What are the issues involved when hiring universities or research institutes to perform eligible "third party" research?
(Note: this answer addresses the federal SR&ED program. Practitioners in Ontario should also see What are the issues involved with payments to universities or other research institutes in Ontario?)
The CRA's Application Policy 1996-04: Payments to third parties for SR&ED addresses this issue. They differentiate between payments to subcontractors and "third party" researchers:
"One key distinction (...) is that payments "on behalf of the taxpayer" are generally made to contractors for specific tasks or pieces of work. In such cases, the taxpayer rather than the contractor would control the actual work and retain ownership rights to the SR&ED. With third party payments the taxpayer generally does not control the actual work performed or own the exclusive rights to the SR&ED."
"Some examples of third party payments:
- Payments for industry-wide SR&ED carried out by an approved industrial research institute where the taxpayer's business is in the same industry.
- Payments by a physician to fund basic medical research, in the physician's field of specialization, at a university.
- A drug company makes a payment to a university for drug research, and their agreement gives the company the rights to any patents resulting from the research."
"Some examples which are not considered third party payments:
- A construction business that makes a donation to a hospital for medical research. Although SR&ED may be done, in general it would be unrelated to the business, and the business would be unable to make use of the results of the research. Therefore the payment fails the "related to a business" and "entitled to exploit the results" tests.
- A physician makes a payment to a general fund of the faculty of Medicine of a university, but the donation does not specify what the payment is to be used for. Although some of the funds may go to support SR&ED which the physician may exploit, some of the funds may be, and probably will be, used for purposes other than SR&ED. Therefore the payment fails the "to be used for SR&ED" test."
More details are available from Application Policy 1996-04: Payments to third parties for SR&ED.