Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy

Date: December 18, 2014

Changes to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy

Reasons for revision

This revision accommodates the legislative changes that have been announced.

Revision overview

Only 80% of contract expenditures and third‑party payments made after 2012 qualify for investment tax credits (ITCs).

Expenditures made for capital or lease costs incurred after December 31, 2013, no longer qualify for scientific research and experimental development (SR&ED) tax incentives.

The text of this document has been revised to reflect these changes, see Appendix D.1 Explanation of changes.

Table of contents


1.0 Overview

1.1 Purpose

This policy document deals with determining the total qualified SR&ED expenditures for investment tax credit (ITC) purposes on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding total qualified SR&ED expenditures for ITC purposes when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations.

This document will:

  • explain what may be included and what must be excluded on Form T661 in calculating total qualified SR&ED expenditures for ITC purposes; and
  • explain how the legislation for SR&ED ITC under the Act relates to the calculating of total qualified SR&ED expenditures for ITC purposes.

1.2 Introduction

The term "total qualified SR&ED expenditures for ITC purposes" is not defined in the Act, but the term is found on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The term represents the amount that is used to calculate a claimant's ITC for SR&ED for a particular tax year. This calculation takes into consideration the terms "qualified expenditure" and "SR&ED qualified expenditure pool" which are defined in the Act. These terms and the additional legislative support for the calculation of total qualified SR&ED expenditures for ITC purposes found on Form T661 are discussed in section 2.0. A summary of the calculation of total qualified SR&ED expenditures for ITC purposes is provided in section 3.0.

The starting point in the Act for calculating the total qualified SR&ED expenditures that qualify for ITC purposes on Form T661 is the total allowable expenditures for SR&ED. A listing of SR&ED expenditure policies is in section 3.0. Each expenditure is discussed in the respective policy for the expenditure. The next step is calculating qualified expenditures (see sections 2.1 and 2.1.1). In calculating qualified expenditures, certain amounts are added to, or deducted from, the allowable expenditures.

From qualified expenditures the SR&ED qualified expenditure pool (see section 2.2) is then calculated. The SR&ED qualified expenditure pool of a claimant includes their qualified expenditures incurred in the year, plus the amount of qualified expenditures transferred to the claimant from a non-arm's length (NAL) performer (see section 7.2), less the amount of qualified expenditures the claimant transferred to a NAL payer (see section 7.2) For more information on transfers, please refer to section 7.0.

The next step in determining the total qualified SR&ED expenditures for ITC purposes is the addition of any repayments of assistance or contract payments to the amount of the SR&ED qualified expenditure pool. For more information, please refer to the Assistance and Contract Payments Policy.

Repayments of assistance or contract payments are not qualified expenditures under the Act. They earn an ITC because they are included in the definition of investment tax credit in the Act. For more information, please refer to the SR&ED Investment Tax Credit Policy.

The final step in determining the total qualified SR&ED expenditures for ITC purposes is a further reduction made to the amount of the SR&ED qualified expenditure pool in the year for any amount in respect of an expenditure incurred in a business where income from the business is exempt from Part I tax. For more information on exempt income, please refer to section 11.0.

Claiming an ITC is not done on Form T661. To claim an ITC, a claimant has to file either Schedule T2SCH31, Investment Tax Credit – Corporations for corporations or Form T2038(IND), Investment Tax Credit (individuals) for individuals. For more information, please refer to the SR&ED Filing Requirements Policy.

Legislative References Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(26) Unpaid amounts

2.0 Legislation

The legislation that supports the calculation of total qualified SR&ED expenditures that qualify for investment tax credit (ITC) purposes found on the Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim is discussed in the following sections 2.1 to 2.3. A summary of the calculation of the total qualified SR&ED expenditures that qualify for ITC purposes is provided in section 3.0. Detailed explanations of the topics summarized in section 3.0 are contained in sections 4.0 to 12.0.

2.1 Qualified expenditure

After December 31, 2012:

The term "qualified expenditure" is defined in the Income Tax Act and means:

  • an expenditure incurred in the tax year by the claimant in respect of scientific research and experimental development carried on in Canada and is:
     

or

For more information on SR&ED expenditure policies, please refer to the listing in section 3.0. For more information on SUE, please refer to SR&ED Shared-Use-Equipment Policy. For more information on the PPA, please refer to the Prescribed Proxy Amount Policy.

Qualified expenditure as defined in the Act does not include:

  • a prescribed expenditure (see section 10.0) incurred in the tax year by the claimant;
  • an expenditure (other than an expenditure that is salary or wages of an employee of the claimant) incurred by the claimant in respect of SR&ED to the extent that it is performed by another person or partnership at a time when the claimant and the other person or partnership to which the expenditure is paid or payable do not deal with each other at arm’s length;
  • an SR&ED expenditure of a current nature that is paid or payable by the claimant to, or for the benefit of, a person or partnership that is not a taxable supplier (see section 9.0) in respect of the expenditure, other than an expenditure in respect of SR&ED directly undertaken by the claimant;
  • an amount that would otherwise be a qualified expenditure to the extent that any government assistance, non-government assistance, or contract payments in respect of the SR&ED that the claimant has received, is entitled to receive, or can reasonably be expected to receive on or before the filing-due date for the tax year.

For more information on contract expenditures for SR&ED performed on behalf of a claimant, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For more information on assistance and contract payments, please refer to the Assistance and Contract Payments Policy.

Prior to January 1, 2013:

The term "qualified expenditure" is defined in the Income Tax Act and means:

or

For more information on current and capital expenditure policies, please refer to the listing in section 3.0. For more information on SUE, please refer to SR&ED Shared-Use-Equipment Policy. For more information on the PPA, please refer to the Prescribed Proxy Amount Policy.

Qualified expenditure as defined in the Act does not include:

  • a prescribed expenditure (see section 10.0) incurred in the tax year by the claimant;
  • an expenditure (other than an expenditure that is salary or wages of an employee of the claimant) incurred by the claimant in respect of SR&ED to the extent that it is performed by another person or partnership at a time when the claimant and the other person or partnership to which the expenditure is paid or payable do not deal with each other at arm’s length;
  • an SR&ED expenditure of a current nature that is paid or payable by the claimant to, or for the benefit of, a person or partnership that is not a taxable supplier (see section 9.0) in respect of the expenditure, other than an expenditure in respect of SR&ED directly undertaken by the claimant;
  • an amount that would otherwise be a qualified expenditure to the extent that any government assistance, non-government assistance, or contract payments in respect of the SR&ED that the claimant has received, is entitled to receive, or can reasonably be expected to receive on or before the filing-due date for the tax year.

For more information on contract expenditures for SR&ED performed on behalf of a claimant, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For more information on assistance and contract payments, please refer to the Assistance and Contract Payments Policy.

Legislative References Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"

2.1.1 Further additions and reductions in the Income Tax Act for determining qualified expenditures

Qualified expenditures are further reduced by any expenditure of a current nature incurred for SR&ED that is unpaid within 180 days of the end of the tax year. An addition to qualified expenditures will be made in the year the expenditure is actually paid. For more information on unpaid amounts, please refer to section 4.0. However, these unpaid amount rules do not apply to salary or wages as particular unpaid rules apply to them. For more information on unpaid salary or wages, please refer to section 11.0 of the SR&ED Salary or Wages Policy.

Where the claimant makes a purchase of goods or services from a non arm’s length (NAL) party, an adjustment (reduction) to their qualified expenditures (other than a  PPA ) may be required. Determining the extent the claimant's qualified expenditures are reduced as a result of these NAL purchases is discussed in section 12.0.

Legislative References Income Tax Act
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(11.5) Adjustments to qualified expenditures
Subsection 127(11.6) Non-arm's length costs
Subsection 127(26) Unpaid amounts

2.2 SR&ED qualified expenditure pool

The term "SR&ED qualified expenditure pool" is defined in the Act. At the end of a claimant's tax year, the claimant's SR&ED qualified expenditure pool will equal the total of the amount of the claimant's qualified expenditures incurred in the year (see sections 2.1 and 2.1.1), plus the amount of qualified expenditures transferred from a NAL taxpayer (performer), less the amount of qualified expenditures transferred to a NAL taxpayer (payer). For more information on transfers of qualified expenditures, please refer to section 7.0.

This pool does not function like an expense pool, such as the pool of deductible SR&ED expenditures. The SR&ED qualified expenditures pool is an amount that is calculated at the end of each tax year. This amount does not carry over to another tax year.

Legislative References Income Tax Act
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(13) Agreement to transfer qualified expenditures

2.3 Further additions and reductions in the Income Tax Act to determine investment tax credits earned in a year

After the amount of a claimant's SR&ED qualified expenditures pool is determined, there are subsequent legislative additions and These additions and reductions are made because they are included in the definition of investment tax credit (such as repayments) or because of other rules found in the Act (such as for exempt income).

Any repayment of assistance or contract payments is a further addition when calculating the total qualified SR&ED expenditures for ITC purposes earned in a year. For more details on repayments of assistance or contract payments, please refer to the Assistance and Contract Payments Policy.

