Hiring a contractor to work on your behalf on an R&D project is very common. Tax payers are willing to claim R&D Contract Expenditures so that they can take advantage of benefits through the R&D tax incentive program. SR&ED Contract Expenditure is usually performed in order to conduct basic research, applied research, experimental development, or support your project on your behalf. According to CRA, a contractor can provide any of the following eligible support work:
“engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research”.
To make sure you are eligible to claim the contractor expenses you have to have a clear understanding of the contract agreement first and the ownership of the work. As a rule of thumb any party who owns the Intellectual Party (IP) can apply for SR&ED Tax Incentive.
SR&ED Contract Expenditures can be claimed only in the same year that the SR&ED project is being conducted. Any payments made to SR&ED contractors upfront for the work that has not being performed can be considered as prepaid expenses. It is very important to keep in mind that you cannot claim an ITC (Investment Tax Credit) for SR&ED Contract Expenditures to a partner, shareholder, associated businesses, or an entity who is not a Canadian taxpayer (Arm’s Length Contractors).
Payments of SR&ED can be also made into various entities such as approved colleges, research institutes, universities, hospitals, etc. Such types of payments are called third party payments. In such cases, the degree of control is the key difference while conducting SR&ED. In terms of third party payment expenses, the claimant has no control of the SR&ED project and can only access or acquire the SR&ED results.
The SR&ED Contract Expenditures is usually treated in the same way under proxy and traditional methods. As of January 2013 the allowance of contract expenditure has been reduced from 100% down to 80%. To be able to establish SR&ED contract work, the following key factors should be highly considered:
Key Factors When Claiming SR&ED Contract Expenditures
- The mutual contract must state that contractors require performing certain SR&ED eligible work such as design, engineering, integration, testing, verification, analyses, etc.;
- Keep track of the payments made and documentations received from contractors such as e-mails, test results, drawings, statements of work, allocation and hourly rate, etc.;
- Clearly state in the contract the ownership or IP of the SR&ED work to prevent any double dipping ending up with CRA claim review;
- Only expenses paid to Canadian Arm’s length contractors can be claimed;
- You cannot claim SR&ED Contractor Expenditures if the project is classified as a support work only;
- One way to maximize your SR&ED claim is to hire self-employed contractors as full-time employees.
We strongly advise you to reach out a professional consulting firm when dealing with contractors. Kelid™ has years of experience helping companies dig up eligible SR&ED expenditures. It costs you nothing to contact us for eligibility of your projects or associated expenditures. We strongly suggest you to check out our SR&ED online calculator to determine an estimate of your return.