CRA Updates to Select SR&ED Program Policies - April 28, 2022

CRA Updates to Select SR&ED Program Policies – October 14, 2022

On October 14, 2022, the Canada Revenue Agency (CRA) announced updates to the Recapture of SR&ED Investment Tax Credit Policy, and the SR&ED Overhead and Other Expenditures Policy. These updates reflect the legislative changes that have been announced to these select SR&ED program policies.

Updates to the Recapture of SR&ED Investment Tax Credit Policy

The Recapture of SR&ED Investment Tax Credit Policy revision overview states:

An expenditure of a capital nature made after December 31, 2013, no longer qualifies for scientific research and experimental development (SR&ED) tax incentives. The recapture rules contained herein continue to apply to the proceeds of disposition or change-in-use of capital property previously claimed as SR&ED capital expenditures and shared-use-equipment that generated an SR&ED investment tax credit (ITC). This ITC would have been earned prior to 2014.

An expenditure of a current nature continues to qualify for SR&ED tax incentives and includes an expenditure for material transformed, which is property that can be subject to ITC recapture.

An ITC continues to be recapturable, if it was earned on a property in any of the 20 preceding tax years.

The basic ITC rate is 15%. Prior to 2014, it was 20%. Some recapture examples are now presented at the rate of 15%.

The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.1

The changes detailed within Appendix B.1 Explanation of changes are as follows:

This document cancels and replaces the Recapture of SR&ED Investment Tax Credit Policy (December 18, 2014).

The following is the explanation of changes to the Recapture of SR&ED Investment Tax Credit Policy as part of the revision of October 14, 2022:

Section 2.0 has been revised to mention that the ITC can potentially be recaptured up to 20 years from the year it was earned. Even though expenditures of a capital nature no longer qualify for SR&ED tax incentives after 2013, the recapture rules contained in this document continue to apply to recapture ITC earned on SR&ED capital expenditures and shared-use-equipment.

Section 3.0 the quick reference table has been modified for rows, “All or substantially all (ASA) equipment” and “Shared-Use-Equipment (SUE),” and for the “Note” after the table, to show that such expenditure items are no longer eligible for SR&ED tax incentives. The ITC earned on such items (prior to 2014) is subject to recapture after 2013. The last sentence in this section was modified to remove reference to available for use rules which apply to capital expenditures, since after 2013, SR&ED contracts can only include expenditures of a current nature.

Section 5.2, 6.3, and 7.4 were modified to delete the reference to the SR&ED shared Use Equipment Policy document.

Section 5.3.1, the example has been expanded to show that there is no ITC recapture on the sale of intellectual property (IP).

Section 7.3 was modified to delete the reference to the SR&ED Capital Expenditures Policy document.

Section 7.6 was modified to include a sentence in the Note, that SR&ED capital expenditures or shared use-equipment (SUE) that resulted in the earning of ITC prior to 2014, can be subject to recapture.

Section 9.1 was modified with a clarification in brackets, that qualified expenditures can be transferred from a non-arms length party, and subsection 127(13) of the Income Tax Act was added to the Legislative references at the end of this section.

Section 9.2.1 includes an example that has been updated to more current years. The enhanced ITC rate has not changed and remains at 35%.

Section 13.4 the example was modified to include years 2013 and 2014, rather than year 1 and 2.

Section 13.5 and 13.6 include examples on recapture of ITC that was previously earned at the 15% rate. The previous version of this policy document had the ITC rate in the examples at 20%. The basic ITC rate is 15%, prior to 2014 it was 20%.

Section 13.7 the example was modified to include years 2012 and 2013, and removed the wording year 1.

Other minor formatting and editing corrections were made throughout the document.2

Updates to the SR&ED Overhead and Other Expenditures Policy

The SR&ED Overhead and Other Expenditures Policy revision overview states:

Expenditures of a capital nature or expenditures for the right to use capital property (lease) do not qualify for scientific research and experimental development (SR&ED) tax incentives if incurred after 2013, references to such expenditures have been removed from this policy document.