A further reduction is made for any expenditure incurred in a business where income from the business is exempt from Part I tax. For more information on exempt income, please refer to section 11.0.

Legislative References Income Tax Act
Paragraph 81(1)(a) Statutory exemptions
Subsection 127(9) Definition of "investment tax credit"
Subsection 149(1) Miscellaneous exemptions

3.0 Summary – Calculating the total qualified SR&ED expenditures for investment tax credit purposes on Form T661

The following is a summary of the calculation of the total qualified SR&ED expenditures for investment tax credit (ITC) purposes on the Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. This summary focuses on the steps of the calculation as discussed in section 1.2. The calculation in this summary refers to the legislation outlined in sections 2.0 to 2.3. The topics contained in this calculation summary are discussed in detail in sections 4.0 to 12.0.

Calculation of allowable SR&ED expenditures (on Form T661)

Total allowable SR&ED expenditures (line 400 on Form T661) are used as a starting point to calculate the total qualified SR&ED expenditures for ITC purposes on Form T661. For more information on SR&ED expenditures of a current or of a capital nature, please refer to the following policies:

Total allowable SR&ED expenditures (on Form T661)

Total allowable SR&ED expenditures are included in the calculation of total qualified SR&ED expenditures for ITC purposes due to the Income Tax Act definition of qualified expenditures (see section 2.1).

Calculation of qualified SR&ED expenditures for ITC purposes (on Form T661)

Further additions and reductions are made to total allowable SR&ED expenditures in order to calculate the total qualified SR&ED expenditures for ITC purposes on Form T661:

Additions – Income Tax Act definition of qualified expenditures (see section 2.1):

Addition – Further addition in the Act (see section 2.1.1):

  • payment of prior years' unpaid amounts (other than salary or wages) (see section 4.0).

Addition – Act definition of SR&ED qualified expenditure pool (see section 2.2):

  • qualified expenditures transferred to the claimant (see section 7.0).

Deductions – Act definition of qualified expenditures (see section 2.1):

Deductions – Further reduction in the Act (see section 2.1.1):

Deduction – Act definition of SR&ED qualified expenditure pool (see section 2.2):

  • NAL transactions:
    • qualified expenditures transferred from the claimant (see section 7.0).

Deduction – Other Act requirements (see section 2.3):

Subtotal: Qualified SR&ED expenditures (on Form T661)

The term "qualified SR&ED expenditures" is a term used on Form T661 to represent the Act term "SR&ED qualified expenditure pool" as discussed in section 2.2. A further addition is made to qualified SR&ED expenditures in order to calculate total qualified SR&ED expenditures for ITC purposes on Form T661:

Addition – Act definition of investment tax credit (see section 2.3):

Total qualified SR&ED expenditures for ITC purposes (on Form T661)

This is the amount of total qualified SR&ED expenditures to be used to calculate the ITC for the tax year.

4.0 Unpaid amounts

For the purposes of calculating total qualified SR&ED expenditures for investment tax credit (ITC) purposes, as well as the refundable ITC  calculation, a claimant's expenditure for SR&ED of a current nature (other than unpaid salary or wages and other remuneration—see below) that is unpaid on the day that is 180 days after the end of the tax year in which the expenditure is otherwise incurred is deemed:

  • not to have been incurred in the year; and
  • to be incurred at the time it is paid.

Notes

  • These unpaid amounts rules are for ITC purposes only. The expenditures are still included in the pool of deductible SR&ED expenditures in the tax year that they are incurred (for an example, see section 4.1.1).
  • Separate rules apply to unpaid salary or wages and other remuneration: Not only are they not included for ITC purposes, but they are also not included in the pool of deductible SR&ED expenditures. For more information on unpaid salary or wages, please refer to section 11.0 of the SR&ED Salary or Wages Policy.

Determining whether or not an amount is actually paid within the 180-day period involves a finding of fact that can only be established after examining all the evidence that would support such a conclusion.

For more information on unpaid amounts, please refer to Interpretation Bulletin IT109R2, Unpaid Amounts.

Legislative References Income Tax Act
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Subsection 127(9)(m) Definition of "investment tax credit", paragraph (m)
Subsection 127(26) Unpaid amounts

4.1 Identification of unpaid amounts on Form T661

A claimant must identify on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, for a particular tax year, the amount of current expenditures (other than salary or wages) incurred in the year but not paid within 180 days of the tax year-end. These unpaid amounts are deducted in the calculation of the total qualified SR&ED expenditures for ITC purposes. Unpaid amounts from previous years that are paid in the current year are included in the calculation of total qualified SR&ED expenditures for ITC purposes on Form T661 for the current year.

Although an unpaid amount for a current expenditure is deemed not to have been incurred in a tax year, the amount must be identified on the prescribed forms for an SR&ED claim on or before the day that is 12 months after the claimant's filing-due date for the particular tax year (for a corporation, this is 18 month after the end of the tax year in which the SR&ED expenditure was incurred). For more information on the SR&ED filing requirements, please refer to the SR&ED Filing Requirements Policy. Unpaid amounts that are not identified on the Form T661 within the 18-month reporting deadline will not be included in calculating total qualified SR&ED expenditures for ITC purposes, even if they are paid in a subsequent year.

Treatment of unpaid SR&ED contract expenditures

After December 31, 2012, two reductions in calculating qualified SR&ED expenditures are made on Form T661 for contract expenditures for SR&ED performed on behalf that are not paid within 180 days of the tax year end. The first reduction is to reduce the arm’s length contract expenditures by 20%. The second reduction is to identify the remaining 80% of the arm’s length contract as incurred in the year but not paid within 180 days of the tax year-end. These two reductions will be identified on their two respective lines on the Form T661 (see section 3.0). This ensures the total amount of the unpaid expenditure is not included as a qualified SR&ED expenditure in the year. Further, in the year the expenditure is paid, only 80% of the amount that was identified is added to the qualified SR&ED expenditures.

Legislative References Income Tax Act
Subsection 127(9) Definition of "investment tax credit", paragraph (m)
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(26) Unpaid amounts

4.1.1 Example – Unpaid amount, SR&ED contract expenditures

Corporation A has a tax year-end of December 31, 2013, and incurs an SR&ED contract expenditure of $100,000 in the year payable to Corporation B, an arm’s length corporation. Corporation A still has not paid the expenditure 180 days after the end of the 2013 tax year. The expenditure is paid in September 2014.

  • Corporation A must identify the expenditure on the "contract expenditures for SR&ED performed on your behalf: arm's length contracts" line of Form T661 by the SR&ED reporting deadline in order for it to be included as an allowable SR&ED expenditure (see section 3.0) deductible in 2013.
  • Corporation A should enter 20% of the contract expenditure, $20,000, as a reduction to qualified expenditures on Form T661 since only 80% of contract expenditures made after 2012 qualify for investment tax credits (see section 2.1).
  • Corporation A has to enter 80% of the unpaid amount, $80,000, on the "current expenditures (other than salary or wages) not paid within 180 days of the tax year end" line of Form T661 for the 2013 tax year. For ITC purposes, 100% of the expenditure is considered not to have been incurred in 2013.
  • When Corporation A pays the expenditure in the 2014 tax year, it should enter 80% of the amount paid on the "payment of prior year's unpaid amounts (other than salary or wages)" line of Form T661 for that year in order to be included in calculating the total qualified SR&ED expenditures for ITC purposes.

5.0 Prescribed proxy amount

Claimants have two ways to calculate their SR&ED expenditures. They can elect to use the proxy method or choose to use the traditional method. The traditional method involves specifically identifying and claiming all SR&ED overhead and other expenditures incurred during the year. For more information, please refer to the Traditional and Proxy Methods Policy.

Claimants that elect to use the proxy method to determine their expenditures on or in respect of SR&ED do not include any portion of overhead and other expenditures in calculating total qualified SR&ED expenditures for investment tax credit purposes. In lieu of these SR&ED overhead and other expenditures, these claimants can include an amount referred to as the prescribed proxy amount (PPA). The PPA is a notional amount calculated under the Regulations. For more information, please refer to the Prescribed Proxy Amount Policy.

Legislative Reference Income Tax Act
Subsection 127(9) Definition of "qualified expenditure"

Legislative Reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

6.0 Shared-use-equipment

Expenditures for capital property acquired before 2014 that do not meet the all or substantially all (ASA) criteria outlined in the  SR&ED Capital Expenditures Policy do not qualify as an SR&ED capital expenditure. However, where claimants perform SR&ED in an environment where their capital property is used for both SR&ED and commercial work, their capital property acquired before 2014 may qualify as shared-use-equipment (SUE) and be included in the calculating of total qualified SR&ED expenditures for investment tax credit (ITC) purposes. Capital property acquired before 2014 that is used primarily during its operating time in SR&ED may meet the requirements of SUE as long as the requirements for first term SUE  and second term SUE are met. For more information, please refer to the SR&ED Shared-Use-Equipment Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of "first term shared-use-equipment"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "second term shared-use-equipment"

7.0 Qualified SR&ED expenditures transferred between the claimant and an SR&ED performer not dealing at arm's length

7.1 Meaning of arm's length

Although the term at arm's length is used throughout the Income Tax Act, the Act does not precisely define it. The term at arm's length refers to a situation where two parties that deal with each other are not related to each other, no control exists between them, nor does one party have a beneficial (financial) interest in the other. It is a question of fact whether two parties not related to each other are dealing with each other at arm's length. For more information, please refer to Income Tax Folio, S1-F5-C1: Related persons and dealing at arm's length, which describes in general terms the criteria the CRA considers when determining whether persons deal with each other at arm's length.

