Foreign contractors in Canada - are these costs eligible to claim for SR&ED?
This situation may arise when a company hires foreign-based specialists to come to Canada temporarily for a project, or where a Canadian company with foreign subsidiaries (or vice versa) brings foreign employees temporarily to Canada to work on a SR&ED project.
The Canadian SR&ED legislation required that eligible activities be "performed in Canada" by a "taxable supplier", which includes (per ITA subsection 127(9)),
"a non-resident person ... by which the amount was payable ... in the course of carrying on business in Canada through a permanent establishment."
Therefore, costs paid to a foreign subcontractor for SR&ED work could be claimed provided the contractor worked through a permanent establishment, and filed a Canadian tax return on their net Canadian income. This would most likely earn the subcontractor an equivalent foreign tax credit when filing returns in their home country, and therefore be tax-neutral to the subcontractor, while providing additional tax credits to the Canadian business.
A more detailed discussion of this issue and an example are provided in MEUK Newsletter 2001-2.