What overheads and other SR&ED expenditures can be claimed if the SR&ED is performed outside Canada?
Calculating which expenditures are eligible for investment tax credits can be complicated. It only gets more complex when you factor in other parameters such as SR&ED work performed outside Canada.
In a previous article, we discussed contracts and purchase of rights for SR&ED performed outside Canada. The eligibility of SR&ED work performed outside Canada is an increasingly important issue, as larger corporations often use various global facilities to run parallel SR&ED work to reach end products faster. Using international resources also allows smaller research and development (R&D) organizations to plan the most productive way to conduct research.
This article discusses SR&ED expenditures undertaken directly by the claimant, outside Canada.
Since the application of these laws depends on numerous factors within each individual case, this is a fairly complex topic of discussion. As such, this article is only meant to provide a basic understanding of the subject matter discussed within and does not serve to replace legal advice provided by experts on a case-to-case basis.
Overhead and Other Expenditures Incurred on SR&ED Performed Outside Canada
As previously discussed, expenditures deductible for SR&ED work performed outside Canada do not qualify for SR&ED income tax credits (ITCs). Instead, they are deductible during calculation of income of a claimant for a particular taxation year, as specified under Subsection 37 (2) “Research Outside Canada” of the Income Tax Act:
In computing the income of a taxpayer for a taxation year from a business of the taxpayer, there may be deducted expenditures of a current nature made by the taxpayer in the year;
(a) on scientific research and experimental development carried on outside Canada, directly undertaken by or on behalf of the taxpayer, and related to the business (except to the extent that subsection (1.4) deems the expenditures to have been made in Canada); or,
(b) by payments to an approved association, university, college, research institute or other similar institution to be used for scientific research and experimental development carried on outside Canada related to the business provided that the taxpayer is entitled to exploit the results of that scientific research and experimental development.1
SR&ED Support Work Performed Outside Canada
Section 6.1 of the SR&ED Overhead and Other Expenditures Policy states:
When a claimant performs support work outside Canada, even if the work is in support of a particular Canadian SR&ED project of the claimant, the expenditures related to such work that is directly undertaken by the claimant and is related to a business of the claimant may only be deductible as an expenditure for SR&ED carried on outside Canada.
The location where the SR&ED activities are carried on is the only criterion for determining which expenditures can be claimed for SR&ED performed in Canada or outside Canada. Accordingly, SR&ED overhead and other expenditures, including foreign travel expenditures, and any other expenditure for SR&ED carried on outside Canada will only qualify for a deduction related to SR&ED carried on outside Canada. The location where the cost is incurred or paid (that is, the location where the contract is entered into or the location of the bank account used for payment) is not relevant. Even if a particular expenditure for SR&ED carried on outside Canada is incurred in Canada or is made through a Canadian subcontractor, or if it represents a minor portion of the project, it will not qualify for a deduction for SR&ED performed in Canada, but it will be treated as a deduction for SR&ED performed outside Canada.2
SR&ED Overhead and Other Expenditures Outside Canada for Non-SR&ED Work
Only specific expenses may be deductible as expenditures for SR&ED carried on inside Canada, and expenditures incurred for work that did not constitute SR&ED may not. These expenditures have to be directly related and incremental to the prosecution of SR&ED in Canada. The allowable overhead and other expenditures may be for one of the following:
The acquisition of equipment to be used in SR&ED in Canada;
The acquisition of materials used in SR&ED in Canada;
Training hands-on employees with respect to SR&ED carried on in Canada; or
Visits to foreign customers with respect to the SR&ED carried on in Canada to update the customer on the SR&ED project’s status.3
This article serves to clarify the Canada Revenue Agency’s (CRA) treatment of overheads and other expenditures incurred outside Canada, whether on SR&ED work or on non-SR&ED activities that directly contribute to the prosecution of SR&ED in Canada. This can be summarized as meaning that any eligible support work undertaken outside Canada for an SR&ED project being performed within Canada can be deducted by the claimant during the calculation of their income for that specific taxation year.
Any overhead and other expenditures incurred outside Canada by a claimant may have some specific costs considered deductible while calculating eligible expenses for SR&ED performed inside Canada, as long as they directly relate and are incremental to the pursuit of SR&ED work.
This article is based on the Income Tax Act and CRA policy documents available at the date of publication. Please consult the Justice Laws website and the CRA website for the most recent versions of these documents.
Do you have experience trying to claim SR&ED or other tax credits for work performed outside Canada?
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- Canada – Justice Laws Website. (September 14, 2017.) Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)). (Accessed: September 28, 2017.) Retrieved from: http://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-37-20140101.html#wb-cont. ↩
- Canada Revenue Agency. (December 18, 2014.) SR&ED overhead and other expenditures related to support work performed outside Canada. In SR&ED Overhead and Other Expenditures Policy (Chapter 6.1). (Accessed: September 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s6_1. ↩
- Canada Revenue Agency. (December 18, 2014.) SR&ED overhead and other expenditures for work outside Canada that does not constitute SR&ED. In SR&ED Overhead and Other Expenditures Policy (Chapter 6.1). (Accessed: September 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/overhead-other-expenditures-policy.html#s6_2. ↩