The Act refers to three categories of persons when determining arm's length relationships. Income Tax Folio S1-F5-C1 deals with each category separately. The first category of persons discussed is related persons which includes discussions on: blood relationship, marriage, common-law partnership, adoption, corporations and other persons, and options and rights. The second category includes personal trusts and their beneficiaries, and the third category includes persons not related to each other.

Legislative Reference Income Tax Act
Section 251 Arm's length

7.2 Not dealing at arm's length situations

If a claimant (known as the payer) contracts a person (known as the performer) to carry on SR&ED on its behalf, and the payer and the performer are not dealing at arm's length (see section 7.1), the expenditures incurred by the payer for the non-arm's length (NAL) contract are not included in the total qualified SR&ED expenditures for investment tax credit (ITC) purposes. These contract expenditures do not qualify for ITC purposes. For more information on contract expenditures for SR&ED performed on behalf of a claimant, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

In addition, in these NAL contract situations the amount received or receivable by the performer of the SR&ED is not considered to be a contract payment and does not reduce the total qualified SR&ED expenditures for ITC purposes of the performer. For more information on contract payments, please refer to definition of contract payment in the Assistance and Contract Payments Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure"
Section 251 Arm's length

7.3 Transferring qualified SR&ED expenditures between persons not dealing at arm's length

If the payer of the SR&ED is not dealing at arm's length (see section 7.1) with the performer of the SR&ED, the performer can transfer its qualified SR&ED expenditures (see section 3.0) to the payer up to a maximum of the contract amount. To make such a transfer, the payer and the performer must each complete Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, and Form T1146, Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm's Length. For information on the reporting deadline for filing Form T1146, please refer to the SR&ED Filing Requirements Policy.

For further clarification, ownership rights to property arising from any SR&ED activity, including property resulting from a qualified SR&ED expenditure which was transferred as stated above, are not part of the (Form T1146) agreement. Only qualified SR&ED expenditures are transferred on Form T1146.

A partnership cannot transfer or receive qualified SR&ED expenditures to or from a NAL party since a partnership is not considered to be a person for the purpose of these rules. For more information, please refer to the SR&ED Claims for Partnerships Policy.

Legislative References Income Tax Act
Subsection 127(8) Investment tax credit of partnership
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(13) Agreement to transfer qualified expenditures
Section 251 Arm's length

7.4 Determining the transferable amount

The amount of qualified SR&ED expenditures (see section 3.0) that the performer can transfer for its tax year is the least of the following three amounts:

  1. the amount specified by the payer (transferee) and performer (transferor) in their agreement (Form T1146);
  2. the performer's SR&ED qualified expenditure pool (see section 2.2) at the end of its tax year, before deducting the transfer of qualified expenditures (see section 2.1) to the payer; and
  3. the total of all amounts where each of the amounts, if the payer and performer were dealing at arm's length, would be a contract payment:
    • for performing SR&ED on behalf of the payer;
    • paid by the payer to the performer on, or before, the day that is 180 days after the end of the performer's tax year; and
    • for:
      • a qualified expenditure the performer incurred in the particular year (not considering any unpaid salary or wages or any unpaid expenditures) for that portion of the SR&ED that was performed when the performer did not deal at arm’s length with the payer, and is paid by the performer on or before the day that is 180 days after the end of its tax year; or
      • an amount in respect of SR&ED that is transferred to the performer by a NAL party.

Determining the transferable amount (the least of the three amounts above) is shown in Appendix A.

The performer cannot transfer to the payer more than the amount that their qualified SR&ED expenditures would have been at the end of the tax year had it not been for this transfer. If the performer attempts to do so, the Act states that no amount can be transferred.

Legislative References Income Tax Act
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(14) Identification of amounts transferred
Section 251 Arm's length

7.5 Other considerations when transferring qualified SR&ED expenditures between persons not dealing at arm's length

7.5.1 Different year-ends for the performer and the payer

Since ITC eligibility arises at the performer's tax year-end, the transfer is made in respect of a particular tax year of the performer (transferor). Timing issues may arise if the performer and the payer have different tax year-ends.

The qualified SR&ED expenditures (see section 3.0) transferred in a particular year (as determined in section 7.4) are excluded from the performer's qualified SR&ED expenditures at the end of the tax year, but are included in the payer's qualified SR&ED expenditures for the payer's first tax year that ends at, or after, the particular year in which the transfer is made.

Thus, if the payer's tax year ends earlier than the performer's year-end, the payer's ITC claim that includes the transferred qualified SR&ED expenditures will be delayed until the first tax year that ends at, or after, the particular year of the performer in which the transfer is made.

Legislative References Income Tax Act
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(14) Identification of amounts transferred
Subsection 127(15) Invalid agreements

7.5.2 Anti-avoidance

The Act provides an anti-avoidance rule that reduces to nil the addition in the payer's (transferee's) qualified SR&ED expenditure (see section 3.0) for the transferred qualified SR&ED expenditures when the payer and the performer (transferor) do not deal at arm’s length as a result of a transaction, event or arrangement, or a series of transactions, events or arrangements, the principal purpose of which was to enable the payer and the performer to enter into the agreement (Form T1146).

The Act provides for an additional anti-avoidance rule so that a claimant cannot circumvent the  NAL  rules by including an arm's length party between a payer and a NAL performer. For more information, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Legislative References Income Tax Act
Subsection 127(16) Non-arm's length parties
Subsection 127(24) Exclusion from qualified expenditures

8.0 Government assistance, non-government assistance and contract payments

The intent of SR&ED legislation is to provide tax incentives to businesses on the net costs of performing SR&ED in Canada. Thus, government assistance, non-government assistance, or contract payments in respect of the SR&ED work performed in the year will reduce the total qualified SR&ED expenditures for investment tax credit (ITC) purposes. The rules are different when making a reduction for assistance to the pool of deductible SR&ED expenditures. For more information on assistance and contract payments, please refer to the Assistance and Contract Payments Policy.

9.0 Expenditures relating to SR&ED contracts paid or payable to a person or partnership that is not a taxable supplier

Total qualified SR&ED expenditures for investment tax credit (ITC) purposes cannot include an SR&ED expenditure of a current nature that is paid or payable to, or for the benefit of (see section 9.3) a person or partnership that is not a taxable supplier (see section 9.1) in respect of the expenditure, other than an expenditure for SR&ED directly undertaken by the claimant (see section 9.4.1). Therefore, this exclusion generally only applies to SR&ED contract situations. However, this taxable supplier rule will generally only apply to expenditures relating to arm's length SR&ED contract situations because a specific provision of the Income Tax Act applies to remove expenditures in respect of SR&ED contracts between persons (or partnerships) not dealing at arm's length from the calculation of total qualified SR&ED expenditures for ITC purposes. For more information, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. If the expenditure relating to the SR&ED contract is paid or payable to or for the benefit of a person or partnership who is not a taxable supplier, then it will not be included in the calculation of total qualified SR&ED expenditures for ITC purposes.

Legislative References Income Tax Act
Subsection 127(9) Definition of "qualified expenditure", paragraph (f)
Subsection 127(9) Definition of "qualified expenditure", paragraph (g)

9.1 Definition of taxable supplier

A taxable supplier in respect of an amount as defined in the Act, and means:

  • a person resident in Canada;
  • a Canadian partnership; or
  • a non-resident person or non-Canadian partnership that pays or receives the amount in the course of carrying on a business through a permanent establishment (see section 9.4.2) in Canada.

The term "taxable supplier" is also relevant for the purpose of the definition of contract payment in the Act and for the purpose of the deemed contract payment rules. For more information, please refer to the Assistance and Contract Payments Policy.

Legislative References Income Tax Act
Subsection 127(9) Definition of "taxable supplier"
Subsection 127(9) Definition of "contract payment"
Subsection 127(25) Deemed contract payment

9.2 Tax policy intent of taxable supplier rules

To promote Canadian SR&ED

One of the intentions of the SR&ED program is to promote Canadian SR&ED and foster the development of a domestic research and development infrastructure. The taxable supplier rules (sections 9.0 to 9.5.3) were implemented to encourage claimants to enter into SR&ED contracts with Canadians or non-Canadians that have a permanent establishment in Canada. This was intended to promote Canadian SR&ED and, in turn, strengthen Canadian research and development capabilities.

