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How does government funding received for a project affect my SR&ED claim?

The CRA provides Application Policy 2005-02: General Rules Concerning the Treatment of Government and Non-Government Assistance to clarify this issue.

Paragraph 37(1)(d) of the Income Tax Act reduces the SR&ED expenditure pool by any amounts of government or non-government assistance a claimant has received, is entitled to receive, or can reasonably be expected to receive on or before the income tax return filing due date for a tax year for current or capital SR&ED expenditures.

Government or non-government assistance reduces SR&ED expenditures on a project-by-project basis. This means that the assistance relating to a particular project cannot reduce the SR&ED expenditures of another project. Further, government or non-government assistance can only reduce the SR&ED expenditures of a particular project to nil. In no case would the reduction result in an SR&ED project having a negative amount for SR&ED expenditures.

Many provinces as well as a territory offer an R&D tax credit program to claimants who have a permanent establishment in the province or territory where they carry out the R&D. These credits can be considered government assistance - it is important for claimants to carefully review the R&D program in their province to determine the impact claiming these credits may have on their SR&ED claim under the federal program.

For Ontario, the effects of claiming the OITC is discussed in MEUK Newletter 2004-1. Basically the portion of the (10%) OITC related to the proxy amount (65% of SR&ED labour) is taxable the following taxation year, unlike the balance of the OITC which is taxable during the taxation year it is earned.

There is often confusion distinguishing between assistance and a contract payment. Some features that distinguish an assistance from a contract payment:

  • Assistance involves predominantly a donative intent rather than a business motive. An assistance agreement between the grantor and the recipient of the amount will show that the main purpose of the agreement from the grantor's point of view was other than profit. Contract payments on the other hand are payments for SR&ED that is performed on behalf of the payor.
  • The repayment provisions if any in an assistance agreement are not strictly enforceable. A contract is a commercial arrangement between two or more parties subject to the legal liabilities and enforceable in the case of default.
  • A contract arrangement implies authority of the payor over the deliverables and sometimes over the whole work process. Assistance by its very nature does not generally extend any such implications although some assistance agreements could include restrictions in respect of how the work is to be done or where the product could be sold, etc.

The Tax Court case Com Dev Ltd. v. The Queen illustrates the difference between a government contract payment and government assistance. This case is discussed in MEUK's "Tax Case Analysis".