Attention: Policies May Have Been Updated
*** Some of the policies referenced were updated 2021-08-13. We are working to update this article and others. ***
The Strategic Aerospace and Defence Initiative (SADI) and SR&ED
One program related to Scientific Research and Experimental Development (SR&ED) is the Strategic Aerospace and Defence Initiative (SADI). Both programs are designed to encourage research and development programs in Canada. There are times when projects may be eligible for assistance in the SADI program and for SR&ED investment tax credits (ITCs). These situations can be complicated and it is imperative that all forms are filled out correctly to avoid an audit or your claim being denied.
In February 2019, the Tax Court of Canada ruled on PCI Geomatics Enterprises Inc. v. Quebec Revenue Agency (2019) , a case dealing with both SADI and SR&ED; the final outcome hinged on whether the SADI loan was considered “forgivable” or “repayable”.
This article will take a closer look at the SADI program to provide the following:
- Background on the program
- SADI vs SR&ED
- Recent Legal Ruling: PCI Geomatics Enterprises Inc. v. Quebec Revenue Agency (2019)
The Strategic Aerospace and Defence Initiative (SADI) is a program administered by the Industrial Technologies Office (ITO). The initiative funds aerospace, defence, space, and security projects across Canada; there is no minimum or maximum project size. The objectives of SADI are:
- Encourage strategic research and development (R&D) that will result in innovation and excellence in new or improved products, services, and processes.
- Enhance the competitiveness of Canadian aerospace, defence, space and security (A&D) companies.
- Foster collaboration between research institutes, universities, colleges, and the private sector.1
Projects are assessed by pre-determined criteria. The areas in which the projects are judged are technological feasibility and capability, managerial capability, collaboration, market potential, financial Information, and benefits.2
The eligibility requirements are as follows:
- Company incorporated in Canada undertakes pre-competitive R&D in Canada.
- Aerospace, defence, space and security applications.
- Activities anywhere along the Technology Readiness Level (TRL) 1-9 scale.
- supports the development of next-generation A&D products/services or process innovations;
- builds on Canadian strengths in A&D technology development;
- enables Canadian companies to participate in platforms and supply chains;
- helps Canada meet international obligations (eg. JSF, DDSA).
- At least 1% of total project costs support collaboration with post secondary institutions in Canada (examples – involving co-ops or subcontract work).
- Demonstrate that SADI support is essential to the location, scope, and/or timing of the project.3
SADI funding has two repayment options, conditional and unconditional. Conditional repayment is based on royalty applied to the company’s gross business revenues; while unconditional repayments are agreed upon amounts over a 15 year period.4
SADI vs SR&ED
SADI deals solely with aerospace, defence, and space research and development. Some projects which qualify as SADI projects are also eligible SR&ED projects and qualify for investment tax credits (ITCs). When a project is eligible as SADI and SR&ED it is important to ensure any funds received are correctly classified and – as required – properly reported in SR&ED claims. Some SADI loans are considered government assistance while others are considered a repayable loan (and therefore not government assistance).
Recent Legal Ruling: PCI Geomatics Enterprises Inc. v. Quebec Revenue Agency (2019)
PCI Geomatics Enterprises (PCI) appealed the assessments for their 2012, 2013, and 2014 taxation years. The Quebec Revenue Agency (ARQ) denied their SR&ED investment tax credits relating to funding the received from a federal program of SADI. ARQ claimed that the funds received from SADI represented government assistance, while the PCI claimed that they did not. as, based on the repayment contract and the anticipated growth of PCI, they should pay back $12,647,250, for the total loan of $7,665,000. Ultimately, the court ruled that the SADI funds were a repayable loan and not a forgivable loan; consequently, the funds did not meet the criteria for “government assistance” and should not have been included in the calculations. The appeal was allowed and the reassessments were sent back to ARQ to include the eligible SR&ED related costs.
Both the SADI program and SR&ED ITCs encourage research and development in Canada. The two programs are designed to help companies continue to conduct their research in Canada. Each project is unique, a SADI eligible project does not always equal an SR&ED eligible project. When a project is eligible for both programs it is important to consider the SADI funds and whether they are a repayable loan or a forgivable loan. All SADI funds should be reported properly to ensure that the SR&ED ITC is correct.
Forgivable and repayable loans are not unique to the SADI program. The Assistance and Contract Payments Policy states that a forgivable loan “would reduce the pool of deductible SR&ED expenditures and qualified SR&ED expenditures accordingly.” 5 It is important to report all assistance received properly on your T661 to give your application the best chance for success.