Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy

Date: March 30, 2022

Table of contents

• 1.0 Purpose
• 2.0 Overview
• 3.0 On behalf of
• 4.0 Look-through rule and the reporting of certain payments
• 5.0 What is a contract for SR&ED?
  • 5.1 Contracts for non-SR&ED work
• 6.0 Arm's length SR&ED contracts
  • 6.1 Arm's length SR&ED contracts
  • 6.2 Arm's length contracts for SR&ED only
  • 6.3 Arm's length contracts that include non-SR&ED work
    • 6.3.1 Example – Arm's length contracts that include non-SR&ED work
  • 6.4 Arm's length SR&ED contracts for support work only
• 7.0 Non-arm's length SR&ED contracts
  • 7.1 When the payer will not earn an SR&ED investment tax credit
  • 7.2 Special Rules – Transferring qualified expenditures
  • 7.3 Exclusion from qualified expenditure
    • 7.3.1 Example – Exclusion from qualified expenditure
  • 7.4 Non-arm's length SR&ED contracts for support work only
• 8.0 Contracts with non-taxable supplier
• 9.0 Contracts that include SR&ED work outside Canada
  • 9.1 Example – Contract that includes SR&ED work outside Canada
• 10.0 Contracts for SR&ED performed on behalf of a claimant vs. third-party payments
• 11.0 Investment Tax Credit recapture on SR&ED contracts
• 12.0 Contracts with placement agencies
• Appendix A – References
  • A.1 Legislative references
• Appendix B – Revisions
  • B.1 Explanation of changes

1.0 Purpose

The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding contract expenditures for SR&ED performed on behalf of a claimant when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations.

2.0 Overview

Generally, a claimant may:

• perform SR&ED in-house,
• have someone else perform SR&ED on their behalf, or
• make payments to certain entities (such as approved entities, universities, or not-for-profit SR&ED corporations) to be used for SR&ED.

This document will focus on the second point: having someone else perform SR&ED on their behalf.

Where a claimant contracts another party to have SR&ED performed on their behalf, the amount payable under the contract may be an allowable SR&ED expenditure and 80% of the expenditure can be allowable as a qualified SR&ED expenditure of the claimant for investment tax credit (ITC) purposes. The party performing the work may be allowed to claim SR&ED expenditures for the contract, but would have to reduce its qualified SR&ED expenditures for ITC purposes by payments received under the contract (contract payment). In this way, there is no duplication of the ITC entitlement. For more information about contract payments, refer to the Assistance and Contract Payments Policy.

Claimants can claim contract expenditures for SR&ED when they award a contract to a contractor to perform SR&ED work on their behalf. The claimant must show that the SR&ED work was carried out in Canada and was related to their business. The contract expenditures for SR&ED work performed on behalf of (see section 3.0) the claimant are generally treated in the same manner under the traditional method and proxy method.

A payment associated with any SR&ED work contracted but not performed is considered a prepaid expense. The Income Tax Act provision for prepaid expenses treats the expenditure as not being made or the expense as not being incurred in the year (and therefore not deductible in the tax year). SR&ED contract expenditures are also subject to the unpaid amount rules. For more information on this, refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Legislative References Income Tax Act
Subsection 18(9) Limitation respecting prepaid expenses
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
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – all or substantially all (ASA)
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts
Subsection 127(26) Unpaid amounts

3.0 On behalf of

When SR&ED carried out in Canada is undertaken “on behalf of” a claimant, this normally refers to a situation where the SR&ED work is contracted out to another party under circumstances where the claimant (payer) typically maintains ownership of the SR&ED work performed.