Accordingly, when a claimant enters into SR&ED contracts with a non-resident person or non-Canadian partnership, it is not enough that the SR&ED be performed in Canada.
For a payment for an SR&ED contract to be included in calculating total qualified SR&ED expenditures for ITC purposes the SR&ED performer must also have a permanent establishment (see section 9.4.2) in Canada.

To stop double-dipping

Another intention of the SR&ED legislation is that only one Canadian claimant should benefit from the ITC incentives on any SR&ED contract. The taxable supplier rules were implemented to clarify the intent of the legislation and ensure that, as they apply to SR&ED contracts, the appropriate party receives the ITC entitlements on the total qualified SR&ED expenditures for ITC purposes.

For example, in a situation where a Canadian company contracts with a foreign company that in turn subcontracts the SR&ED work to another Canadian company, the taxable supplier rule will apply to prevent the double dipping of ITC by two Canadian corporations on that same SR&ED project (see example in section 9.5.1).

9.3 For the benefit of

For the purposes of the taxable supplier rules (see section 9.0), the term "for the benefit of" describes the benefit conferred on either the person (or partnership) who receives a payment under the contract or another party that ultimately benefits from the payment. However, the term does not refer to the benefit obtained by the payer through the fulfillment of the contract. For an illustration of the term for the benefit of, see the examples in sections 9.3.1 and 9.3.2.

9.3.1 Example 1 – Contracts and subcontracts

A Canadian corporation, A Co., contracts with another Canadian corporation, B Co., to perform SR&ED. B Co. in turn contracts with a foreign corporation, For Co., to actually perform the SR&ED work.

In applying the taxable supplier rules and the term "for the benefit of", the payment made by A Co. to B Co. would be for the benefit of B Co. and the payment made by B Co. to For Co. would be for the benefit of For Co.

9.3.2 Example 2 – Third-party payment

A Canadian corporation, Canco, makes a third-party payment to a Canadian university through a foreign subsidiary, For Co.

In applying the taxable supplier rules and the term "for the benefit of", a payment made by Canco directly or through For Co. to a Canadian university would be for the benefit of the university.

9.4 Circumstances where taxable supplier rules do not apply

9.4.1 Directly undertaken by the claimant

For the purpose of calculating total qualified SR&ED expenditures for ITC purposes, the taxable supplier rules do not apply to payments of expenditures of a current nature for SR&ED if the SR&ED is directly undertaken by the claimant. For example, this means that the taxable supplier rules do not apply to the purchase of materials by the claimant from a person (or partnership) who is not a taxable supplier where they are used in SR&ED the claimant directly undertakes in Canada.

Example

To undertake its own SR&ED, a Canadian corporation acquires $10,000 in materials from an arm's length supplier located in the United States.

The taxable supplier rules do not apply, since the SR&ED is directly undertaken in Canada by the claimant (the materials are consumed or transformed in SR&ED directly undertaken by the claimant in Canada).

9.4.2 Carries on a business through a permanent establishment

The taxable supplier rules will not apply where an arm’s length SR&ED contract is entered into with a non-resident person or non-Canadian partnership that carries on a business in Canada through a permanent establishment.

Whether or not a permanent establishment exists is a question of fact that must be determined on a case-by-case basis. For the purposes of the definition of taxable supplier in the Act, a permanent establishment is defined in the Regulations. However, the term permanent establishment is also defined in detail in each reciprocal income tax treaty or convention that Canada has with another country. When determining whether a permanent establishment exists, the definition under a treaty or convention always takes precedence over the definition in the Regulations.

Determining whether a permanent establishment exists in Canada, according to the definition in the Regulations or a tax treaty or convention, relies on the definition of a fixed place of business. A non-resident person or non-Canadian partnership that carries on business through a fixed place of business in Canada will have a permanent establishment in Canada. A fixed place of business may include a branch, an office, a factory, or a workshop. In certain cases, a non-resident that has no fixed place of business in Canada may also be deemed to have a permanent establishment in Canada if the establishment satisfies specific criteria set out in the Regulations or a tax treaty or convention.

It is up to the SR&ED claimant to provide the CRA with evidence supporting the position that an amount was paid or payable to a non-resident person or non-Canadian partnership with a permanent establishment in Canada.

It may not be clear whether or not a non-resident person or non-Canadian partnership has a permanent establishment in Canada. The International and Large Business Directorate of the Compliance Programs Branch has established guidelines to help determine whether or not a non-resident has a permanent establishment in Canada.

Legislative Reference Income Tax Regulations
Section 8201 Definition of "permanent establishment"

9.5 Application of the taxable supplier rules

For the examples below, on the application of the taxable supplier rules, the contract payment rules of the Act are also relevant. For more information on contract payments, please refer to the Assistance and Contract Payments Policy.

9.5.1 Example 1 – Arm's length foreign contract

A Canadian corporation, A Co., contracts out its SR&ED to a foreign corporation, For Co., for a contract amount of $1,000. A Co. and For Co. deal with each other at arm's length throughout the period in which the SR&ED is performed. For Co. does not have a permanent establishment in Canada and is therefore not a taxable supplier.

However, For Co. does not actually perform the SR&ED. Instead it contracts out the SR&ED to a Canadian company, B Co., for a contract price of $900. B Co. incurs SR&ED expenditures of $850 relating to the SR&ED contract with For Co.

In applying the taxable supplier rules, the SR&ED is not directly undertaken by A Co. Therefore, the $1,000 would be considered to be paid or payable to, or for the benefit of, a non-resident corporation that is not a taxable supplier (For Co.). As a result, the $1,000 would be included in the pool of deductible SR&ED expenditures of A Co. but not be included in the calculating the total qualified SR&ED expenditure for ITC purposes.

B Co., on the other hand, has $850 to include in its pool of deductible SR&ED expenditures and in the total qualified SR&ED expenditures for ITC purposes. B Co. would not have to reduce its total qualified SR&ED expenditures for ITC purposes by the payment under the contract since the amount is received from For Co., which is not a taxable supplier.

9.5.2 Example 2 – Arm's length Canadian contract with a foreign subcontract

A Canadian corporation, A Co., contracts out its SR&ED to another Canadian corporation, B Co., with a contract amount of $1,000. A Co. and B Co. deal with each other at arm's length (see section 7.1) throughout the period in which the SR&ED is performed.

However, B Co. does not actually perform the SR&ED. Instead it contracts out the SR&ED to a foreign company, For Co., for a contract price of $950. For Co. in turn contracts it to a third Canadian company, C Co., with a contract amount of $900. C Co. incurs SR&ED expenditures of $850 relating to the SR&ED contract. For Co. does not have a permanent establishment in Canada and is therefore not a taxable supplier.

Since A Co. does not directly undertake the SR&ED, $950 of the $1,000 would be considered to be paid or payable to or for the ultimate benefit of a corporation that is not a taxable supplier in respect of the $950. Therefore, the $950 would not be included in A Co's calculation of the total qualified SR&ED expenditure for ITC purposes because of the taxable supplier rules. Since the SR&ED is performed in Canada, A Co. may still be able to claim $1,000 as allowable SR&ED expenditures and $50 of qualified SR&ED expenditures in calculating the ITC.

B Co. would have $950 of allowable SR&ED expenditures, but would not have any qualified expenditure for two reasons. First, the $950 paid or payable by B Co. to For Co. would not qualify because For Co. is not a taxable supplier. Second, there is a contract payment of $1,000 paid or payable to B Co. from A Co.

C Co. would have $850 of allowable SR&ED expenditures and qualified expenditure for ITC purposes. C Co. would not have to reduce its total qualified SR&ED expenditures for ITC purposes by the payment under the contract, since the amount is received from For Co., which is not a taxable supplier.

9.5.3 Example 3 – Arm's length contract to non-resident individual

A Canadian corporation, A Co., contracted out its SR&ED to a non-resident individual for a contract amount of $40,000. A Co. also reimbursed other expenses of the non-resident individual (such as travel and accommodation) for a total of $5,000. The non-resident individual is not an employee of A Co. and performs the SR&ED at A Co's place of business in Canada. (If the non-resident individual were an employee of A Co., the taxable supplier rules would not apply.) A Co. and the non-resident individual deal with each other at arm's length throughout the period in which SR&ED is performed. The non-resident individual is not a taxable supplier because he has no permanent establishment in Canada. Determining whether the non-resident individual has a permanent establishment in Canada is a question of fact that is made on a case-by-case basis.

In applying the taxable supplier rules, A Co. does not directly undertake the SR&ED. Therefore, the contract amount of $40,000 and the $5,000 paid for the other expenses of the individual would be considered to be paid or payable to, or for the benefit of, a non-resident individual who is not a taxable supplier. Thus, the total expenses of $45,000 would be an allowable SR&ED expenditure to A Co. but not be included in calculating the total qualified SR&ED expenditures for ITC purposes, even if the SR&ED was performed in Canada.

10.0 Prescribed expenditures

Prescribed expenditures within the meaning of the Regulations are not qualified SR&ED expenditures and, therefore, do not earn investment tax credits (ITCs).

