Questions surrounding calculating SR&ED expenses:
Do you include HST when calculating expenses for contractors?
When calculating SR&ED expenses accuracy is key to ensure your claim is not filed as ineligible. This post discusses whether or not HST is included when calculating contractor expenses.
How does HST work?
Businesses generally keep track of both the HST they collected and the HST they paid during the reporting period. When an invoice comes in, the cost is split and recorded in two separate accounts: one account for the expense and one account for the HST that was paid on the purchase. The HST that was paid out can then be reclaimed if the company is a GST/HST registrant.
The primary vehicle used to reclaim HST is the Input Tax Credit (ITC) (not to be confused with Investment Tax Credits, which is also abbreviated to ITCs). Input Tax Credits can only be claimed on purchases for “consumption, use, or supply in your commercial activities.”1
There are certain restrictions on ITCs for companies that are worth more than $10-million annually. These restrictions apply to goods and services such as road vehicles, energy, telecommunications services, and meals and entertainment.
The total amount of GST/HST that the company paid on purchases is entered on Line 106 of the company’s return and is used to calculate their ITCs. Next, the amount that was paid is subtracted from the amount of HST that was collected during the reporting period to determine whether the company will receive a refund or will have to make a payment.
Claiming HST for SR&ED Contractors
When claiming SR&ED, Line 340 of the T661 allows you to claim “the amount you paid or that was payable to arm’s length contractors who performed SR&ED work on your behalf.”2 A common question is whether this expense includes the HST that was paid to contractors.
The simple answer to this question is no, you do not include HST when claiming SR&ED contractors. The reason for this is that the government doesn’t want companies to claim HST twice, since they should have already claimed this HST separately on their GST/HST return. As a result, the amount entered on Line 340 should be the amount paid to SR&ED contractors less the amount of sales tax.
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- Government of Canada. (August 11, 2017.) Input Tax Credits. (Accessed: August 31, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/gst-account/input-tax-credits.html. ↩
- Government of Canada. (November 10, 2015.) T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim- Guide to Form T661. (Accessed: August 31, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html. ↩