Taxable Benefits & SR&ED
We are often asked by our clients about taxable benefits and SR&ED. Are bonuses eligible? Retiring allowances? What other benefits can we include? In this article, we will examine taxable benefits and what they mean for your SR&ED application.
What are taxable benefits?
The SR&ED Salary or Wages Policy defines taxable benefits as:
Taxable benefits are benefits or allowances an employer provides to its employees that are taxable under the Income Tax Act. For example: automobile benefits; housing, board, and meals; gifts and awards; interest-free or low-interest loans; group term life insurance policies; or tuition fees.1
When the Canada Revenue Agency refers to “taxable benefits,” in the context of SR&ED, they are referring to a broad category of non-cash benefits. There are:
- non-cash benefits, an “actual good, service, or property that you give to your employee,” including a good, service, or property that you pay a third party to provide for your employees;
- cash benefits, which are direct deposits, cheques, or physical currency;
- near-cash benefits, which function as cash, such as gift cards, or can be converted to cash, such as security, stock or a gold nugget.2
Taxable benefits give employees (who are the primary beneficiaries of the benefit) an economic advantage that can be measured in money. 3
When filling out your T661, you must discern the value of your employees’ taxable benefits (of the non-cash kind) and include that value in the employee’s income. Employers should only include the actual costs incurred with respect to the taxable benefits in the allowable salary or wages. Unfortunately, in most cases, the benefit’s value is not an expense incurred in the process of scientific research and experimental development and is hence not an allowable SR&ED expenditure.4
The table below shows taxable benefits and their eligibility as SR&ED eligible expenses according to the Salary or Wages Policy.4
| Taxable Benefits | SR&ED eligibility |
|---|---|
| Cash benefit | May be included as SR&ED salary or wages |
| Non-cash benefit | May be included in SR&ED salary or wages, if: the value is a reasonable estimate of actual costs—the value of the benefit does not include any Goods and services tax / Harmonized sales tax (GST / HST) or Provincial sales tax (PST), unless no input tax credit was claimed—the actual costs to which the non-cash benefit relates are not claimed as a business expense |
| Bonuses | Yes, for non-specified employees* |
| Remuneration based on profits | Yes, for non-specified employees* |
| Signing bonus & Non-competition payments | Yes, but excluded from salary base for PPA. |
| Related benefits (e.g. supplementary sick benefits, employer contribution to employee savings plan) | No, could be considered as overhead and other expenditures under the traditional method. |
| Extended vacation or sick leave | No, not directly undertaking, supporting, or supervising; not directly engaged. |
| Stock option benefits | No |
| Retiring Allowance/Severance Pay | No, could be considered as overhead and other expenditures under the traditional method. |
*Bonuses must be removed from the salary base when calculating the PPA amount, please see below for more information.4
Bonuses
All bonuses are excluded from the salary bases when calculating the PPA. Bonuses for performance (not based on profit) may be eligible if the work conducted is SR&ED eligible.
4.0 Bonuses, remuneration based on profits and other types of remuneration
Restrictions apply to bonuses (see section 4.2) and remuneration based on profits (see section 4.1) in respect of specified employees (see section 6.0). When calculating the prescribed proxy amount (PPA), all bonuses and remuneration based on profits (both to specified and non-specified employees) are excluded from the salary base of employees directly engaged in SR&ED in Canada. For more information on the PPA, please refer to the Prescribed Proxy Amount Policy.