10.1 Prescribed expenditures of a current nature

Prescribed expenditures of a current nature include expenditures incurred by a claimant for the general administration or management of a business.

The term general administration or management of a business includes, but is not limited to, the following expenditures incurred by a claimant:

  • administrative salaries or wages and related benefits for a person whose duties are not all or substantially all directed to the prosecution of SR&ED, except to the extent that such expenditures are directly attributable to the prosecution of SR&ED as determined by the Regulations;
  • a legal or accounting fee;
  • interest and other financing costs described in any of paragraphs 20(1)(c) to (g) of the Income Tax Act;
  • an entertainment expense;
  • an advertising or selling expense;
  • a conference or convention expense;
  • a due or fee for membership in a scientific or technical society or organization; and
  • a fine or penalty.

For more information on expenditures directly attributable to the prosecution of SR&ED, please refer to the SR&ED Overhead and Other Expenditures Policy.

Prescribed expenditures also include expenditures of a current nature for the maintenance and upkeep of premises, facilities or equipment to the extent that such expenditures are not attributable to the prosecution of SR&ED.

Many of the prescribed expenditures listed in the Regulations are excluded in calculating the total qualified SR&ED expenditures for ITC purposes for greater certainty. The prescribed expenditures would generally not be included in the pool of deductible SR&ED expenditures in the first place. However, some expenditures of a current nature that are directly related and incremental to the prosecution of SR&ED may be included in the pool of deductible SR&ED expenditures under the traditional method but will not be included in calculating the total qualified SR&ED expenditures for ITC purposes because they are prescribed. Examples of such expenditures are:

  • fees for preparing SR&ED claims (whether the fees relate to the financial or technical portion of the claim);
  • cost to attend conventions or conferences; and
  • interest expenses.

For more information on the deductibility of these expenditures, please refer to section 4.8 of the SR&ED Overhead and Other Expenditures Policy.

Legislative Reference Income Tax Regulations
Paragraph 2902(a) Prescribed current expenditures for purposes of qualified expenditures

10.2 Prescribed expenditures

The following explains prescribed expenditures after 2013 and prescribed expenditures of a capital nature before 2014.

After 2013:

Prescribed expenditures incurred after 2013 are expenditures that are incurred in respect of:

  • the acquisition of property that is qualified property or qualified resource property as defined in the Act; and
  • the acquisition of property that has been used or acquired for use or lease or for any purpose before it was acquired by the claimant (see section 10.2.1).

The expenditures for the property described above are generally not expenditures of a current nature (see section 3.0).

Before 2014:

Prescribed expenditures of a capital nature incurred before 2014 are expenditures that are in respect of:

  • the acquisition of property, except if it is for first term shared-use-equipment (SUE) or second term SUE or for the provision of premises, facilities, or equipment for which the all or substantially all rule for capital expenditures applies;
  • the acquisition of property that is qualified property as defined in the Act; and
  • the acquisition of property that has been used or acquired for use or lease or for any purpose before it was acquired by the claimant (see section 10.2.1).

For more information on first or second term shared-use-equipment, please refer to the  SR&ED Shared-Use-Equipment Policy and for more information on capital expenditures, please refer to the SR&ED Capital Expenditures Policy.

Note
"Qualified property" and “qualified resource property” are defined in the Act and earn ITCs apart from those earned under the SR&ED program. ITCs are prevented from being earned twice in respect of a property that is both qualified property and a qualified expenditure (see section 2.1) for SR&ED carried on in Canada.

Legislative Reference Income Tax Regulations
Paragraph 2902(b) Prescribed expenditures for purposes of qualified expenditures
Former paragraph 2902(b) Prescribed capital expenditures for purposes of qualified expenditures

10.2.1 Used property

After 2013:

Capital expenditures incurred after 2013 do not qualify for SR&ED tax incentives. Since the rules for prescribed expenditures for used property incurred after 2013 are not generally applicable to expenditures of a current nature (see section 10.1), they will generally not be applicable to expenditures incurred after 2013.

Before 2014:

A capital expenditure incurred prior to 2014 for the purchase of previously used equipment can be included in the pool of deductible SR&ED expenditures, but is not allowed in calculating the total qualified SR&ED expenditure for ITC purposes.

To be considered not to have been used, the property must not only be new when the claimant acquired it, but it must not have been acquired for use or lease or for any purpose whatever by any previous owner. As a result of these requirements, if a property that has been used or was acquired for a use (even though unused) is transferred to a new owner, the new owner is not entitled to the ITC on that property. However, when a lesser acquires new property which has yet to be leased and then jointly elects with the first lessee of the property to deem the property as being directly acquired by the lessee, the property will not be considered to have been used or acquired for use or lease, for any purpose whatever before the lessee acquired the leasehold interest in the property.

The cost of a piece of equipment that is used regularly for demonstration purposes is considered to be a prescribed expenditure. However, new equipment that is demonstrated for, or tested by, a prospective purchaser would not normally be considered to have been used for a purpose. In certain cases, a refurbished property can also be considered not to have been used property. For more information, please refer to the SR&ED Capital Expenditures Policy.

Legislative References Income Tax Act
Section 16.1 Leasing properties
Subsection 127(9) Definition of "qualified property"

Legislative Reference Income Tax Regulations
Paragraph 2902(b) Prescribed expenditures for purposes of qualified expenditures
Former paragraph 2902(b) Prescribed capital expenditures for purposes of qualified expenditures

10.3 Other prescribed expenditures

Expenditures made to acquire rights in, or arising out of, SR&ED are prescribed expenditures. Such expenditures are also excluded from the pool of deductible SR&ED expenditures. SR&ED expenditures in respect of which an amount is deductible as charitable donations under section 110.1 or 118.1 of the Act are also prescribed expenditures.

Legislative Reference Income Tax Act
Subsection 37(4) Acquisition of rights

Legislative References Income Tax Regulations
Paragraph 2902(c) Prescribed expenditures – acquisition of rights
Paragraph 2902(d) Prescribed expenditures – donations

10.4 Reimbursements of expenditures

An expenditure incurred by a claimant that is reimbursed by a person resident in Canada, or in certain cases by a person that is not resident in Canada, is a prescribed expenditure.

Legislative Reference Income Tax Act
Paragraphe 2902(e) Prescribed expenditures  reimbursements

11.0 Other reductions in calculating the total qualified SR&ED expenditures for investment tax credit purposes

For the purposes of calculating the investment tax credit (ITC), a claimant cannot include any amount in respect of an expenditure incurred in the course or earning income in a particular tax year if any of the income is exempt income or is exempt from tax under Part I of the Income Tax Act. The legislation ensures that an ITC can only be generated when the income from the business, to which a particular expenditure relates, is subject to Part I tax.

Such expenditures are deducted in calculating the total qualified SR&ED expenditures for ITC purposes on the "other deductions" line of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

11.1 SR&ED expenditures incurred by a corporation owned by the Crown

SR&ED a claimant cannot include any amount in respect of an expenditure incurred in the course or earning income in a particular tax year if any of the income is exempt income or is exempt from tax under Part I of the Income Tax Act.

An example of exempt income is a situation where the statutory exemptions of the Act apply.

Legislative References Income Tax Act
Paragraph 81(1)(a) Statutory exemptions
Subsection 127(9) Definition of "investment tax credit", paragraph (l)
Subsection 149(1) Miscellaneous exemptions

Legislative Reference Income Tax Regulations
Section 7100 Prescribed Federal Crown Corporations

12.0 Purchase of goods and services from non-arm's length suppliers

There are different rules for each of the three types of non-arm’s length (NAL) transactions:

  • contract for SR&ED performed on behalf of the claimant;

As explained in section 2.1 the definition of qualified expenditures provides that expenditures for contracts for SR&ED performed on behalf of the claimant by a NAL person (or partnership) do not qualify for investment tax credit (ITC) purposes. For purposes of Form T661 they reduce the total qualified SR&ED expenditures for ITC purposes. For more information, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

  • purchase of services (other than a contract for SR&ED); or
  • purchase of goods.

A claimant (performer) of SR&ED may purchase goods or services (other than a contract for SR&ED) from a person (or partnership) with whom the performer does not deal at arm's length (see section 7.1) at the time of the transaction. In such a case, the amount eligible for an ITC to the claimant (performer) is limited to the cost to the NAL person (or partnership) of providing the goods or services. Purchases from NAL suppliers of goods and services (other than a contract for SR&ED) are discussed in the following sections.

Section 12.5.1 summarizes the application of adjusted service cost and adjusted selling cost under the proxy method and traditional method.

12.1 Adjustments to total qualified SR&ED expenditures for investment tax credit purposes that result from purchases of goods and services from non-arm's length suppliers

The Income Tax Act provides rules for determining the amount of expenditures in respect of purchases of goods (property) or services from NAL suppliers. The Act deems the claimant's qualified expenditure to be the amount after adjusting for situations where a claimant purchases goods (property) or services from a person (or partnership) with whom the claimant does not deal at arm’s length.

