Proposed Changes to SR&ED Tax Treatment (2005)

October 16, 2012 SRED

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At SREDucation, we’re taking the time to document all of the changes that have occurred to the SR&ED program over the years. In our “From the Archives” series, you’ll be able to see how the program has evolved since its inception in 1986. For a timeline of these events, check out the SR&ED Tax Credit page on Facebook. Stay current with the program by understanding the historical context.

Proposed Changes to SR&ED Tax Treatment (2005)

On Nov. 15, 2005, Finance Minister Ralph Goodale tabled a Notice of Ways and Means Motion intended to address concerns about the proper claiming of tax credits.

“Specifically,” read a notice at the time, Goodale was “proposing amendments to the Income Tax Act to clarify that the amount of an expenditure allowable to a taxpayer, and upon which a tax credit or deduction may be claimed, is limited to the amount actually disbursed by the taxpayer.”

Goodale’s notice was issued in response to a Tax Court of Canada decision “involving shares issued under an employee stock option plan,” the notice continued.

“The amount paid by the employees was less than the value of the shares at the time they were issued, and the Court allowed the corporation to treat the difference as a scientific research and experimental development (SR&ED) expenditure qualifying for SR&ED tax credits.”

In response, the notice is intended to ensure “no expenditure will be considered to have been made by a taxpayer except to the extent of an actual outlay or expense incurred by the taxpayer.”

Details of the SR&ED Amendments

One amendment targeted employee stock options. Issuing shares to an employee was considered an expense (under income tax purposes), but there were questions regarding how much a corporation could spend for this purpose. “A corporate taxpayer was allowed to claim an SR&ED tax credit for the amount by which the fair market value of shares issued by the corporation exceeded the exercise price payable to the corporation for its shares under an employee stock option plan,” the notice read. Goodale’s announced amendments clarified that if the compensation went above and beyond the money given to other employees, this could not be considered claimable under SR&ED.
While the Revenue Minister could previously give his authorization to extend the 12-month filing deadline for SR&ED claims, the 2005 changes said unequivocally that this would be no longer the case. “The ability to waive the 12-month filing deadline has come under increasing pressure as taxpayers have sought to file additional claims,” the notice stated. “The proposed amendments clarify with certainty that there will be no exception to the 12-month filing deadline for applications for investment tax credits and SR&ED treatment.”

This article is based upon a Government of Canada notice issued at the time: Minister of Finance proposes amendments concerning the income tax treatment of certain expenditures.