Whether the payer requested the contractor (performer) to perform SR&ED on behalf of the payer under the terms of the contract is a key element for determining an amount as being a contract payment for the performer. This determination is made on the basis of the terms of the contract read as a whole and by reviewing all the facts surrounding the particular situation. A contract payment reduces the qualified SR&ED expenditures of the performer, for more information see the Assistance and Contract Payments Policy.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts

4.0 Look-through rule and the reporting of certain payments

Expenditures of a capital nature or expenditures for the right to use capital property do not qualify for SR&ED tax incentives. As a consequence, the claimant’s SR&ED contract expenditure must be reduced by the amount of any related expenditure of the person or partnership (the performer) that is not an expenditure of a current nature (for example, capital property) – the look-through rule.

When a claimant is required to reduce an expenditure because of the look-through rule, the performer is required to inform the claimant in writing of the amount of the reduction. This information is to be provided without delay if requested by the claimant and in any other case no later than 90 days after the end of the calendar year in which the expenditure was made.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 37(14) look-through rule
Subsection 37(15) reporting of certain payments

5.0 What is a contract for SR&ED?

An SR&ED contract is for the performance of basic research, applied research, experimental development, or support work, done on behalf of (see section 3.0) a claimant. For more information on what is SR&ED, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

An arm’s length performer who has been contracted to perform SR&ED work will be able to claim expenditures for their work if the performer is carrying out basic research, applied research, or experimental development, along with the support work. The performer must reduce their qualified SR&ED expenditures for any contract payments. For more information with respect to contract payments, refer to the Assistance and Contract Payments Policy.

SR&ED support work, done by the performer must be commensurate with the needs and directly in support of the basic research, applied research, or experimental development work performed by or on behalf of the payer. Given that these requirements have been met, a payer may claim contract expenditures for SR&ED support work done by a performer regardless of the method chosen by the payer—the traditional or proxy method. For more information on the traditional and proxy methods, refer to the Traditional and Proxy Methods Policy.

A performer who has been contracted to perform only SR&ED support work is not eligible to claim expenditures for this work. This is because support work on its own does not meet the definition of SR&ED. The exception to this is in the case of a non-arm’s length (NAL) performer (see section 7.4).

Legislative References Income Tax Act
Subsection 127(9) Definition of “contract payment”
Subsection 248(1) Definition of “SR&ED”

5.1 Contracts for non-SR&ED work

Contract costs for non-SR&ED work (for example, work performed by electricians, welders, and mechanics that is not one of the eight support work activities described in the definition of SR&ED in the Act) may qualify as SR&ED overhead and other expenditures under the traditional method if the directly related and incremental tests are met. For more information about directly related and incremental tests, refer to the SR&ED Overhead and Other Expenditures Policy.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i) Pool of deductible SR&ED expenditures – current expenditures
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subsection 248(1) Definition of “SR&ED”

Legislative Reference Income Tax Regulations
Paragraph 2900(2)(c) Other expenditures directly related and incremental to the prosecution of SR&ED – traditional method

6.0 Arm's length SR&ED contracts

6.1 Arm's length SR&ED contracts

Where a claimant (payer) enters into an SR&ED contract (see section 5.0) with an arm’s length party, the claimant (not the performer) must show that the work performed on its behalf was SR&ED carried on in Canada by the ultimate performer and that the SR&ED is related to a business of the claimant.

Therefore, the nature of the contract and not the type of expenditures incurred by the performer would be the deciding factor in determining whether the contract amount represents an allowable SR&ED expenditure of the claimant (payer).

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts

6.2 Arm's length contracts for SR&ED only

Only 80% of the expenditure related to SR&ED contracts is allowable as a qualified SR&ED expenditure for the purpose of calculating the investment tax credit (ITC) to the extent that the SR&ED is performed in Canada in the tax year by a taxable supplier and is related to a business of the claimant.

Where a contract is for SR&ED only, the CRA will not look-through (the contract) to identify the type of expenditures the performer incurred when the CRA is determining the allowable and qualified SR&ED expenditures of the claimant (payer). However, the CRA is able to look-through to determine that (for example):

• the contracted SR&ED was performed in Canada;
• the services were rendered in the claimant's tax year;
• the performer awards a contract to a subcontractor to do some of the work under the contract;
• the SR&ED contract expenditure is reduced by the amount of any related expenditure of the person or partnership (the performer) that is not an expenditure of a current nature, see section 4.0.