The amount entered on the "adjustments to purchases of goods and services from non-arm's length suppliers" line of Form T661 is the difference between the amount determined in respect of the purchase of goods or services from NAL suppliers (the amount included as allowable SR&ED expenditures (see section 3.0)) and what may be included in calculating the claimant's total qualified SR&ED expenditures for ITC purposes. An exception to this rule is with respect to shared-use-equipment (SUE). If the property is SUE no amount is entered on the line "adjustments to purchases of goods and services from non-arm's length suppliers" (capital) of Form T661. Rather, the expenditure for the SUE that is acquired and available for use before 2014, will be entered on the "expenditures on shared-use equipment" line of Form T661, after applying the rules outlined in section 12.2. For more information on SUE, please refer to the SR&ED Shared-Use-Equipment Policy.

Legislative References Income Tax Act
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 127(11.5)(a) Adjustments to qualified expenditures
Subsection 127(11.6) Non-arm's length costs

12.2 Determining the amount of expenditures in respect of purchases of goods and services from non-arm's length suppliers

The amount of an expenditure a claimant incurs for a service or good (property) and the claimant's capital cost of the property are deemed to be:

  • for a service provided to the claimant, either the expenditure the claimant incurred or the adjusted service cost (see Appendix B.1), whichever amount is less; and
  • for a good (property) sold to the claimant, either the capital cost of the good (property) to the claimant otherwise determined or the adjusted selling cost (see Appendix B.2) to the supplier of the property, whichever amount is less.

Legislative Reference Income Tax Act
Subsection 127(11.6) Non-arm's length costs

12.3 Gifts are not to be deemed acquired at fair market value

The Act normally deems a taxpayer to have acquired a gift at fair market value. For the purposes of determining the amount of expenditures in respect of purchases of goods or services from NAL suppliers (see section 12.2), the Act provides that gifts will not be deemed to have been acquired at fair market value.

12.3.1 Example

ABC Co. performs SR&ED in Canada. ABC Co. and DEF Inc. are not dealing at arm's length. ABC Co. purchases a property from DEF Inc. that was originally received by DEF Inc. as a gift.

Tax consequences:

The cost of the property to ABC Co. will be nil, because the adjusted selling cost (see Appendix B.2) of the property to DEF Inc. is nil. The result is consistent with the situation where a claimant (performer) of SR&ED receives property directly as a gift.

Legislative References Income Tax Act
Subsection 69(1) Inadequate considerations
Subsection 127(11.8) Interpretation for non-arm's length costs

12.4 Leasing of a property is deemed to be the rendering of a service for lease costs incurred prior to 2014

The following rule and example contained in section 12.4.1 are applicable to lease costs incurred before 2014. Lease costs incurred after 2013 do not qualify for SR&ED tax incentives.

The Act provides that the leasing of property is deemed to be the rendering of a service. It is intended that the owner of a property will base the cost of leasing the property on the normal accounting depreciation available with respect to the property. However, this is not found in the Act nor in the Regulations, but only in the Explanatory Notes published by the Department of Finance Canada. The example in section 12.4.1 is from those notes.

Legislative References Income Tax Act
Subsection 127(11.6) Non-arm's length costs
Subsection 127(11.7) Definition of "adjusted selling cost"
Subsection 127(11.8) Interpretation for non-arm's length costs

12.4.1 Example

An R&D performer, A Co., leases a machine (from January 2012 to December 2013) from a NAL person, B Co., for $1,000 per month. B Co., which does not own the machine, leased it from another NAL person, C Co., for $900 per month. C Co. acquired the machine from an arm's length person for $20,400. The life expectancy of the machine is two years. The normal depreciation method used by C Co. is the straight-line method. The machine was leased to B Co. immediately after C Co. acquired the machine. B Co. in turn immediately leased it to A Co.

The amount of the expenditure incurred by A Co. in respect of the lease would be $850 per month ($20,400 prorated over 24 months).

12.5 Summary of determining non-arm's length costs

For expenditures incurred after 2013:

Under the proxy method, there are no situations involving a determination of the adjusted service cost since expenditures incurred for other types of services would be claimable only under the traditional method as overhead and other expenditures.

The situations where a determination of the adjusted selling cost is required are the same under the proxy and traditional methods since they both only involve the purchase of materials.

For expenditures incurred before 2014:

Under the proxy method, situations involving a determination of the adjusted service cost will include only the leasing or rental of machinery or equipment from a NAL supplier. It may also include a lease expense that was all or substantially all (ASA) attributable to using premises or facilities other than a building (for example a structure). For more information on structures, please refer to the SR&ED Capital Expenditures Policy.

When equipment is leased from a NAL supplier, the Act deems the leasing to be the rendering of a service. Expenditures incurred for other types of services would be claimable only under the traditional method as overhead and other expenditures, since they would be replaced by the prescribed proxy amount (PPA) under the proxy method.

The situations where a determination of the adjusted selling cost is required are almost the same under the proxy and traditional methods, except for purchases of general-purpose office equipment or furniture (GPOEF).

Legislative Reference Income Tax Act
Subsection 127(11.8) Interpretation for non-arm's length costs

12.5.1 Summary of the application of adjusted service cost and adjusted selling cost under the proxy and traditional methods

Non-arm’s length purchase implications of goods or services under the proxy and traditional methods.

1) Adjusted service cost

a) Proxy method:

  • Leasing / rental of equipment for lease costs incurred before 2014.
  • Other services: N/A – they are overhead and other expenditures.

b) Traditional method:

  • Leasing / rental of equipment for lease costs incurred before 2014.
  • Other services for which an expenditure may be claimed as an SR&ED overhead and other expenditures (if it is directly related and incremental). For example: maintenance, servicing equipment, clerical services.

2) Adjusted selling cost

a) Proxy method:

  • Purchase of materials, SUE before 2014, and ASA equipment – other than GPOEF before 2014.

b) Traditional method:

Purchase of materials, SUE before 2014, and ASA equipment – including GPOEF before 2014.

Appendix A – Transferrable amount on Form T1146

A.1 Steps to determine the transferable amount on Form T1146

The steps required to determine the maximum amount that can be transferred from the performer (transferor) to the payer (transferee) are summarized as follows. These steps are included on Form T1146.

Step 1 (line 100 of Form T1146)

Determine the performer's SR&ED qualified expenditure pool (see section 2.3) at the end of the tax year, before the transfer.

Step 2 (line 110 of Form T1146)

Determine the notional contract payment (NCP). An NCP is a payment from the payer to the performer for SR&ED performed on the payer's behalf that would be a contract payment if the payer and the performer were dealing at arm's length. For information on the definition of contract payment, please refer to Assistance and Contract Payments Policy.

An expenditure may relate to a contract for services, but the services are not performed before the end of the payer's tax year. In such a situation, the Income Tax Act provision regarding prepaid expenses will apply to treat the expenditure of the payer as not being made or incurred in the year (therefore not deductible in the tax year) but rather made or incurred in the tax year in which the services are actually performed.

Step 3 (line 112 of Form T1146)

Determine the amount in respect of the NCP that the payer has not paid to the performer on or before the day that is 180 days after the end of the performer's tax year. This requirement is similar to the requirements for unpaid expenditures (unpaid amounts), except that the 180-day period for the payment of the NCP is based on the performer's tax year-end.

Step 4 (line 114 of Form T1146)

Calculate the maximum NCP.

Step 5

Determine the qualified expenditures that relate to the NCP, which are incurred and paid by the performer on or before the day that is 180 days after the end of the tax year of the performer.

Items to consider in this determination are:

  • unpaid salary or wages and unpaid amounts that relate to the non-arm’s length (NAL) SR&ED;
  • SR&ED projects performed at a time when the payer and the performer were dealing at arm's length; and
  • qualified expenditures incurred for other SR&ED projects.

Step 6

Determine if there is any amount transferred to the performer (transferor) for expenditures attributable to the SR&ED. This would be the case where the performer (transferor) has subcontracted all or a portion of the SR&ED to a NAL subcontractor, and the subcontractor transferred its qualified expenditures attributable to the SR&ED to the performer (transferor).

Step 7

Determine the qualified expenditures that relate to the NCP and that are incurred by the performer before subtracting unpaid amounts.

Items to consider in this determination are:

  • SR&ED projects performed at a time when the payer and the performer were dealing at arm's length; and
  • qualified expenditures incurred for other SR&ED projects.

Step 8 (line 102 on Form T1146)

Calculate: [A ÷ B] x the amount calculated in Step 4 (line 114 of Form T1146)

Where:

A = qualified expenditures of the performer paid within 180 days of the performer's year-end (Step 5), plus the amount transferred to the performer from a subcontractor (Step 6).

B = qualified expenditures of the performer including unpaid amounts (Step 7), plus the amount transferred to the performer from a subcontractor (Step 6).

Step 9 (line 104 on Form T1146)

The amount that may be transferred is the amount up to the lesser of:

  • the amount determined in Step 1; and
  • the amount determined in Step 8.

