SR&ED Third-Party Payments and Contracts: Additional Considerations

When applying to the Canada Revenue Agency for Scientific Research & Experimental Development (SR&ED) investment tax credits, the information you provide in each section can ultimately decide its fate in the hands of a discerning CRA agent. Make sure you are on target for a successful application by considering the information provided below.

What is a third-party payment? It’s not a contract and it’s not a partnership. Understanding what a third-party payment is essential to making sure you don’t slip up on your T661 in Lines 340, 345 and 370. This article explains each line, and how to complete it.

Line 340: Arm’s Length Contracts

Line 340 is where you enter arm’s length contract expenditures. The arm’s length contract expenditures are the payments you or your company make to subcontractors who “performed SR&ED work on your behalf.” 1

An arm’s length contract is a situation where each of the two parties does not exercise control over the other, and the two are “not related.”2

For example, if you pay two independent contractors in your tax year to perform SR&ED work on your behalf, and you paid the first contractor $65,000 and the second $20,000, you would enter $85,000 in Line 340.3

Line 345: Non-Arm’s Length Contracts

Line 345 is where you enter the amount paid to non-arm’s length contractors. These contractors will be distinct from the arm’s length contractors mentioned above. Work performed by a non-arm’s length contractor is “deductible but” it will “not qualify for SR&ED investment tax credit (ITC) purposes”.4

A situation where two parties would be in a situation designated as non-arm’s length would be one where “one party exerts control over the other”.5

If you’re concerned that your non-arm’s length contract will render your SR&ED claim ineligible, not to fear – we’ve previously written about how to maintain eligibility despite the contract type.

Line 370: Third-Party Payments

Line 370 is where you will enter “the total of all third-party payments for SR&ED that you reported on Form(s) T1263”.6 A third-party payment is one that you or your company would have made during your reporting year to a CRA-approved entity within Canada. A third-party payment is a payment made to a corporation, association, university, college, research institute, granting council, to fund basic research that the third-party is doing. The party’s SR&ED will produce results that the claimant will “be entitled to exploit”.7

For your expenditure to be deductible, your payment must be for work that relates to your own company with respect to:

  1. SR&ED work taking place: There must be some research and analysis to advance the existing knowledge base taking place under the supervision of the third party. For example, you cannot simply claim that a donation to a hospital’s general faculty was a TPP: while some of the funds donated may be used for SR&ED, “some of the funds may be, and probably will be, used for purposes that are not SR&ED”.8
  2. The relevance of the research performed to your business: The SR&ED work carried out by your third party could be basic research (i.e., research with no determined application). This research should be “related to a business of the claimant”.9 For example, if you are a pharmaceutical company, you may “fund basic research in chemistry or biology”.10 On the flip side, you would not make a payment to a study looking into the field of geography.
  3. Beneficial to your business: The basic research must “have a direct and beneficial application” to the work being “carried on by the claimant”.11 This applies to the example above: if you are a pharmaceutical company, you are likely to benefit from basic research in biology and chemistry and use the results of this work to create new products with your company.

If the work you made an expenditure for does not match the criteria, it does not qualify as a third-party payment and is therefore not deductible.

Contracts vs. Third Party Payments

As mentioned above, it is important to differentiate between a third-party payment and a contract. A contractor performing SR&ED work usually only has one payer, while a third party may have multiple funders. The results of the SR&ED work of a contractor are also exclusive: they belong solely to the claimant who has paid them to perform SR&ED, whereas with a third party the results are publicly published and multiple claimants may benefit from the found results. The SR&ED work of a contractor may be commercially focused, solely for the advancement of a company’s knowledge base, as opposed to a third party who may carry out basic research, the application of which (be it commercial or not) is not known.12 Unlike contracts, which are undertaken directly on your behalf, a third party may be “paid for SR&ED not directly undertaken by you or on your behalf”.13

This table is from the CRA’s Guide to the T661 and offers some differences between SR&ED contracts and third-party payments.

It is important to note that if you are going to be claiming a Third-Party Payment, you must submit “Form T1263, Third-Party Payments for Scientific Research and Experimental Development (SR&ED), for each payment and attach it to Form T661”.14

Summary: SR&ED Contract Payments vs. SR&ED Third-Party Payments

Supporting publicly-available basic research can advance your own company’s knowledge base, as well as reaping benefits in other ways (read more about how to benefit from Third Party Payments). However, you still must put in effort when identifying Third-Party Payments : an improperly filled out Line 370  and T1263 can be difficult to explain should you be marked for an audit. The same goes for Lines 340 and 345: it is useful to familiarize yourself with the definitions presented in this article regarding what is a contractor, the difference between an arms’ length and a non-arms’ length contractor, and how they are all differ from a Third-Party Payment.

Do you know how much you can receive for your contracts or third-party payments? Try our SR&ED calculator. 

Show 14 footnotes

  1. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  2. “SR&ED Glossary.” The Government of Canada, 15 July 2015, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#rmslngth. Accessed 27 Aug. 2019.
  3. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  4. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  5. “SR&ED Glossary.” Government of Canada, 15 July 2015, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#nl. Accessed 27 Aug. 2019.
  6. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  7. “Third-Party Payments Policy.” Government of Canada, 18 Dec. 2014, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/third-party-payments-policy.html#ppx1. Accessed 27 Aug. 2019.
  8. “Third-Party Payments Policy.” Government of Canada, 18 Dec. 2014, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/third-party-payments-policy.html#ppx1. Accessed 27 Aug. 2019.
  9. “SR&ED Glossary.” Government of Canada, 15 July 2015, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html#thrdpp. Accessed 27 Aug. 2019.
  10. “Third-Party Payments Policy.” Government of Canada, 18 Dec. 2014, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/third-party-payments-policy.html#ppx1. Accessed 27 Aug. 2019.
  11. “Third-Party Payments Policy.” Government of Canada, 18 Dec. 2014, https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/third-party-payments-policy.html#ppx1. Accessed 27 Aug. 2019.
  12. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  13. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.
  14. “Scientific Research and Experimental Development (SR&ED) Expenditures Claim Guide to Form T661.” Canada Revenue Agency, https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4088/t4088-15e.pdf. Accessed 27 Aug. 2019.

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