“SR&ED Outside Canada” Series Part Three: Salaries and Wages Outside Canada
Updated to Reflect New Policies (2022)Â*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***Â |
What salaries and wages are eligible for employees performing SR&ED work outside Canada?
The treatment of salaries and wages for employees performing Scientific Research & Experimental Development (SR&ED) outside Canada is a vital aspect of filing claims and will be addressed in this third article of the “SR&ED Outside Canada” series. (For parts one and two, please see Part One: Contracts and Purchase of Rights and Part Two: Overhead and Other Expenditures.)
In this article, we will discuss:
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The treatment of salary or wages of employees carrying on SR&ED outside Canada;
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The calculation of permissible salary or wages for SR&ED work carried on outside Canada; and
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The clarification of applicable rules and limiting conditions.
Disclaimer
Since the application of these laws depends on numerous factors within each individual case, this is a fairly complex topic of discussion. As such, this article is only meant to provide a basic understanding of the subject matter discussed within and does not serve to replace legal advice provided by experts on a case-to-case basis.
Salary or Wages of Employees Performing SR&ED Work Outside Canada
As described in section 10.0 of the SR&ED Salary or Wages Policy:
Claimants can earn SR&ED investment tax credits (ITCs) on permissible salary or wages for SR&ED work carried on outside Canada after February 25, 2008.
The SR&ED work carried on outside Canada must be directly undertaken by the employees of the claimant, and must form part of the SR&ED carried on in Canada by the claimant. Permissible salary or wages incurred by a claimant in a tax year is limited to 10% of the total of salary or wages for the SR&ED carried on in Canada.
The permissible salary or wages for the work carried on outside Canada is deemed to be an expenditure made in Canada by the claimant. Accordingly, such expenditures qualify for the SR&ED ITC and are excluded from the application of the rules for SR&ED carried on outside Canada for which no ITC can be earned.1
Calculation of Permissible Salary or Wages for SR&ED Work Performed Outside Canada
Under section 10.1 of the SR&ED Salary or Wages Policy, the Canada Revenue Agency states,
In order to determine the amount that can be claimed as the permissible salary or wages for SR&ED carried on outside Canada, claimants will first have to calculate the two amounts A and B below. The lower of amount A or B can be claimed as the permissible salary or wages for SR&ED carried on outside Canada.
Amount A – Total of salary or wages for SR&ED work carried on outside Canada
The salary or wages that can be claimed for SR&ED work carried on outside Canada must meet the following criteria:
the costs were incurred after February 25, 2008;
the SR&ED work was directly undertaken by an employee of the claimant and not performed by a contractor;
the employee who performed the SR&ED work was a resident of Canada at the time the expense was incurred;
the work was related to a business of the claimant;
the SR&ED work carried on by the employee outside Canada was an integral part and solely in support of the SR&ED work carried on in Canada; and
the salary or wages paid were not subject to income or profits tax from another country.
Amount B – 10% of the total of SR&ED salary or wages for SR&ED carried on in Canada
This limit is calculated as 10% of the total salary or wages claimed for SR&ED carried on in Canada. Note: Although the Income Tax Act refers to an expense incurred in the year for salary or wages paid to an employee in respect of SR&ED, it is the practice of the CRA to use the amount on line 306 of Form T661 (expenditure incurred) for the purposes of determining the 10% limit.
For the tax year that includes February 26, 2008, the 10% limit is prorated based on the number of days after February 25, 2008, that are in that tax year over the total number of days that are in that tax year.
The formula is:
(Number of days in the tax year after February 25, 2008) / (Total number of days in the tax year)
Example
Company A’s tax year end is September 30, 2008. Company A claimed one SR&ED project carried out in Canada during the tax year. Company A has five employees (other than specified employees) performing SR&ED and each are paid $9,000 per month. All employees are working 100% of their time on the SR&ED project and they all reside in Canada. Company A’s SR&ED salaries for 2008 tax year are $540,000 ($9,000 x 12 months x 5 employees = $540,000).
Employee 1 performed SR&ED work outside Canada in November 2007 (30 days)
Employee 2 performed SR&D work outside Canada in March 2008 (31 days).
The permissible salary for work carried on outside Canada is the lesser of A or B:
Amount A – Calculated
$9,000 – Eligible salary for Employee 2 only as Employee 1 performed SR&ED work before February 25, 2008.
Amount B – Calculated
$31,092 (total salary or wages for SR&ED performed in Canada) x (10%) x (proration for the number of days in the tax year after February 25, 2008 / total number of days in the tax year.
