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What is a 'specified employee'? What are the restrictions on SR&ED labour inclusions and limits for specified employees?

The term "specified employee" is defined in the Income Tax Act - subsection 248(I). A specified employee is:

  • any employee who owns 10% or more of any class of stock of the corporation, or
  • any individual who is related to such an employee

Related persons include "individuals connected by blood relationship, marriage or adoption", per ITA 251(2)(a). This is further clarified in ITA 251(6):

"For the purposes of this Act, persons are connected by

(a) blood relationship if one is the child or other descendant of the other or one is the brother or sister of the other;

(b) marriage if one is married to the other or to a person who is so connected by blood relationship to the other;

(b.1) common-law partnership if one is in a common-law partnership with the other or with a person who is connected by blood relationship to the other; and

(c) adoption if one has been adopted, either legally or in fact, as the child of the other or as the child of a person who is so connected by blood relationship (otherwise than as a brother or sister) to the other."

Specified employees have certain restrictions on SR&ED labour inclusions and limits. The major effects are:

  • the maximum amount of salaries and wages claimed as SR&ED expenses for a specified employee is limited to 500% of YMPE (yearly maximum pensionable earnings) as outlined in ITA subsection 37(9.1)
  • the maximum amount of salaries and wages for a specified employee for calculation of the "salary base" used in the proxy allocation cannot exceed 250% of YMPE, or 75% of the total salary of that employee for the year, as outlined in ITA Regulation 2900(7)
  • Bonuses or renumeration based on profits should not be included in the R&D hourly rate calculation or in the R&D expenditure pool as stated in ITA subsection 37(9) and Regulation 2900(9)
  • the specified employee wage limits can not be exceeded for any individual employee through the use of multiple corporations under the same control group, per Form T-1174

The YMPE rate changes yearly - for 2007 it is $43,700. This results in maximum SR&ED labour and salary base amounts of $218,500 and $109,250, respectively.

We recommend any specified employee involved in SR&ED be paid salary rather than commissions or bonuses for incomes that will result in up to $218,500 of SR&ED wages, to maximize the credits that can be claimed.