR&ED and the work is being performed by their physician-employees, the MPC may submit SR&ED claims as a corporation if it meets all other program requirements. It can claim the ITCs and expenditures incurred, including the physician-employees' salaries or wages. The salaries or wages must be reasonable and based on the time spent performing the research the MPC is claiming. SR&ED expenditures don't have to be reduced by contract payments if the SR&ED work was directly undertaken (and funded) by an MPC and not on behalf of another party.
  2. If an MPC is undertaking SR&ED work on behalf of another party and the work is being performed by its physician-employees, it may submit SR&ED claims as a corporation. As individuals and corporations are two separate legal entities, it is important that MPCs be named on service agreements and contracts as the entity performing the SR&ED work on behalf of another party. Note that certain provincial or other legislation may restrict that contractual right for an HCE to contract directly with an MPC. Assistance and contract payment reductions may apply.
  3. If an MPC's physician-employees are undertaking SR&ED work on behalf of another party and only their physicians are named on agreements or contracts as performing SR&ED work, then it is the physicians who may submit SR&ED claims as individuals. See Scenario 1 (b) for more information.
  4. If an MPC is undertaking SR&ED work on behalf of another party but is also directly undertaking (and funding) additional research for themselves, they may submit claims for SR&ED work directly performed and funded with reduction of expenditures for contract payments. See Scenario 2 (a) and 2 (b) for more information.

Documentation

The CRA recommends that all agreements be in writing. Where no written agreement exists, other evidence should demonstrate which party is legally bound to provide the medical services and perform the research. See Factors determining performance of SR&ED work for more information.

  • Research-related documents: Documents and records showing the work performed and the related expenditures should be kept and made available to the CRA should a claim be reviewed. Documents created when SR&ED work is performed are the best evidence to support a SR&ED claim because they provide a detailed account of the research, developments, and challenges throughout the project. Documents produced as a result of performing the work are also helpful to the CRA.
  • Relationship-contractual agreements: Contracts and other documents that show the legal relationships and terms of the agreement between the physicians and/or their MPCs and other parties should be made available to the CRA should a claim be reviewed. Contractual agreements with other parties should ideally be in writing, especially when all or part of the agreements relate to the medical research to be performed, the funding for the research, or the amount paid for the research. As well, these contractual agreements should describe the nature of the SR&ED work to be performed, the payments attributed to the SR&ED work, and who will perform the work.
  • Other documents: Although having written documents establishing contractual agreements is ideal and encouraged, other sources of information may be used to support a claim. Emails or signed attestations outlining the terms of the SR&ED work to be performed may also be submitted for consideration.

Common scenarios

This table summarizes scenarios involving physicians or their MPCs performing SR&ED work and who may claim the work.

Note 

When eligible activities are performed, the qualified SR&ED expenditures may be claimed.

Common scenarios
Legal person or entity Who is directly undertaking the work? What this means Who claims the SR&ED? Considerations
Scenario 1:
Individual/ Independent Contractor

(proprietor unincorporated business)
A) Physicians directly undertaking SR&ED work. Physicians are doing SR&ED work for themselves and incur expenditures associated with the work.

There is no other contractual obligation to perform SR&ED work on behalf of another party.
Individuals

(physicians)
SR&ED expenditures must be paid and incurred.

Proprietors cannot receive a salary (T4 income); therefore, it is not a qualified SR&ED expenditure.
B) Physicians undertaking SR&ED work on behalf of another party. Physicians have a contractual relationship to perform SR&ED work. Individuals

(physicians)
Qualified expenditures may be reduced by assistance and contract payments.
C) Physicians undertaking SR&ED work on behalf of another party but also directly undertaking research for themselves. Physicians have a contractual relationship to perform SR&ED work on behalf of another party. However, physicians are also doing SR&ED work for themselves and incurring costs outside of contractual obligations. Individuals

(physicians)
Qualified expenditures may be reduced by assistance and contract payments.
Scenario 2:
MPC
A) MPCs directly undertaking SR&ED work. MPCs are doing SR&ED work for themselves and incur expenditures associated with the work.

There is no other contractual obligation to perform SR&ED work on behalf of another party.
MPCs SR&ED expenditures must be paid and incurred.
B) MPCs undertaking SR&ED work on behalf of another party. MPCs have a contractual relationship to perform SR&ED work. MPCs Qualified expenditures may be reduced by assistance and contract payments.
C) MPCs’ physician-employees are undertaking SR&ED work on behalf of another party and only their physicians are named on the service agreement or contract as the entity performing the SR&ED work. Physicians have a contractual relationship to perform SR&ED work.

See Scenario 1 (b) for more information.
Individuals

(physicians)
Qualified expenditures may be reduced by assistance and contract payments.
D) MPCs are performing research on behalf of another party but are also directly undertaking (and funding) research for themselves. MPCs have a contractual relationship to perform SR&ED work on behalf of another party. However, MPCs are also doing SR&ED work for themselves and incurring expenditures outside of contractual obligations.

In these cases, it’s important that agreements and contracts reflect what SR&ED work was performed on behalf of another party and what work was directly undertaken (and funded) by the MPCs for themselves. See Scenario 2 (a) and 2 (b) for more information.
MPCs Qualified expenditures may be reduced by assistance and contract payments.

Factors determining performance of SR&ED work

To help determine whether claimants are undertaking SR&ED work for themselves or on behalf of another party, the CRA will review factors such as:

1. Are there written or verbal agreements between the parties? Do these agreements include an obligation to perform medical research?

2. Are there written or verbal agreements between parties and the physician(s) describing which entity paid the expenses related to the provision of medical services and medical research?

3. If the agreements were verbal, is there objective evidence regarding the terms of such agreements and the moment of their formation? Emails or signed attestations may be acceptable to validate this information.

4. Do corporate documents, such as articles of incorporation, amendments thereto, resolutions, minutes of meetings of the directors and/or shareholders, etc. refer to:

  • The major business activity as the provision of medical services and medical research?
  • Any agreement with the health care entities?
  • Payments or compensation received or receivable for the provision of medical services and medical research?
  • Any agreement between the MPC and the physician?
  • What services the physician is to provide to the MPC?
  • How the physician is to be compensated for the work performed for the MPC?
  • How much of the physician's time should be spent on medical research?
  • How much of the physician's time should be spent on other activities?
  • What portion of the physician's remuneration pertains to the medical research performed?
  • What method was used to determine what portion of the physician's salary pertains to the medical research performed?

Tips for physicians and MPCs

1. Have documents and records available that:

  • Describe the nature of the SR&ED work;
  • Identify who performed the work;
  • Specify and provide supporting evidence of the time spent doing the work; and
  • Support any paid expenditures related to performing the research.

2. Have written agreements that clearly state the relationships between the physician and the MPCs with HCEs or other parties. Other contractual agreements, such as those relating to the performance of medical research and the funding related to the claimed SR&ED should ideally also be in writing.

3. The agreement (s) should describe:

  • the research obligations of the performer (physician or MPC);
  • the contract amount attributable to the research;
  • in what capacity the physician or the MPC performs the research to help identify who is able to claim the SR&ED incentives.

4. If the SR&ED work is performed under contract for another party, remember that the Assistance and Contract Payments Policy may apply.

Contacting the CRA

If you need more information on this topic or need to contact your local coordinating tax services office, see the SR&ED website at canada.ca/taxes-sred.

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