Can Foreign Companies Claim the SR&ED Investment Tax Credit?

Put simply, no. Foreign-owned, non-resident companies cannot claim SR&ED. The SR&ED ITC program is made to financially assist Canadian Companies that perform SR&ED and help them to succeed; however, non-Canadian Controlled Private Corporations, which are controlled by “non-Canadian” or “foreign” individuals, can still benefit from the SR&ED investment tax credit because the company is still a resident in Canada. The residency of a company must be determined before claiming SR&ED ITCs.

Space:

For a “place of business” to exist, there must be space:

A place of business of a person includes any premises used for conducting business activities of the person. If a business does not require actual premises to function, a place of business of a person may exist where it has a certain amount of space at its disposal, such as space at a public warehouse.⁵

Continuity and permanency:

Typically, a place of business is lasting or intended to last “indefinitely” in order for it to have a “Fixed place of business”:

Generally, the business must be considered as “ongoing”, in that there should be an unbroken succession of business and presence at the place of business. For example, in certain circumstances, an indication of continuity and permanence could be the fact that the physical address of a place of business that is accessible to the general public is listed in a directory or on a Web site.⁶

Control:

There must be control at the place of business:

This requirement may be satisfied where there is someone at the place of business who has the authority to make decisions with respect to the operations of the business. In the case of a proprietor who is the owner/operator, authority would rest with that person. In an organization with branch operations, an employee of the branch should have the authority to make important business decisions.⁷

Constant presence and ordinary routine:

To be determined as a “fixed place of business” the CRA states there must be a constant presence and ordinary routine in place:

Where the ongoing presence of personnel is required at a particular place to undertake the business activities of a person (as opposed to where, for example, the person undertakes its business activities through the operation of automated equipment as explained below), an indication of constant presence can be the visibility of personnel within a place of business. This aspect is more critical in those circumstances where common facilities are used, such as public warehouses. The constant presence of an employee or representative of the business indicates the presence of the business.

Also, the day-to-day business must be capable of being carried on and an ordinary routine must exist. Where activities take place with a degree of regularity, be it daily, weekly, monthly, or seasonally, there may be a fixed place of business. Conversely, a place where isolated activities occur would not qualify as a fixed place of business.⁸

If the corporation has an establishment in Canada that meets the requirements to be determined as a resident of Canada, and the company carries out SR&ED, then it may be eligible to claim the SR&ED ITC. However, the SR&ED must be carried out in that Canadian permanent establishment.

It’s important to note that claiming the SR&ED ITC can be a complex process, and claimants may wish to seek the advice of tax professionals who are familiar with the SR&ED program in Canada. We urge claimants to seek further legal consultation if they are unsure about the residency status of their company or employees.

Once it has been established that the claimant company is a resident in Canada, the question is whether it is a Canadian-controlled private corporation’s-corporations (CCPC) or non-CCPC, as they will each qualify for different SR&ED ITC rates.

CCPC vs. non-CCPC

A Canadian-Controlled Private Corporation (CCPC) is defined by the Government of Canada as:

The corporation is a CCPC if it meets all of the following requirements at the end of the tax year:

• it is a private corporation
• it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year
• it is not controlled directly or indirectly by one or more non-resident persons
• it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700 of the Income Tax Regulations)it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada
• it is not controlled directly or indirectly by any combination of persons described in the three previous conditions
• if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange were owned by one person, that person would not own sufficient shares to control the corporation
• no class of its shares of capital stock is listed on a designated stock exchange⁹

As a CCPC, the company must not be controlled directly or indirectly by non-resident persons, any corporation owned or controlled by a non-resident will be defined as a non-CCPC.

A corporation is considered a non-CCPC by the Government of Canada if:

…it meets all of the following requirements at the end of the tax year:

• it is resident in Canada
• it is not a public corporation
• it is not controlled by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700 of the Income Tax Regulations)
• it is not controlled by one or more prescribed federal Crown corporations (as defined in Regulation 7100)
• it is not controlled by any combination of corporations described in the two previous conditions¹⁰

Both CCPCs and non-CCPCs are defined as being residents of Canada. So while the controller may not be a resident of Canadian, so long as the corporation is resident within Canada it may still benefit from the SR&ED ITCs.

SR&ED ITC Rates for non-CCPCs

The SR&ED ITCs may be earned at an enhanced rate of 35% only by CCPCs. While non-CCPCs cannot claim SR&ED ITCs at the enhanced rate, the basic SR&ED ITC rate of 15% is still a viable option. Appendix A in the SR&ED Investment Tax Credit Policy shows the rates at which the types of corporations may claim SR&ED. Non-CCPCs fall under the “All other corporations not included above” designation:

The credits discussed in this article pertain only to the Federal SR&ED ITCs. Some Canadian provinces offer their own SR&ED-related ITCs or Grants with varying degrees of refundability and eligibility. For example, the province of Ontario has the Ontario Innovation Tax Credit (OITC) program, which is refundable at a rate of 8% on eligible SR&ED expenditures, and the Ontario Research and Development Tax Credit (ORDTC) program, which is non-refundable at a rate of 3.5% on eligible SR&ED expenditures. Both the OITC and ORDTC programs specify that they are available to corporations with “a permanent establishment in Ontario during the year”, and have no other residency rules¹¹¹². This means both OITC and ORDTC are available to non-CCPCs as well as CCPCs.

In contrast, the province of Saskatchewan’s SR&ED ITC program is refundable for CCPCs; however, non-CCPCs are eligible only for non-refundable tax credits under this program:

“Canadian-controlled private corporations (CCPCs) are eligible for a refundable tax credit on the first $1 million of eligible expenditures

eligible expenditures that are more than this annual limit, and those incurred by non-CCPCs, are eligible for a non-refundable credit”¹³

See Provincial Tax Credits – Making the Most of SR&ED for details on provincial SR&ED-related funding programs across Canada, and whether they are refundable and available to non-CCPCs.

Conclusion

In summary, a company controlled by a foreign resident may be considered a non-Canadian controlled corporation so long as the corporation is considered to be a resident in Canada, and they may be eligible to claim non-refundable SR&ED ITCs at the basic rate of 15% if they conduct SR&ED activities in Canada. They must also meet certain eligibility criteria and follow the rules for claiming these ITCs. See our article “Am I SR&ED Eligible? 6 Questions for SR&ED Eligibility” for more details on SR&ED eligibility rules.

As always, we recommend you track all SR&ED-related expenditures as your SR&ED project progresses, this contemporaneous documentation will prevent any confusion when it is time to prepare your SR&ED tax forms and will help you if your claim is pulled for an audit.

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