Guidance: How the Canada emergency wage subsidy affects SR&ED claims

The Government of Canada provides support to Canadian businesses facing hardship as a result of COVID-19. The Canada emergency wage subsidy (CEWS), available to eligible employers to help keep or rehire employees, is one example of this support.

Although the treatment of government assistance for the purpose of the Scientific Research and Experimental Development (SR&ED) Program has not changed, claimants and other stakeholders may wonder how the CEWS affects SR&ED claims.

The Department of Finance Canada has stated that assistance received under the CEWS reduces the amount of remuneration expenses eligible for other federal tax credits calculated on the same remuneration. This statement is consistent with the definition of government assistance in subsection 127(9) of the Income Tax Act.

SR&ED expenditures and government assistance

Calculating the pool of deductible SR&ED expenditures

Government assistance for a deductible SR&ED expenditure reduces the pool of deductible SR&ED expenditures, if the taxpayer, at the filing-due date for a tax year:

• received the assistance
• is entitled to receive it
• can reasonably be expected to receive it

If the reduction is more than the balance of the pool otherwise calculated, the excess amount is included in the net income for the year.

Calculating the qualified SR&ED expenditure amount for investment tax credit purposes

In calculating the investment tax credit (ITC), government assistance that can reasonably be considered in respect of SR&ED reduces the qualified SR&ED expenditures, if the taxpayer, on or before the filing due date for the tax year:

• received the assistance
• is entitled to receive it
• can reasonably be expected to receive it

The CEWS received or receivable for an expenditure of a taxpayer that may be a qualified SR&ED expenditure is considered assistance in respect of SR&ED. In determining the qualified SR&ED expenditures for an ITC, using the proxy method or the traditional method, you have to calculate the CEWS amount received or receivable for directly attributable salary and wages which includes directly engaged salary and wages.

SR&ED salary and wages

There are two types of salary and wages that can be claimed for SR&ED:

• Directly engaged salary or wages are paid to employees doing hands-on SR&ED work based on the time spent. They are claimable under the traditional method or the proxy method.
• Directly attributable salary or wages are paid to employees directly undertaking, supervising, or supporting SR&ED work and to employees whose salary or wages are directly related and incremental to SR&ED work, such as the wages of clerical and administrative staff, based on the time spent. Directly attributable is a broader type than directly engaged. Salary and wages not directly engaged are reported as overhead and other expenditures on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, and can only be claimed using the traditional method.

For more information on directly engaged and directly attributable work, go to SR&ED Salary or Wages Policy, and see Table 3, Claiming salary or wages for SR&ED, in Guide T4088, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

SR&ED and non-SR&ED work

When an employee is involved in SR&ED and non-SR&ED work during the tax year, an adjustment is needed to separate the two kinds of work. SR&ED salary and wages are calculated based on the time spent directly engaged or directly attributable in SR&ED, relative to the total time worked in a tax year. If the CEWS is not received evenly throughout the tax year for the employees who are directly engaged or directly attributable in SR&ED, an adjustment is required to calculate the CEWS that reduces deductible SR&ED expenditures and qualified SR&ED expenditures.

Employee directly engaged or directly attributable, substantially all of the time

An employee may work all or substantially all (90% or more) of the time during an entire tax year as directly engaged or directly attributable in SR&ED. The CEWS amount received or receivable for any length of time during the tax year for that employee reduces the deductible SR&ED expenditures and the qualified SR&ED expenditures.

Three scenarios for an employee directly engaged 80% of the time

An employee is directly engaged in SR&ED for 80% of the time, from the week starting on Sunday, September 27, 2020, to the week ending on Saturday, November 21, 2020, and does not work in SR&ED the rest of the tax year. Consider the following three scenarios:

• The employer receives CEWS for that employee only from the week starting on Sunday, April 12, 2020, to the week ending on Saturday, August 29, 2020. The business was closed during this period. The CEWS amount received for that employee does not reduce the deductible SR&ED expenditures or the qualified SR&ED expenditures.
• The employer receives CEWS for that employee only from the week starting on Sunday, April 12, 2020, to the week ending on Saturday, August 29, 2020. The business was operating and the employee was not working in SR&ED during that period. The CEWS amount received for that employee does not reduce the deductible SR&ED expenditures or the qualified SR&ED expenditures.
• The employer receives CEWS for that employee only from the week starting on Sunday, April 12, 2020, to the week ending on Saturday, October 24, 2020. An amount equal to 80% of the CEWS amount received for that employee from September 27 to October 24, 2020, when the employee was directly engaged in SR&ED, reduces the deductible SR&ED expenditures and the qualified SR&ED expenditures.

Your method to calculate the CEWS assistance that reduces the deductible SR&ED expenditures and the qualified SR&ED expenditures should be the same for every employee that is directly engaged or directly attributable in SR&ED in the tax year, and your method should reflect your reality.

Example of the Canada emergency wage subsidy applied to an SR&ED claim

Sarah is the lead engineer in a company earning $1,400 per week. For 12 weeks during the tax year, she is involved in an SR&ED project and spends 100% of her time in directly engaged activities and does non-SR&ED work during the rest of the year. Jamaal is an administrative assistant earning $700 per week for the company. He spends 30% of his time helping Sarah track the SR&ED project cost and its progress during the same period. Sarah's salary for directly engaged activities can be claimed under the traditional method or the proxy method. Jamaal's salary for his contribution to the SR&ED project can be claimed as overhead and other expenditures under the traditional method only.

The corporation receives the following CEWS: $847 per week for Sarah's work and $525 per week for Jamaal's work, during the 12-week period. For the time each of them spends directly engaged or directly attributable in SR&ED over the course of the 12 weeks, the corporation receives $10,164 ($847 per week, multiplied by 12 weeks) from the CEWS for Sarah and $1,890 (30% of $525 per week multiplied by 12 weeks) for Jamaal. His salary is the only overhead and other expenditures claimed in the example.

To simplify the example, we assume that no other assistance or research and development tax credit is received or receivable.

More information

For more information and to contact your tax services office, go to canada.ca/taxes-sred.