Legislative References Income Tax Act
Subsection 18(9) Limitation respecting prepaid expenses
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts
Subsection 37(14) look-through rule
Subsection 127(9) Definition of “qualified expenditure”, paragraph (g)
Subsection 248(1) Definition of “SR&ED”

6.3 Arm's length contracts that include non-SR&ED work

A claimant (payer) may contract with an arm’s length party (performer) to do SR&ED and other work (that is not SR&ED) on behalf of (see section 3.0) the payer, within a single contract for a total contract price. The claimant (payer) incurs SR&ED expenditures and earns an ITC on the amount that relates to SR&ED work performed under the contract to the extent that the performer is a taxable supplier, SR&ED is related to a business of the payer, and is performed in Canada in the tax year. The portion of the contract amount that relates to non-SR&ED work is not allowed as an SR&ED expenditure and does not earn any ITCs.

Splitting the contract amount between SR&ED and non-SR&ED work may be done in a number of ways. For example, a reasonable separation may be made based on the fair market value of work performed. The CRA will accept the method chosen by the claimant, provided that it provides a reasonable approximation of the SR&ED expenditures.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 127(9) Definition of “qualified expenditure”, paragraph (g)

6.3.1 Example – Arm's length contracts that include non-SR&ED work

A Canadian corporation, Corporation A, contracts with an arm’s length Canadian corporation, Corporation B, to develop a custom product for a total contract amount of $300,000. In developing the custom product, Corporation A estimated that Corporation B performed SR&ED work amounting to $125,000 of the contract price and the remaining $175,000 was allocated to non-SR&ED work. A review of the work performed under the contract identified the SR&ED work and the non-SR&ED work. An analysis of the associated costs with the SR&ED work supported the claimant's estimates, and the CRA accepted the allocation as being reasonable.

The requirements of the Income Tax Act were met for the portion of the contract that related to SR&ED work carried on in Canada that related to a business of the claimant. As a result, the contract amount of $125,000 allocated to the SR&ED work would be considered to be an allowable SR&ED expenditure and 80% of the expenditure is allowable as a qualified SR&ED expenditure to Corporation A (payer). The contract amount allocated to non-SR&ED work of $175,000 is not deductible for SR&ED purposes but could be deductible, depending on the circumstances, as a business expense or capital expenditure to Corporation A.

Legislative Reference Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf

6.4 Arm's length SR&ED contracts for support work only

Where a claimant (payer) contracts out only support work to an arm’s length party (performer), the payer is eligible to claim the amount of the contract provided that the work is commensurate with the needs and directly in support of the basic research, applied research, or experimental development work performed by or on behalf of (see section 3.0) the payer. The costs for work that is not described in paragraph (d) of the definition of SR&ED are not allowable contract expenditures for SR&ED, but may be allowed as overhead and other expenditures under the traditional method (see section 5.1).

The performer cannot claim the expenditures incurred for the support work since this work, on its own, is not SR&ED.

For more information on the eligibility of support work, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 248(1) Definition of “SR&ED”

7.0 Non-arm's length SR&ED contracts

7.1 When the payer will not earn an SR&ED investment tax credit

Where a claimant (payer) enters into an SR&ED contract (see section 5.0) with a non-arm’s length (NAL) party (NAL performer), special rules apply, whereby the claimant's expenditures for the SR&ED contract are allowable SR&ED expenditures, but are not qualified SR&ED expenditures for the purpose of calculating the investment tax credit (ITC).

