Walking into Danger with SR&ED or the CRA

Can fees incurred during the preparation of an SR&ED claim (including SR&ED consultant fees) be included in the claim’s expenditures?

SR&ED consultants are often necessary third parties when filing an SR&ED claim, as the process can be complicated. Although the CRA state that “the non-adversarial nature of the process allows many taxpayers to represent themselves,” 1 they also note that “consulting with specialists is often required to resolve […] objections [in the SR&ED program].” 2 However, can SR&ED consultant fees be claimed as an SR&ED expense?

The answer is no, SR&ED Consultant fees cannot be claimed as an expense in your claim. The reasons why can be found in the Canada Revenue Agency’s (CRA’s) SR&ED Overhead and Other Expenditures Policy 3 and are detailed below.

What Fees Are Being Considered?

It is important to know what the CRA consider as accounting fees, or fees relating to technical work. According to the SR&ED Overhead and Other Expenditures Policy, fees considered regarding the preparation of an SR&ED claim include: 4

  • Analyzing and evaluating the technical work;
  • Compiling technical information;
  • Drafting technical reports;
  • Evaluating the amount of expenditures that may qualify for SR&ED Investment Tax Credits (ITCs);
  • Compiling the costs of SR&ED: and,
  • Meeting with the CRA.

As the CRA notes, “[these] costs are not all accounting fees but are costs necessary to submit an SR&ED claim.” 5

Why You Cannot Claim These Fees

The CRA “does not consider the preparation of technical descriptions for SR&ED claims to be support work” 6 eligible for an SR&ED tax credit, this includes SR&ED consultant fees or the time spent by an employee preparing the claim. (“Support work” is defined in the CRA’s SR&ED Glossary as being “work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research.”) 7

The Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy explains that “prescribed expenditures of a current nature include expenditures incurred by a claimant for the general administration or management of a business. […] Many of the prescribed expenditures listed in [this policy] are excluded in calculating the total qualified SR&ED expenditures for ITC purposes for greater certainty. The prescribed expenditures would generally […] not be included in calculating the total qualified SR&ED expenditures for ITC purposes because they are prescribed.” 8 The SR&ED Overhead and Other Expenditures Policy further explains that “no ITC can be earned in respect of fees paid for preparing SR&ED claims.” 9 This means that the work conducted to complete the SR&ED claim (e.g. writing the technical narrative, gathering documentation, etc.) is considered to be “general administration or management of the business” and so is an ineligible expense for SR&ED.10

However, for fees that are deductible, “the onus is on the claimant to establish the direct relationship between the prosecution of SR&ED and such costs.” 11 This means that claimants must be able to justify each cost in their SR&ED claim and state how it was directly related in undertaking the SR&ED work.

Why Do the CRA Take This Position?

The CRA takes this position in order to clarify at least two Tax Court of Canada (TCC) rulings (one of which dates back to the 1990s) that caused confusion over what fees are, or are not, appropriate to support an SR&ED claim.

These TCC rulings are summarized below. (See our Comprehensive Guide to SR&ED for more TCC rulings regarding SR&ED.)

Val-Harmon v. Her Majesty the Queen

In Val-Harmon v. Her Majesty the Queen (1995), fees were paid by Val-Harmon (the Appellant) to a company specializing in SR&ED that was neither a legal, nor accounting firm. The Appellant claimed the fee as an SR&ED expenditure and did not differentiate between amounts paid for technical and accounting aspects of the services rendered. Val-Harmon said in court that the fees were engineering fees, and these fees were not for legal or accounting purposes.  

Surprisingly, the Appellant won its appeal, so the Minister of National Revenue tried to re-argue its case, saying that the costs had to be “directly related” to SR&ED. The tax court ruled that this change in position was not fair to the Appellant, and allowed the Appellant to claim 75 percent of the fees it paid out to the firm specializing in SR&ED.12

Armada Equipment Corporation v. The Queen

In 2007, Armada Equipment Corporation brought an appeal to the tax court after paying more than $28,000 to two consultants that had assisted them in preparing their SR&ED claim: a retired engineer and a chartered accounting firm. This amount was included in the Appellant’s SR&ED claim, which the CRA denied. While the court upheld the CRA’s position this time, it also did not change its position on the previous case (Val-Harman).

The court did note that the fees were paid for services rendered after the SR&ED work was completed. Therefore, the court ruled that a “qualified expenditure” — or all the amounts that qualify for calculating the ITC in a tax year –  must be incurred along with ongoing R&D.13

Conclusion

These court cases standardized the CRA’s position on claiming SR&ED claim preparation costs as an expenditure in the SR&ED claim. In 1995 it was not specifically in CRA policy that claim preparation expenses were ineligible, as this was left to the judge to decide should the claim be taken to court. However, the decision in 2007 led to the CRA developing a standard position on claiming SR&ED preparation expenses in an SR&ED claim.

The CRA have clarified that now, only “qualified expenditures” directly incurred during SR&ED work are eligible as an expenditure in an SR&ED claim. While this might be disappointing to some, there are no longer any surprises for companies who may have expected their costs to prepare the SR&ED claim to be eligible.

 

Have you tried to claim expenses for SR&ED consultants in your SR&ED claim? Do you know of other common misconceptions in the SR&ED program regarding eligibility?
Comment below or add to the conversation on our LinkedIn group, Facebook page or Twitter.

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Show 13 footnotes

  1. Government of Canada. (January 24, 2012.) Complaints and Disputes. Your right to a formal review. How do we ensure our redress processes are impartial? Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/your-right-a-formal-review.html.
  2. Government of Canada. (November 8, 2017.) Income Tax Objections. Are there different levels of complexity for objections? Scientific Research and Experimental Development (SR&ED) objections. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/income-tax.html.
  3.  Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  4. Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  5.  Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  6.  Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  7.  Government of Canada. Canada Revenue Agency. (March 20, 2017.) SR&ED Glossary. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html.
  8. Government of Canada. (December 18, 2014.) Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy. 10.0 Prescribed expenditures. 10.1 Prescribed expenditures of a current nature. Retrieved November 23, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/total-qualified-expenditures-investment-tax-credit-purposes-policy.html#s10_1.
  9.  Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  10.  Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy. Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  11. Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy.  Retrieved November 22, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  12. Government of Canada. Canada Revenue Agency. (April 14, 2016.) SR&ED Overhead and Other Expenditures Policy.  Retrieved November 23, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s4_8_1.
  13. Hearn, D.R. (January 15, 2008.) Scitax Advisory Panel LF. Bulletin: Are Tax Advisor Fees an Eligible SR&ED Expenditure? Number 32. Retrieved November 23, 2017, from: http://www.scitax.com/pdf/bul-032.pdf. (PDF Document.)

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