Step 10 (line 106 on Form T1146)

Specify the amount for the transfer (up to the amount determined in Step 9).

The Act specifies the least of three amounts (see section 7.4). The three amounts are those determined in steps 1 and 8, plus the amount specified in the agreement (Step 10).

Legislative References Income Tax Act
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(14) Identification of amounts transferred
Subsection 127(26) Unpaid amounts
Section 251 Arm's length

A.2 Examples of determining transferable amount

The following examples illustrate different aspects of the transferable amount:

Example 1

B Ltd. performed SR&ED on behalf of A Ltd., a  NAL party. Both companies have the same December 31 tax year-end. The total amount of the SR&ED contract was $100,000 of which A Ltd. had not paid $5,000 within 180 days of the tax year-end. The work was completed by the tax year-end of A Ltd. B Ltd. incurred expenditures of $80,000 as follows:

SR&ED salaries: $55,000
Materials consumed or materials transformed in SR&ED: $10,000
SR&ED capital property (equipment): $15,000, incurred before 2014

B Ltd. paid the salaries expenditures in the year. The expenditures for materials and equipment were still unpaid 180 days after the end of the year.

The amount that may be transferred is determined as follows:

Step 1

The SR&ED qualified expenditure pool of B Ltd. (performer and transferor) is $70,000 ($80,000 incurred less $10,000 of current expenditures not paid).

Step 2

The notional contract payment (NCP) is $100,000 between A Ltd. and B Ltd.

Step 3

The portion of the NCP that is unpaid by A Ltd. (payer and transferee) is $5,000.

Step 4

The portion of the NCP that is paid is $95,000. This is the maximum NCP.

Step 5

All of the qualified expenditures of B Ltd. relate to the NCP; this was the only SR&ED performed by B Ltd. Of the total qualified expenditures of $80,000, the portion paid within 180 days of the end of the year is $70,000. (The only adjustment is for current expenditures.)

Step 6

There are no amounts transferred to B Ltd. This would only happen if B Ltd. contracted out a portion of the work to a NAL party, and thereby became a payer to whom expenditures could be transferred.

Step 7

All of the qualified expenditures of B Ltd. relate to the NCP; this was the only SR&ED performed by B Ltd. The total qualified expenditures is $80,000.

Step 8

[($70,000 + $0) x $95,000] ÷ ($80,000 + $0) = $83,125

Step 9

The maximum amount of expenditures that may be transferred is the lesser of the amounts from Step 1 ($70,000) and Step 8 ($83,125).

B Ltd. will not be able to transfer any amount in respect of the unpaid $10,000 (even if the amount is eventually paid) because the expenditure incurred by B Ltd. was not paid within 180 days after its tax year-end.

Example 2

Corporation K Co. performs SR&ED for a NAL corporation, J Co., under a contract. Both J Co. and K Co. have a December 31 tax year-end. The contract amount is $10,000.

K Co. performs all the SR&ED in Year 1 and incurs $9,800 of qualified expenditures. K Co. pays all its qualified expenditures in respect of the SR&ED in Year 1. However, J Co. pays K Co. only $5,000 under the contract before June 30 of Year 2. K Co. and J Co. file an agreement with the CRA requesting a transfer of $9,800 from K Co. to J Co. for Year 1.

Since J Co. has only paid $5,000 within the stipulated time frame, the third limit (see section 7.4) is $5,000 (see Step 4 in Appendix A.1). Therefore, the amount transferred under the agreement is limited to $5,000 despite that the amount specified in the agreement is $9,800.

K Co. will not be able to transfer the remaining $4,800 paid in Year 2. The NCP that is in respect of an expenditure incurred by K Co. in Year 2 is 0 (zero).

Example 3

A corporation, G Inc., performs SR&ED for a NAL corporation, E Inc., under a contract. Both G Inc. and E Inc. have a December 31 tax year-end. The contract price is $10,000, which E Inc. paid fully in Year 1. G Inc. performed all the SR&ED in Year 1 and incurred $9,000 of qualified expenditures. However, G. Inc. only paid $3,000 of the qualified expenditures by the 180th day after December 31 of Year 1. The remaining $6,000 was paid on December 31 of Year 2. G Inc. and E Inc. want to file an agreement with the CRA to transfer qualified expenditures from G Inc. to E Inc. for Year 1.

For qualified SR&ED expenditures to be transferable, the performer (G Inc.) must have paid them within 180 days after the performer's tax year-end. In this case, only $3,000 of G Inc.'s qualified expenditures for the SR&ED performed under the contract is paid within the time limit. Accordingly, only $3,000 of the contract amount between G Inc. and E Inc. is taken into account in determining the least of the three amounts.

Therefore, G Inc. may transfer no more than $3,000 to E Inc., despite the full payment by E Inc.

Even though G Inc. pays the remaining $6,000 at the end of Year 2, G Inc. will not be able to transfer any amount in respect of the $6,000 of qualified expenditures to E Inc. for any tax year.

Legislative References Income Tax Act
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(14) Identification of amounts transferred
Subsection 127(26) Unpaid amounts
Section 251 Arm's length

Appendix B – Determining adjusted service cost and adjusted selling cost

B.1 Adjusted service cost

The term adjusted service cost (for a supplier who renders a particular service) is defined in the Income Tax Act. The formula for determining the adjusted service cost is:

A - B - C - D - E

Where:

A = the cost to the supplier of rendering the particular service. Where a service is rendered directly by an individual operating a proprietorship, the cost of rendering the service is considered to be nil to the extent that only the time of the individual is required to provide the service. That is because no salary cost is involved. However, the purchaser of the same service would be entitled to a deduction if an employee of the proprietorship renders the service, since the employee's time would entail salary costs. The same principle applies to partners and employees of a partnership. A partner's time would not represent a cost to the partnership, but the time of an employee of the partnership would.

B = the difference between the cost to the supplier for a service rendered by a non-arm’s length (NAL) sub supplier and the adjusted service cost to the NAL sub supplier of rendering the service. This amount has the effect of eliminating the markup in a service contract where, for the purpose of rendering the service, the supplier incurs an expense for a service rendered by another person or partnership (sub supplier) not dealing at arm's length with the supplier.

C = the markup of a property acquired from a NAL supplier, where the cost of the property is reflected in the cost of rendering the service.

D = the portion of the cost that relates to remuneration based on profits or a bonus paid or payable to any employee of the supplier. For comparison purposes, had the payer of the service used its own employees to render the service, only such amounts paid to specified employees would not be allowable SR&ED expenditures.

E = any government assistance or non-government assistance that can reasonably be considered to be in respect of rendering the particular service and that the supplier has received, is entitled to receive or can reasonably be expected to receive.

Legislative Reference Income Tax Act
Subsection 127(11.7) Definition of "adjusted service cost"

B.1.1 Example of adjusted service cost calculation and adjustment to qualified expenditures

The following example illustrates the adjusted service cost calculation and the adjustment to qualified expenditures in the following situation: X gives Y, a NAL party, a maintenance contract. Y incurs expenditures, including supplies that it purchased from Z, a NAL party. Z had purchased the supplies from W, an arm's length party.

Image of the adjusted service cost calculation and the adjustment to qualified expenditures

Facts:

  • X does SR&ED and has chosen the traditional method for its claim.
  • a – X gives Y, a NAL party, an $80,000 maintenance contract (purchases of services other than a contract for SR&ED – see section 12.0).
  • Y incurs the following expenditures:

Salaries: $30,000
Supplies: $15,000
Total: $45,000

  • b – Y purchased the $15,000 of supplies from Z, a NAL party.
  • c – Z had purchased the supplies from W, an arm's length party, for $8,000.

Calculation of the adjusted service cost

The adjusted service cost to Y (supplier) is:

$45,000 less [$15,000 - $8,000] = $38,000

The amount that X may claim for this service contract is $38,000 (the lesser of $80,000 and $38,000).

The adjustment required to qualified expenditures

The adjustment required to qualified expenditures (on Form T661) to achieve the desired result is the difference between $80,000 and $38,000, which is $42,000.

The amount that may be included in the claimant's pool of deductible SR&ED expenditures remains at $80,000.

Legislative References Income Tax Act
Subsection 127(11.6) Non-arm's length costs
Subsection 127(11.7) Definition of "adjusted service cost"

B.2 Adjusted selling cost

The term adjusted selling cost is defined in the Act. The definition of adjusted selling cost is similar to the definition of adjusted service cost. Both definitions trace the costs incurred by  NAL  parties in providing a service or a property.

The adjusted selling cost of a property is determined by the formula:

A - B

Where

A = an amount that is determined as follows:

(a) Where the property is purchased by the supplier from a person (or partnership) with whom the supplier does not deal at arm’s length, then A is the lesser of the cost to the supplier and the adjusted selling cost to the other NAL person (or partnership).

(b) Where (a) does not apply, then A is the cost of the property to the supplier. This provision will apply when either the supplier purchases the property in an arm's length transaction, or the supplier creates, manufactures, or assembles the property. If the supplier purchases the property in an arm's length transaction, then the adjusted selling cost to the supplier is the purchase price. If the supplier creates, manufactures, or assembles the property, then the adjusted selling cost to the supplier is the cost of making the property subject to the rules in (c) to (e).