The NAL performer can claim its SR&ED expenditures and qualified expenditures relating to the SR&ED work performed on behalf of (see section 3.0) the payer. Also, the amount received or receivable is not considered to be a contract payment and it will not reduce the NAL’s performer’s qualified expenditure for ITC purposes.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 127(9) Definition of “contract payment”
Subsection 127(9) Definition of “qualified expenditure”, paragraph (f)
Subsection 248(1) Definition of “SR&ED”, paragraph (d)
Section 251 Arm's length

7.2 Special Rules – Transferring qualified expenditures

Special rules may apply to allow the NAL performer to transfer all or a portion of its qualified SR&ED expenditures in the year to the payer up to a maximum of the contract amount. Use prescribed Form T1146, Agreement to transfer qualified expenditures incurred in respect of SR&ED contracts between persons not dealing at arm's length, to make the transfer. As stated in section 7.1, the contract payment rules do not apply when there is a NAL relationship. For more information on transfers of qualified expenditures, refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy and for more information on the contract payment rules, refer to the Assistance and Contract Payments Policy.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 127(9) Definition of “contract payment”
Subsection 127(9) Definition of “qualified expenditure”, paragraph (f)
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 248(1) Definition of “SR&ED”, paragraph (d)
Section 251 Arm's length

7.3 Exclusion from qualified expenditure

A claimant cannot circumvent the NAL rules (see section 7.1) by including an arm’s length party between a payer and a NAL performer.

Legislative Reference Income Tax Act
Subsection 127(24) Exclusion from qualified expenditure

7.3.1 Example – Exclusion from qualified expenditure

Corporation A (payer) contracts with an arm's length party, Corporation B, to carry out the SR&ED. Corporation B then subcontracts the SR&ED to Subco C, a NAL party to Corporation A.

If the main purpose of this arrangement can reasonably be considered to allow Corporation A to obtain a qualified expenditure for the payment to the arm's length party, Corporation B, the amount will not be allowed as a qualified expenditure to Corporation A. However, the amount received by the arm's length party, Corporation B, and the amount received by Subco C will retain their character as contract payments. As a result, none of the corporations would be entitled to claim an ITC for the SR&ED performed. For more information on the contract payment rules, refer to the Assistance and Contract Payments Policy.

Legislative Reference Income Tax Act
Subsection 127(24) Exclusion from qualified expenditure

7.4 Non-arm's length SR&ED contracts for support work only

In an SR&ED contract situation (see section 5.0) with NAL parties, the payer cannot earn an ITC because of the NAL rules (see section 7.1). In addition, if the work performed is only support work, the NAL performer would not be able to claim the SR&ED expenditures because such work, on its own, does not meet the definition of SR&ED. As a result, no expenditures incurred either by the payer or the NAL performer would be qualified expenditures for ITC purposes. However, subsection 37(13) of the Income Tax Act deems the support work of a NAL performer to be SR&ED, provided that the support work would be SR&ED if it were performed by the payer. This allows the NAL performer to claim the SR&ED expenditures even if it is only for support work activities. The NAL performer can transfer the qualified SR&ED expenditures to the NAL payer (see section 7.2) or the NAL performer can keep the qualified SR&ED expenditures and earn the ITC.

For more information on the eligibility of support work, refer to the Guidelines on the Eligibility of Work for SR&ED Tax Incentives.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 37(13) Non-arm's length contract – linked work
Subsection 248(1) Definition of “SR&ED”, paragraph (d)

8.0 Contracts with non-taxable supplier

A claimant cannot earn an investment tax credit (ITC) for an SR&ED contract (see section 5.0) expenditure that is paid or payable to or for the benefit of a person or partnership that is not a taxable supplier. This does not apply to an expenditure on SR&ED directly undertaken by the claimant. For more information about the taxable supplier rules, refer to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

A performer who does the SR&ED work on behalf of (see section 3.0) a payer that is not a taxable supplier does not take into account the payment received from this payer to reduce its qualified SR&ED expenditures. This is because an amount received by the performer  from a non-taxable supplier does not meet the definition of contract payment. A contract payment is an amount received from a taxable supplier and would reduce the qualified SR&ED expenditures used to calculate the ITC. For more information on what reduces qualified expenditures, see the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 127(9) Definition of “contract payment”
Subsection 127(9) Definition of “qualified expenditure”, paragraph (g)

9.0 Contracts that include SR&ED work outside Canada

A claimant may enter into a contract with an arm’s length party where all or a portion of the SR&ED will be carried on outside Canada.

