We asked the CRA directly if Non-Profit Organizations can claim SR&ED.
Their answer? No. Is there a way to work around this?
We were recently asked if Non-Profit Organizations (NPO) can claim SR&ED tax credits. An NPO is defined by the Income Tax Act (ITA) (paragraph 149(1)(l)) as,
“a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada”
Can Non-Profit Organizations claim SR&ED?
The miscellaneous exemptions section of the ITA states that “No tax is payable under this Part on the taxable income,” and includes charities (paragraph 149(1)(f)) and NPOs (paragraph 149(1)(l)). This indicates charities and NPOs are both exempt from income tax. An NPO cannot be a charity, nor can a charity be an NPO. Charities apply for registration with the Canadian Revenue Agency (CRA) and, once accepted, are exempt from income tax. NPOs do not have to register with the CRA for tax exemption and, as stated in the Income Tax Guide to the NPO Information Return (Chapter 1, Section 5), “cannot issue tax receipts for donations or membership fees contributed.” Charities can issue donation receipts.
NPOs, although exempt from income tax, may also have to file an NPO Information Return (Subsection 149(12)) if it meets the following criteria (Income Tax Guide to the NPO Information Return (Chapter 1, Section 5)):
- it received or was entitled to receive taxable dividends, interest, rentals, or royalties totalling more than $10,000 in the fiscal period;
- the total assets of the organization were more than $200,000 at the end of the immediately preceding fiscal period (the amount of the organization’s total assets is the book value of these assets calculated using generally accepted accounting principles); or
- it had to file an NPO information return for a previous fiscal period.
This causes confusion as to whether an NPO would then be eligible to claim SR&ED tax credit for any qualifying work. We investigated by calling the CRA’s business enquiries line directly to get a direct answer. The tax specialist at the CRA’s answer was clear:
No, most NPOs cannot make a claim for an SR&ED tax credit.
According to the CRA’s business enquiries line, NPOs predominantly don’t pay income tax and cannot claim ITCs, nor can an NPO claim for any work that otherwise may be eligible for SR&ED.
Wait, so why is there a reference to nonprofits in SR&ED policies?
Good question. NPOs may sometimes be confused with Non-Profit Corporations for Scientific Research and Experimental Development (Non-profit SR&ED corporations). Paragraph 149(1)(j) of the ITA defines a Non-profit SR&ED corporation as,
“a corporation that was constituted exclusively for the purpose of carrying on or promoting scientific research and experimental development, no part of whose income was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof, that has not acquired control of any other corporation and that, during the period,
(i) did not carry on any business, and
(ii) expended amounts in Canada each of which is
- (A) an expenditure on scientific research and experimental development (within the meaning that would be assigned by paragraph 37(8)(a) if subsection 37(8) were read without reference to paragraph 37(8)(d)) directly undertaken by or on behalf of the corporation, or
- (B) a payment to an association, university, college or research institute or other similar institution, described in clause 37(1)(a)(ii)(A) or 37(1)(a)(ii)(B) to be used for scientific research and experimental development, and
the total of which is not less than 90% of the amount, if any, by which the corporation’s gross revenue for the period exceeds the total of all amounts paid in the period by the corporation because of subsection 149(7.1)”
The CRA’s SR&ED Filing Requirements Policy describes a Non-profit SR&ED corporation’s expenditure reporting deadlines for inclusion in SR&ED claims, and the CRA’s Third Party Payments Policy sets out exactly how a Non-profit SR&ED corporation is determined.
The CRA’s Third Party Payments Policy also lists these “approved entities,” which are as follows (the CRA advise that “if an entity is not listed, contact the entity in question with respect to their status as an approved entity”):
- Alberta Research Council, Edmonton, Alberta
- Canadian Arthritis Network, Toronto, Ontario
- Centre des technologies du gaz naturel (Québec) Inc., Montréal, Quebec
- Centre for Cold Ocean Resources Engineering, Memorial University of Newfoundland, St. John’s, Newfoundland and Labrador
- Children’s Hospital of Eastern Ontario (CHEO) Research Institute Trust, Ottawa, Ontario
- Field Crop Development Centre, Alberta Ministry of Agriculture, Food and Rural Development, Edmonton, Alberta
- Genesis Research Foundation, Toronto, Ontario
- *Harvard University, Massachusetts, U.S.A.
- L’institut de recherche et de développement en agroenvironnement (IRDA; Research and Development Institute for the Agri-Environment), Quebec
- London Health Sciences Centre Research Inc., London, Ontario
- McGill University-Montreal Children’s Hospital Research Institute, Montréal, Quebec
- National Research Council of Canada, Ottawa, Ontario
- Ottawa Health Research Institute, Ottawa, Ontario
- Research Branch, Agriculture and Agri-Food Canada, Ottawa, Ontario
- The Arthritis Research Centre Society of Canada, Vancouver, British Columbia
- The John P. Robarts Research Institute, London, Ontario
- The Lawson Research Institute, London, Ontario
- Toronto Hospital Research Institute, Toronto, Ontario
- *University of North Dakota, North Dakota, U.S.A.
*for purposes of a deduction under paragraph 37(2)(b) in the Income Tax Act.
I’m still confused. How do agricultural organizations claim SR&ED? Aren’t they non-profits?
Not exactly. As you will have noticed, for every rule at the CRA, there is always an outlier. Agricultural organizations are not considered Nonprofit SR&ED corporations, they are considered “agricultural organizations that fund SR&ED.” Per the CRA Glossary:
Agricultural check-offs are contributions made to agricultural organizations that fund SR&ED.
The Canada Revenue Agency (CRA) allows farm producers to earn investment tax credits (ITCs) on contributions made to agricultural organizations that fund SR&ED. For the producers to receive the ITC under the ITA, the agricultural organization may act as an agent for the producers in matters relating to SR&ED. In effect, all SR&ED transactions by agricultural organizations will constitute a transaction made by producers.
For more information please refer to section 8.0 of the Third-Party Payments Policy.
NPOs are exempt from income tax and so usually cannot qualify for SR&ED tax credits. Non-profit SR&ED corporations are similar to NPOs but will have been set-up with the sole purpose of, “carrying on or promoting scientific research and experimental development.”