In this case, a new company, assuming their SR&ED application would be accepted, paid their employees while at the same time borrowing the same employees’ salaries back from them, creating a financial disaster.
This company chose this approach under the impression that they would be able to claim the salaries as SR&ED expenses, even though the employees had agreed to go without while the company established itself. The agreement was to repay the employees, contingent on the SR&ED application being accepted.
However, what this company failed to realize was that this very contingency would lead to their application being rejected. Not only did the company miss out on crucial research support, but they were required to pay source deductions on wages that were effectively unpaid. This company had been in communication with the CRA about their intentions and were under the impression that this contingent plan was permissible.
An honest mistake, which led to a financial disaster that could have been completely avoided had the company had a more thorough understanding of the intricacies of SR&ED policy.