Where an entire contract relates to SR&ED work carried on outside Canada, no portion of the contract amount is allowed as an SR&ED expenditure. Such expenditures cannot be included on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The payer will be able to deduct the SR&ED contract (see section 5.0) amount as an expenditure for SR&ED work performed outside Canada under subsection 37(2) of the Income Tax Act, when calculating their net income or loss for income tax purposes, but no ITC will be earned for such expenditures.

Where SR&ED work is carried on partially in Canada and partially outside Canada under the same contract, the claimant must allocate the contract amount between the SR&ED carried on in Canada and the SR&ED carried on outside Canada.

The method used to allocate the contract amount between the SR&ED carried on in Canada and the SR&ED carried on outside Canada must be reasonable and may, for example, be based on the fair market value of the SR&ED work carried on in Canada and the SR&ED work carried on outside Canada. Discussions with the claimant, an examination of the contract, and a review of the performer's work and related costs, if available, may also be used to allocate a reasonable portion of the contract amount to SR&ED carried on in Canada and SR&ED carried on outside Canada. The claimant must be able to show the CRA how the costs were allocated between SR&ED carried on in Canada and SR&ED carried on outside Canada.

Once a reasonable allocation of the contract amount has been established for SR&ED carried on in Canada, the CRA will not look-through (the contract) to identify the type of expenditures the performer incurred when the CRA is determining the allowable and qualified SR&ED expenditures of the claimant (see section 6.2).

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 37(2) Research outside Canada

9.1 Example – Contract that includes SR&ED work outside Canada

A Canadian corporation, Corporation A, contracts out its SR&ED to an arm’s length Canadian corporation, Corporation B, for a contract amount of $500,000. Corporation B performs SR&ED work in Canada but a portion of the work was performed outside of Canada. Corporation A allocated $350,000 of the contract price to SR&ED work that Corporation B performed in Canada, and allocated the remaining $150,000 to SR&ED work that Corporation B performed outside Canada. After a review of the contract and discussions with Corporation A, the CRA accepted the allocation as being reasonable.

The requirements of the Act were met for the portion of the contract that related to SR&ED work carried on in Canada that related to a business of the claimant. As a result, the contract amount of $350,000 allocated to the SR&ED work carried on in Canada is allowable and $280,000 ($350,000 x 80%) as a qualified SR&ED expenditure to Corporation A. The contract amount allocated to SR&ED work carried out outside Canada, $150,000, is not allowed as an SR&ED expenditure and is not a qualified expenditure for ITC purposes. In the case of SR&ED work performed outside Canada, the portion of the expenditures relating to that work may be deducted, when calculating the net income or loss for income tax purposes, under subsection 37(2) of the Act.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subsection 37(2) Research outside Canada

10.0 Contracts for SR&ED performed on behalf of a claimant vs. third-party payments

Claimants (payers) can make payments to certain entities, such as approved universities, colleges, or research institutes, to be used for SR&ED (see section 2.0). These payments are commonly referred to as third-party payments. It is important to distinguish between SR&ED contracts (see section 5.0) performed on behalf of (see section 3.0) the claimant and payments that the claimant made to certain third-parties to be used for SR&ED in Canada.

The key difference is the degree of control the payer has over the SR&ED being performed. In contract situations, the SR&ED services are performed directly for the payer who generally obtains the rights to the SR&ED. In third-party situations, the payer does not control the SR&ED performed, but obtains an entitlement to exploit the results of the SR&ED.

Unlike contract expenditures for SR&ED performed on behalf of the claimant, third-party payments generally become eligible for the SR&ED tax incentives at the time the payment is made (cash basis), rather than at the time the SR&ED work is performed (accrual basis).