Text was included to clarify:

  • when a retiring allowance is directly attributable to the prosecution of SR&ED
  • that a fixed cost maintenance contract generally will not meet the incremental test for SR&ED overhead and other expenditures
  • that the cost of waste disposal is not considered to be directly related and incremental to the prosecution of SR&ED when the SR&ED activity that produced the scrap has finished

The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.3

Additionally, the changes detailed within Appendix B.1 Explanation of changes are as follows:

This document cancels and replaces the SR&ED Overhead and Other Expenditures Policy (December 18, 2014).

The following is the explanation of changes to the SR&ED Overhead and Other Expenditures Policy as part of the revision of October 14, 2022.

Section 3.2.1 b) a note has been added at the end of the examples as a reminder that expenditures of a capital nature, such as equipment purchases, do not qualify for SR&ED tax incentives, but the cost to operate the equipment, including repair and maintenance costs could still qualify as SR&ED overhead and other expenditures.

Section 3.2.1 c) has been revised to illustrate that a fixed cost maintenance contract cannot meet the incremental test for SR&ED overhead and other expenditures. Previously, the example referred to the leasing of equipment which is an expenditure for the right to use capital property that, after 2013, cannot be claimed for SR&ED tax incentives.

Section 4.4.2 has been revised to update the years referenced in Example 1 and Example 2. An additional fact was added in Example 2, “Ms. Z would not have been employed by B Limited, if she was not performing the SR&ED,” to provide support why in this situation 60% of the retiring allowance is considered directly attributable to the prosecution of SR&ED. Example 3, was revised to include a question, and the answer was included as a separate paragraph.

Section 4.6 has been revised to indicate that expenditures of a capital nature or expenditures for the right to use capital property, such as lease costs can no longer form part of the SR&ED expenditures or qualified SR&ED expenditures.

Section 4.7.6 has been reformatted into two paragraphs to better illustrate that generally, the cost of waste disposal is not considered to be directly related and incremental to the prosecution of SR&ED when the SR&ED activity that produced the scrap has finished. When scrap is recycled and used in SR&ED, any disposal costs for the scrap are not overhead and other expenditures, but may form part of the (recycled) material cost for SR&ED.

Section 6.1 has been revised to explain that expenditures for SR&ED carried on outside Canada do not form part of the pool of deductible SR&ED expenditures nor the qualified SR&ED expenditures for the purposes of calculating the ITC.

Other minor formatting and editing corrections were made throughout the document.4

Summary

The changes to the above policies reflect the legislative changes that have been announced in October 2022 as updates to SR&ED policies. The CRA has removed information that no longer applies such as capital expenditures and the previous basic investment tax credit rate of 20%. While we know it can be confusing at times to determine exactly which expenditures are allowable under SR&ED and which are not, the adjusted wording within the SR&ED Overhead and Other Expenditures Policy specifically will be helpful to determine the eligibility of those more obscure expenses such as maintenance and waste disposal. We hope that these changes will enhance the taxpayer’s understanding of the individual policies and the program as a whole. Other articles of interest may be: Taxable Benefits & SR&ED and Can Equipment Costs be Claimed for SR&ED? We will continue to keep our readers updated on any additional changes or updates to the SR&ED Policies mentioned in this article, other SR&ED policies, and reporting deadlines. To keep up to date on all SR&ED program changes please keep an eye on the What’s new – SR&ED Program CRA page.

Have SR&ED experiences of your own to share?
T661 stories you’d like to share?
 

Connect With Us! 

Share your thoughts by commenting below, or adding to the conversation on our LinkedIn page, Facebook page, or via Twitter. 

Or even better, sign up for the Comprehensive Guide to SR&ED. 

Show 4 footnotes

  1. Government of Canada. (October 14, 2022). Recapture of SR&ED Investment Tax Credit Policy. Accessed October 17, 2022, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/recapture-investment-tax-credit-policy.html
  2. Government of Canada. (October 14, 2022). Recapture of SR&ED Investment Tax Credit Policy. Accessed October 17, 2022, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/recapture-investment-tax-credit-policy.html
  3. Government of Canada. (October 14, 2022). SR&ED Overhead and Other Expenditures Policy. Accessed October 17, 2022, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html
  4. Government of Canada. (October 14, 2022). SR&ED Overhead and Other Expenditures Policy. Accessed October 17, 2022, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html

0 Comments

Leave a Reply

error: This content is Copyright InGenuity Group Solutions Inc. Please contact the site administrator if you wish to use this content.
%d bloggers like this: