sred ineligible expenditures

Building rent and lease expenditures are washed out to sea by SR&ED.

Are Building Rent and Lease Expenditures Eligible for SR&ED?

The 2012 budget had a significant impact on what expenses were eligible for SR&ED, including building lease or rent expenses. The CRA highlight in the SR&ED Lease Expenditures Policy that building lease expenditures and/or rent expenses cannot be claimed under the SR&ED tax incentive program.1 The Third-Party Payments Policy further emphasizes this by stating,

Expenditures for capital property, or for the use of or the right to use capital property […] do not qualify for SR&ED tax incentives. Thus, third-party payments […] to certain entities used to acquire a building, a leasehold interest in a building, or to pay an amount in respect of the rental expense, […] no longer qualify for SR&ED tax incentives.

The SR&ED Lease Expenditures Policy gives information on how to claim expenditures prior to 2014, however, this information is no longer relevant as SR&ED claims can only be filed 18-months after the completion of a project.2

The Exception to the Rule

In the entire history of the SR&ED program, only a single building has been determined as eligible for SR&ED.3 The single building in question is located at the Ottawa airport and is a highly advanced aeronautics test facility and clean room. The specifications for eligible specialist buildings are incredibly precise:4

special-purpose building is a building the working areas of which are designed and constructed to have a displacement in any direction of not more than .02 micrometre and to have per .028 cubic metre of interior airspace:

  • not more than 350 airborne particles of a size less than or equal to .1 micrometre in diameter and no airborne particles of a size greater than .1 micrometre in diameter
  • not more than 75 airborne particles of a size less than or equal to .2 micrometre in diameter and no airborne particles of a size greater than .2 micrometre in diameter;
  • not more than 30 airborne particles of a size less than or equal to .3 micrometre in diameter and no airborne particles of a size greater than .3 micrometre in diameter; or,
  • not more than 10 airborne particles of a size less than or equal to .5 micrometre in diameter and no airborne particles of a size greater than .5 micrometre in diameter.

If your building fits these very precise specifications then it may be eligible for inclusion in your SR&ED claim.

Legal Recourse for Claiming Rent

Despite the lack of flexibility when it comes to issues of rent and lease expenses in SR&ED claims some individuals take the decision to deny their claim for rent, to court. In 2010 there was a Tax Court of Canada ruling regarding SR&ED rent expenditures that concluded:5

Under subparagraph 37(8)(d)(ii) of the ITA [Income Tax Act], expenses for the use of a building cannot be included in SR&ED expenses, and consequently, such expenses cannot be “qualified expenditures” for the purposes of investment tax credits.

Bottom Line

Unless yours is the building mentioned above, it is extremely unlikely that your building rent or lease costs will fall under eligible expenses for the SR&ED tax credit. Perhaps in the future the SR&ED program will loosen these restrictions to include multi-function buildings that still contribute to the overall SR&ED work, but until then, educate yourself on what expenses are eligible and avoid putting yourself in a high claim risk situation with a greater potential for audit.

Do you have questions about the eligibility of other expenditures you want to claim?

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

Show 5 footnotes

  1. Government of Canada. (December 18, 2014.) SR&ED Lease Expenditures Policy. (Accessed: August 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/lease-expenditures-policy.html.
  2. Government of Canada. (December 18, 2014.) SR&ED Filing Requirements Policy. (Accessed: August 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/filing-requirements-policy.html#s1_1.
  3. Government of Canada. (December 18, 2014.) SR&ED Capital Expenditures Policy. (Accessed: August 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/capital-expenditures-policy.html#ppx1.
  4. Government of Canada. (December 18, 2014.) SR&ED Capital Expenditures Policy. (Accessed: August 28, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/capital-expenditures-policy.html#ppx1.
  5. Tax Court of Canada. (April 9, 2010.) Tax Court of Canada Judgments – Blais v. The Queen. (Accessed: August 28, 2017.) Retrieved from: http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/29735/index.do?r=AAAAAQAFYmxhaXMB.

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