CRA Updates to Select SR&ED Program Policies – March 30, 2022
On March 30, 2022, the Canada Revenue Agency (CRA) announced updates to the Pool of Deductible SR&ED Expenditures Policy, the Traditional and Proxy Methods Policy, the Third-Party Payments Policy, and the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. These updates reflect the legislative changes that have been announced.
Updates to the Pool of Deductible SR&ED Expenditures Policy
The Pool of Deductible SR&ED Expenditures Policy revision overview states:
As expenditures of a capital nature or expenditures for the right to use capital property (lease) do not qualify for scientific research and experimental development (SR&ED) tax incentives if incurred after 2013, references to such expenditures have been removed from this policy document.
The overview section includes expanded discussions on three topics. First, SR&ED must be related to the business of the claimant. Second, it explains when expenditures in the pool of deductible SR&ED expenditures can be deducted and the circumstances when restrictions may apply. Additionally, expenditures for SR&ED performed outside Canada cannot be included in the pool of deductible SR&ED expenditures or result in the earning of the investment tax credit.
The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.1
The changes detailed within Appendix B.1 Explanation of changes are as follows:
Section 2.0 has been revised to remove discussions on expenditures of a capital nature or expenditures for the right to use capital property (lease) if the expenditure was incurred after 2013, as such expenditures do not qualify for SR&ED tax incentives. New wording has been provided for clarity, to explain that expenditures for SR&ED performed in Canada may result in the earning of ITC. If the expenditures that form the pool of deductible SR&ED expenditures are not deducted in the year, they may be deducted in a subsequent year. Additional wording was provided to explain that the SR&ED performed can be related to the business of a related corporation. In Note 1, new wording was provided to explain that, except for the special rules for permissible salary or wages for SR&ED work carried on outside Canada, expenditures for SR&ED performed outside Canada cannot be claimed on Form T661 and do not result in ITC.
Sections 3.1 and 4.0 have been revised to remove discussions on expenditures of a capital nature or expenditures for the right to use capital property (lease) if the expenditure was incurred after 2013, as such expenditures do not qualify for SR&ED tax incentives. Any discussions that remain on expenditures of a capital nature relate to capital expenditures incurred prior to 2014, which are still included in the determination of the pool of deductible SR&ED expenditures.
Section 6.0 has been revised to include wording such that the use of an amount from the pool of deductible SR&ED expenditures is not subject to the SR&ED reporting deadline since the SR&ED expenditures comprising the pool were identified on time on Form T661.2
Updates to the Traditional and Proxy Methods Policy
The Traditional and Proxy Methods Policy revision overview states:
All references to capital expenditures or expenditures of a capital nature and the basic investment tax credit rate of 20% have been removed, as these no longer apply after 2013. The prescribed proxy amount is calculated using the 55% rate.The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.3
Section 2.0 has been revised to include a new paragraph, which provides a brief description of the main difference between the traditional and proxy methods.
Sections 4.1, 5.1, and 6.1 have been revised to remove any discussion related to expenditures of a capital nature as such expenditures do not qualify for SR&ED tax incentives after 2013.
Former sections 6.8, Lease costs, and 6.9, Capital expenditures, were removed as expenditures of a capital nature are excluded from SR&ED expenditures.
Former section 6.10 Provincial and territorial research and development tax credits, was renumbered as section 6.8. Some clarifying wording was added.
Former section 6.11 Comparison of the traditional and proxy methods, was renumbered as section 6.9.
Former section 6.12 Example – Additions to the expenditure pool and calculating the investment tax credit for the traditional and proxy methods, was renumbered as section 6.10.
Other minor formatting and editing corrections were made throughout the document.4
Updates to Third-Party Payments Policy
The Third-Party Payments Policy revision overview states:
Removed unnecessary wording since, only 80% of a third party payment made after 2012 qualifies for an investment tax credit, and after 2013, expenditures for capital property or the right to use capital property cannot be claimed.
The text of this document has been revised to reflect these changes, see Appendix C.1 Explanation of changes.5
The changes detailed within Appendix C.1 Explanation of changes are as follows:
Section 2.3 has been revised to remove unnecessary wording, such as, prior to 2013 and the inclusion of 100% in qualified SR&ED expenditures. Since 2013, only 80% of the third-party payment is included in the qualified SR&ED expenditures.
Section 6.2 has been revised to remove unnecessary wording, since after 2013, expenditures for capital property or the right to use capital property cannot be claimed. This includes third-party payments made after December 31, 2013, to certain entities used to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense.
Section 11.3.1 has been revised to clarify that only colleges that are affiliated with a university are provided automatic approval.
Section 11.3.2 has been revised to update the name of the branch and the address of the Income Tax Rulings Directorate. Also, an email address was included.
Other minor formatting and editing corrections were made throughout the document.6
Updates to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy
The Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy revision overview states:
Removed unnecessary wording since, after 2012, only 80% of contract SR&ED expenditures amount is allowable as qualified SR&ED expenditures for the purposes of calculating the investment tax credit.
The explanation of the phrase “on behalf of” has been expanded to clarify that a contract payment received by the performer reduces their qualified SR&ED expenditures.
What is a contract for SR&ED has been expanded by adding clarification for support work.
The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.7
The changes detailed within Appendix B.1 Explanation of changes are as follows:
Section 3.0 has been revised by clarifying that a contract payment for SR&ED received by the performer reduces their qualified expenditures for the investment tax credit (ITC).
Section 4.0 has been revised by removing the opening passage referring to expenditures of a capital nature or the right to use capital property made after 2013, as this is no longer necessary.
Section 5.0 has been revised by adding clarification for support work, which is defined in paragraph 248(1)(d) of the definition of SR&ED of the Income Tax Act. A performer who only performs SR&ED support work is not eligible to claim expenditures for this work. This is because support work, on its own, does not meet the definition of SR&ED.
Section 6.2 has been revised to remove unnecessary wording since after 2012 only 80% of contract SR&ED expenditures are allowable as qualified SR&ED expenditures for the purpose of calculating the investment tax credit.
Section 7.4 has been revised to better explain that expenditures for support work can be claimed by the performer in a NAL situation.
Section 8.0 has been revised to briefly explain the effects of a contract payment on the calculation of ITC of the performer.
Section 9.0 has been revised to clarify that expenditures for SR&ED work performed outside Canada by a contractor, cannot be claimed on Form T661, and do not result in the earning of ITC. The current expenditures of the SR&ED contract work performed outside Canada can be deducted when the payer calculates the net income or loss for income tax purposes.
Other minor formatting and editing corrections were made throughout the document.8
Conclusion
The changes to the above policies reflect the legislative changes that have been announced. The CRA has removed discussions concerning capital expenditures, and have adjusted the wording of various sections. As the SR&ED related policies can be confusing, it is our hope that these changes will enhance the taxpayers understanding of the individual polcies and the program as a whole. Other articles of interest may be: Computer, Software, Server Costs and SR&ED and Are Rent/Building Lease Expenditures SR&ED Eligible? We will keep our readers updated on any additional changes or updates to the SR&ED Policies mentioned in this article, other SR&ED policies, and reporting deadlines. To keep up to date on all SR&ED program changes please keep an eye on the What’s new – SR&ED Program CRA page.