(c) If part of the cost of the property is attributable to another property (such as, a component) acquired from a NAL person or partnership (the seller), then that component's cost to the supplier is the lesser of the actual cost to the supplier and the adjusted selling cost to the seller.

(d) If part of the cost of the property is attributable to a service rendered by a NAL person or partnership (the seller), then the cost to the supplier is the lesser of the actual cost to the supplier and the adjusted service cost to the seller.

(e) The cost to the supplier should not include any remuneration based on profits or bonuses paid or payable to any employee of the supplier.

B = any government assistance or non-government assistance in respect of the property that the supplier has received, is entitled to receive, or can reasonably be expected to receive in respect of the property.

Legislative Reference Income Tax Act
Subsection 127(11.7) Definition of "adjusted selling cost"

B.2.1 Example of adjusted selling cost calculation and adjustment to qualified expenditures

The following example illustrates the adjusted selling cost calculation and the adjustment to qualified expenditures in the following situation: X buys a material (a part) from Y, a  NAL part supplier. Y incurs expenditures to build the part, including a component that it purchased from Z, a NAL party. Z had purchased the component from W, an arm's length party.

Adjusted selling cost calculation and the adjustment to qualified expenditures

Facts:

  • X needs to perform SR&ED on a part.
  • a – X orders the part for $50,000 from Y, a NAL party.
  • Y decides to build it and incurs the following expenditures:

Salaries: $20,000
Materials: $10,000
Component: $8,000
Total: $38,000

  • b – Y purchased the $8,000 component from Z, a NAL party
  • c – Z had purchased the same component for $5,000 from W, an arm's length party.

Calculation of the adjusted service cost

The adjusted selling cost to Y (supplier) is:

$38,000 less [$8,000 - $5,000] = $35,000

The amount that X may claim for this property is the lesser of $50,000 and $35,000.

The adjustment required to qualified expenditures

The adjustment required to qualified expenditures (on Form T661) to achieve the desired result is the difference between $50,000 and $35,000 which is $15,000.

Note that the amount that may be included in the claimant's pool of deductible SR&ED expenditures remains at $50,000.

Legislative References Income Tax Act
Subsection 127(11.6) Non-arm's length costs
Subsection 127(11.7) Definition of "adjusted selling cost"

B.3 Must be a qualified expenditure of the ultimate purchaser

The Act provides that any cost to a supplier shall not include any amount that would not be a qualified expenditure if the amount were incurred directly by the ultimate purchaser or user of the goods or services. The following two examples in sections B.3.1 and B.3.2 illustrate this concept.

Legislative Reference Income Tax Act
Subsection 127(11.8) Interpretation for non-arm's length costs

B.3.1 Amount claimable by ultimate purchaser—example of two non-arm's length entities

Facts:

X (the ultimate purchaser) gives a $100,000  NAL cleaning contract (purchases of services other than a contract for SR&ED – see section 12.0) to Z (supplier).

Z's expenses are as follows:

Salaries: $70,000
Rent: $1,000
Amortization: $2,000
Interest: $1,500
Total: $74,500

The Act states that X can only claim costs in respect of the NAL cleaning contract to the extent that they would be qualified expenditures if X had incurred them directly. Rent, amortization, and interest are not qualified expenditures. Thus, X can only claim expenditures of $70,000 as a qualified expenditure.

The adjustment required in calculating total qualified SR&ED expenditures for investment tax credit purposesto achieve the desired result is the difference between $74,500 and $70,000 which is $4,500.

Legislative Reference Income Tax Act
Subsection 127(11.8) Interpretation for non-arm's length costs

B.3.2 Amount claimable by ultimate purchaser—example of three or more non-arm's length entities

Facts:

X (ultimate purchaser) gives a $100,000  NAL  cleaning contract to Y (supplier). Y in turn, gives an $80,000 NAL contract to Z (supplier) for the same cleaning services.

Z's expenses are as follows:

Salaries: $70,000
Rent: $1,000
Amortization: $2,000
Interest: $1,500
Total: $74,500

The Act ensures that X cannot circumvent the rule in respect of the expenditures by interposing another party between itself and the supplier of the goods or service. In this case, X can still only claim $70,000 as a qualified expenditure.

The Act also addresses situations where the circumstances are the same as above except that Y is an arm's length party to both X and Z, which operate with each other not at arm's length. A claimant cannot circumvent the NAL rules by including an arm's length party between a payer and a NAL performer. For more information, please refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Legislative Reference Income Tax Act
Subsection 127(11.8) Interpretation for non-arm's length costs

Appendix C – References

C.1 Legislative references

List of provisions
Income Tax Act Description
Section 16.1 Leasing properties
Subsection 37(1) Pool of deductible SR&ED expenditures
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Paragraph 37(1)(b) Pool of deductible SR&ED expenditures – capital expenditures [Repealed]
Subsection 37(4) Acquisition of rights
Subsection 69(1) Inadequate considerations
Paragraph 81(1)(a) Statutory exemptions
Subsection 127(8) Investment tax credit of partnership
Subsection 127(9) Definition of "contract payment"
Subsection 127(9) Definition of "first term shared-use-equipment"
Subsection 127(9) Definition of "investment tax credit"
Subsection 127(9) Definition of "investment tax credit", paragraph (l)
Subsection 127(9) Definition of "investment tax credit", paragraph (m)
Subsection 127(9) Definition of "qualified expenditure"
Subsection 127(9) Definition of "qualified expenditure", paragraph (f)
Subsection 127(9) Definition of "qualified expenditure", paragraph (g)
Subsection 127(9) Definition of "qualified property"
Subsection 127(9) Definition of "second term shared-use-equipment"
Subsection 127(9) Definition of "SR&ED qualified expenditure pool"
Subsection 127(9) Definition of "taxable supplier"
Subsection 127(11.5) Adjustments to qualified expenditures
Paragraph 127(11.5)(a) Adjustments to qualified expenditures
Subsection 127(11.6) Non-arm's length costs
Subsection 127(11.7) Definition of "adjusted selling cost"
Subsection 127(11.7) Definition of "adjusted service cost"
Subsection 127(11.8) Interpretation for non-arm's length costs
Subsection 127(13) Agreement to transfer qualified expenditures
Subsection 127(14) Identification of amounts transferred
Subsection 127(15) Invalid agreements
Subsection 127(16) Non-arm's length parties
Subsection 127(24) Exclusion from qualified expenditures
Subsection 127(25) Deemed contract payment
Subsection 127(26) Unpaid amounts
Subsection 149(1) Miscellaneous exemptions
Section 251 Arm's length
List of regulations
Income Tax Regulations Description
Subsection 2900(4) Calculation of the prescribed proxy amount
Paragraph 2902(a) Prescribed current expenditures for purposes of qualified expenditures
Paragraph 2902(b) Prescribed expenditures for purposes of qualified expenditures
Former paragraph 2902(b) Prescribed capital expenditures for purposes of qualified expenditures
Paragraph 2902(c) Prescribed expenditures – acquisition of rights
Paragraph 2902(d) Prescribed expenditures – donations
Section 7100 Prescribed Federal Crown Corporations
Section 8201 Definition of "permanent establishment"

Appendix D – Revisions

D.1 Explanation of changes

The following are the explanation of changes to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy as part of the revision of December 18, 2014:

Section 1.0 has been revised to delete the first sentence of the previous policy which mentioned that this policy document was a consolidation of the CRA publications that deal with determining the total qualified SR&ED expenditures for investment tax credit purposes.

Sections 1.2 and 2.1 have been revised to reflect the legislative changes resulting from the federal 2012 budget measures, specifically the changes to the definition of “qualified expenditure.”

Section 3.0 has been updated to reflect the reduction on Form T661 for 20% of arm’s length contract expenditures and third-party payments.

Sections 4.1 and 4.1.1 have been updated to account for reductions to qualified SR&ED expenditures on Form T661 due to arm’s length contracts that have not been paid within 180 days of the tax year-end.

Sections 10.2, 10.2.1, and 10.4 have been revised to reflect the changes in legislation for prescribed expenditures.

Sections 12.4 and 12.4.1 have been revised to reflect the legislative changes resulting from the federal 2012 budget measures, specifically lease costs incurred after December 31, 2013, no longer qualify for SR&ED tax incentives.

Sections 12.5 and 12.5.1 have been revised to describe the summary of determining non-arm’s length costs for expenditures incurred after 2013 resulting from the federal 2012 budget measures.

Appendix C.1 has been revised by updating the legislative references.

Appendix C.2 "CRA publications" has been removed.

References to “current and capital expenditures” or “capital expenditures” were revised throughout the document to reflect the federal 2012 budget measure concerning capital. Legislative references have been updated throughout the document, and wording throughout the document has been added, to indicate capital expenditures no longer qualify for SR&ED tax incentives after 2013.

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

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