Taxable Supplier Rules for SR&ED (2002)

July 9, 2013 SRED

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Taxable Supplier Rules for SR&ED Clarified

On October 18, 2002, the Federal government released an application notice considering the issue of SR&ED-qualified expenditures for an investment tax credit, specifically when “a claimant incurs expenditures relating to an SR&ED contract involving a person or partnership that is not a taxable supplier.”

As defined by the government that year, a “taxable supplier” is a Canadian resident or partnership, or a non-resident person or non-Canadian partnership that is taxed due to doing business through a Canadian permanent establishment. The rules were first brought forth in the 1995 budget, the government stated.

SR&ED Contract Payments

The policy explained what a “contract payment” means under SR&ED.

It is payable to a taxpayer or taxable supplier;
The money is used for scientific research;
SR&ED is used for, or on behalf of, an entity that is eligible to deduct expenditures for it;
The taxpayer was at “arm’s length” when SR&ED was performed.

Justifying the SR&ED taxable supplier rules, the government said they were put in place to “encourage claimants to enter into SR&ED contracts with Canadians or non-Canadians that have a permanent establishment in Canada.” If that was accomplished, this would strengthen research and development in the country, the government stated.

Double-Dipping in SR&ED Contracts

The government also clarified that only one SR&ED claimant should receive the benefit. Prior to taxable supplier rules arriving, “in certain situations two Canadian taxpayers could argue they were eligible to claim qualified expenditures … on the same SR&ED project. This situation arose when a Canadian company contracted with a foreign company that in turn subcontracted the SR&ED work to another Canadian company.”

Taxable supplier rules, the notice continued, don’t apply “to payments under SR&ED where the claimant will directly undertake the SR&ED.” More specifically, it meant buying materials outside of Canada could not qualify for the SR&ED work the taxpayer was working on. Additionally, the 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.”

This article is based upon a Government of Canada application policy issued at the time: Application Policy: Taxable supplier rules.