($540,000 – $18,000) x (10%) x (218 / 366)
Based on the above calculation, the amount that can be claimed as salary or wages for work carried on outside Canada on line 307 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, is $9,000.2
Section 10.3 of the SR&ED Salary or Wages Policy also specifies:
The calculation of permissible salary or wages for SR&ED work carried on outside Canada is determined with respect to the total amount of salary or wages for the SR&ED inside Canada. The calculation does not distinguish between specified employees and employees other than the specified employees.
However, the way Form T661 is structured, the total amount of permissible salary or wages for SR&ED outside Canada should be allocated between employees other than specified employees (line 307) and specified employees (line 309). The total of lines 307 and 309 cannot exceed 10% of the total amount of salary or wages for the SR&ED inside Canada (line 306 of Form T661).3
Application of the Rules and Limiters
The rules and limiters, which regulate the claim on credit capture from salaries and wages for SR&ED work performed outside Canada, are listed under Section 10.2 of the SR&ED Salary or Wages Policy.
Meaning of “Solely in Support”
The SR&ED work carried on outside Canada by the claimant that is basic research, applied research, experimental development or work described in paragraph (d) of the definition of SR&ED in subsection 248(1) of the Act would qualify as being “in support” provided the work is an integral part and is solely in support of the SR&ED work carried on in Canada by the claimant.
The question whether an activity performed outside Canada is solely in support of the SR&ED work carried on in Canada is a question of fact to be determined on a case by case basis.
Where an activity is in support of both an SR&ED project carried on in Canada and another SR&ED project carried on outside Canada, that activity would not be considered to be solely in support of the SR&ED work carried on in Canada.
Where an activity performed outside Canada supports work that involves SR&ED carried on in Canada and at the same time supports non-SR&ED work (dual purpose activity) performed in Canada would not be considered to be solely in support of the SR&ED work carried on in Canada.
Salary or Wages Paid Were Not Subject to Income or Profits Tax from Another Country
Salary or wages paid to an employee for SR&ED work on outside Canada can be included as permissible salary or wages only if the claimant reasonably believes that the salary or wages is not subject to an income or profits tax imposed, because of the employee’s presence or activity in a country other than Canada, by the government of that particular country.
This rule takes into account only those taxes that are applied because of an employee’s presence or activities in a foreign country – and not, for example, a tax that applies to a country’s citizens regardless of where they live or work.
To determine whether the salary or wages paid to an employee for work performed outside Canada is subject to an income or profits tax imposed by a foreign government, the claimant should consider the tax treaty between Canada and the foreign country in which the SR&ED work in support of the SR&ED in Canada is performed.
Determining Amount B – Limit
Amount B is calculated as 10% of the total salary or wages claimed for SR&ED carried on in Canada.
The 10% limit is calculated on the total allowable salary or wages for SR&ED in Canada and not only the salary or wages relating to the projects(s) carried on in Canada that the work outside Canada solely supports.
For example, if the claimant carries out two SR&ED projects in Canada and testing outside Canada is required for one of the projects, the total salary or wages expenditures for SR&ED in Canada is taken into account for the calculation of the 10% limit.
Under the traditional methods, Amount B can include the portion of other salary or wages of employees who directly undertake, supervise, or support the SR&ED that can be claimed as SR&ED overhead and other expenditures on line 360 of Form T661 (salary or wages of employees not directly engaged in the prosecution of SR&ED).
Other salary or wages that are considered SR&ED overhead and other expenditures, such as the salary or wages of clerical staff providing a service to SR&ED employees claimed on line 360 of Form T661, are not included in the total salary or wages for the purpose of calculating the 10% limit.4
Salaries and Wages for Employees Undertaking SR&ED Outside Canada: Summary
The claimant can earn ITCs on permissible salaries or wages on eligible work performed outside Canada, as long as the amount claimed does not exceed 10% of the total allowable salary or wages for all SR&ED projects performed inside Canada by the claimant.
The work for which salaries and wages are claimed must be qualified basic research, applied research, experimental development or work described in paragraph (d) of the definition of SR&ED in subsection 248 (1) of the Income Tax Act.5 Any support work for which the salaries and wages are being claimed must solely perform SR&ED support exclusively for the project under which they are being claimed.
This article is based on CRA policy documents available at the date of publication. Please consult the CRA website for the most recent versions of these documents.
Do you have experience trying to claim SR&ED or other tax credits for work performed outside Canada?