For more information on third-party payments, refer to the Third-Party Payments Policy.

Legislative References Income Tax Act
Subsection 18(9) Limitation respecting prepaid expenses
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
Subparagraph 37(1)(a)(ii) Pool of deductible SR&ED expenditures – third-party payments to certain entities
Subsection 127(26) Unpaid amounts

11.0 Investment Tax Credit recapture on SR&ED contracts

The SR&ED investment tax credit (ITC) recapture rules apply where:

• a payer gives a contract to an arm’s length performer for SR&ED, or SR&ED and other work, to be performed on their behalf; and
  • the contract results in the acquisition of property (other than intellectual property) that will be used in the payer's SR&ED, or
  • that will be used in their business, or that will be sold.

The SR&ED ITC recapture rules apply when the payer disposes of the property or converts it to commercial use.

For more information about the ITC recapture rules, refer to the Recapture of SR&ED Investment Tax Credit Policy.

Legislative Reference Income Tax Act
Subsection 127(27) Recapture of investment tax credit

12.0 Contracts with placement agencies

An expenditure related to placement agency workers is treated the same as a contractor expenditure.

The expenditure resulting from a contract with an external provider or placement agency for providing workers can be considered an expenditure for the prosecution of SR&ED directly undertaken on behalf of (see section 3.0) a claimant (that is an expenditure for an SR&ED contract (see section 5.0)) provided it meets all the tests used to validate contracts in an SR&ED claim. In all cases, a claimant must demonstrate that the worker performed SR&ED work, and that the work was done in Canada on its behalf. In the case of contracts with placement agencies that involve both SR&ED and non-SR&ED work, the claimant must also be able to show the proportion of the worker's time that was spent on SR&ED so that the expenses can be apportioned accordingly.

The claimant may also need to provide additional facts about the particular situation so that the CRA can determine if the expenses are allowable and qualified SR&ED expenditures. While the terms of a placement agency contract can be useful in determining whether the worker performed SR&ED work, other means can be used, such as a review of the claimant's books and records, or explanations of cost allocations, time sheets, and other supporting documents.

Legislative References Income Tax Act
Subparagraph 37(1)(a)(i.01) Pool of deductible SR&ED expenditures – current expenditures, on behalf
Subclause 37(8)(a)(ii)(A)(I) SR&ED expenditures in Canada under the traditional method – ASA
Subclause 37(8)(a)(ii)(B)(II) SR&ED expenditures in Canada under the proxy method – contracts
Subsection 248(1) Definition of “SR&ED”

Appendix A – References

A.1 Legislative references

Appendix B – Revisions

B.1 Explanation of changes

The following are the explanation of changes to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy as part of the revision of March 30, 2022:

Section 3.0 has been revised by clarifying that a contract payment for SR&ED received by the performer reduces their qualified expenditures for the investment tax credit (ITC). 

Section 4.0 has been revised by removing the opening passage referring to expenditures of a capital nature or the right to use capital property made after 2013, as this is no longer necessary.

Section 5.0 has been revised by adding clarification for support work, which is defined in paragraph 248(1)(d) of the definition of SR&ED of the Income Tax Act. A performer who only performs SR&ED support work is not eligible to claim expenditures for this work. This is because support work, on its own, does not meet the definition of SR&ED.

Section 6.2, has been revised to remove unnecessary wording since after 2012 only 80% of contract SR&ED expenditures are allowable as qualified SR&ED expenditures for the purpose of calculating the investment tax credit.

Section 7.4 has been revised to better explain that expenditures for support work can be claimed by the performer in a NAL situation.

Section 8.0 has been revised to briefly explain the affects of a contract payment on the calculation of ITC of the performer.

Section 9.0 has been revised to clarify that expenditures for SR&ED work performed outside Canada by a contractor, cannot be claimed on Form T661, and do not result in the earning of ITC. The current expenditures of the SR&ED contract work performed outside Canada can be deducted when the payer calculates the net income or loss for income tax purposes.

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