“Bonus” and “remuneration based on profits” are not defined in the Income Tax Act or the Regulations. Therefore, the ordinary dictionary definitions of the terms apply.7
The policy clearly states that all bonuses are excluded from the PPA. This applies regardless if the employee is a specified or non-specified employee. Bonuses claimed as salary amounts in Lines 305 and 306 of the T661 must be paid for duties where the employee is directly engaged in SR&ED eligible work, it also must be an expenditure on or in respect of SR&ED.8 The policy further explains:
Where an employee performs duties that are considered to be directly engaged in SR&ED under the proxy method (see section 7.0) or are considered to be directly undertaking, supervising or supporting the prosecution of SR&ED under the traditional method (see section 8.0) and the only remuneration in the year in respect of performing those duties was bonuses or remuneration based on profits, the CRA will consider an amount thereof that is commensurate with the performance of those duties to be salary or wages directly attributable to SR&ED or directly engaged in SR&ED. The determination of what is commensurate is a question of fact and may require the utilization of industrial standards published by various technological or professional associations.9
T661 Lines 810, 812, and Line 814
In line 810, where the T661 asks for the salary/wages of an employee, the CRA is looking for “income from an office or employment” including “any expenditure made in respect of a taxable benefit as well as vacation pay, statutory holiday pay, sick leave pay, pay in lieu of termination notice, bonuses, tips and gratuities, honorariums, director’s fees, management fees and commissions.”10
On line 812 of your T661 SR&ED application form, you are required to enter the bonuses, remunerations based on profit and taxable benefits that you have included in your record of salary and wages of employees who were directly engaged in the SR&ED work other than specified employees. This number is excluded from the salary base for the calculation of the prescribed proxy amount (PPA).11 You will then enter the value of the taxable benefits into line 812, and subtract the value of line 812 from the value of line 810, and enter the remaining value into line 814.
To clarify, when the CRA asks for the salary or wages that you have paid to an employee, they are asking for the salaries or wages that you’ve paid to an employee for that is “incurred on or in respect of SR&ED” and directly attributable to their SR&ED eligible work.4
Of course, this calculation is complicated when you are filling out for a specified employee (i.e., an employee who does not operate at arm’s length with the employer, and/or is a specified stakeholder in the company); if you are filing for a specified employer, please read our post about the restrictions and regulations with specified employees in SR&ED in Specified Employees in SR&ED: Restrictions and Regulations.
Severance Pay and Retiring Allowance
The SR&ED Salary or Wages Policy states:
Salary or wages do not include amounts in respect of the employer’s shares of the related benefits (see section 5.1), amounts for extended vacation or sick leave (see section 5.2), stock options benefits (see section 5.3) and retiring allowances (see section 5.4). There is also a general rule that applies to exclude unpaid salary or wages (see section 11.0).
5.4 Retiring allowances
A retiring allowance is included in the income of the recipient. However, a retiring allowance is not considered to be salary or wages by definition. As a result, a retiring allowance cannot be allowed as salary or wages under either the traditional method or the proxy method.
A claimant may be able to treat a retiring allowance (which may include a payment described as termination or severance pay) as overhead and other expenditures on line 360 of Form T661 under the traditional method. For more information on retiring allowances as SR&ED overhead and other expenditures, please refer to the SR&ED Overhead and Other Expenditures Policy.13
Unfortunately, this means that severance pay and retiring allowances are not SR&ED eligible wages as they are not directly attributable to SR&ED eligible work.
Related benefits (e.g. supplementary sick benefits, employer contribution to employee savings plans)
Related benefits are not considered SR&ED eligible salary or wages. Under the traditional method, they may qualify as overhead and other expenditures.
The following expenditures can also be considered related benefits, provided such expenditures do not constitute a taxable benefit, since taxable benefits are elements of an employee’s salary or wages (see section 3.0):
- supplementary sick benefits; and
- an employer’s contributions in relation to an employee savings plan where, for example, for every $3 dollars that an employee uses to purchase shares in the parent company the employer undertakes to pay $1 dollar, up to a given maximum.
The employer’s contributions to the Quebec and Ontario health insurance plans are not “related benefits,” since it is not necessary to be an employee to benefit from these plans. Consequently, under the traditional method such contributions are general business expenses that can only be SR&ED overhead and other expenditures if they are directly related and incremental to the prosecution of SR&ED in Canada. For more information on SR&ED overhead and other expenditures, please refer to the SR&ED Overhead and Other Expenditures Policy.13
Conclusion
Taxable benefits and their impact on SR&ED eligible expenses can be confusing. Many benefits are not eligible as they are not directly attributable to SR&ED eligible work. Please speak with your SR&ED consultant or tax professional if you have questions about these benefits.