The Battle of the SR&ED Claim
When we submit claims for SR&ED, it’s quite common to see companies hire contractors to perform work – sometimes all of the work! This relationship opens up some excellent questions about who really gets to claim the SR&ED tax credit – it’s not always the person who performed the actual research. With the increasing rate of self-employed contractors in recent years, this question is popping up more and more. So let’s take a look at what the details can help identify which entity is eligible.
When hiring a contractor, there is usually a contract in place, outlining the work to be performed, fees associated, and other legal necessities. If you intend to hire a contractor, or intend to perform contract work for a company, including an article within that contract identifying who the owner of the SR&ED is would be beneficial. However, the CRA may still not consider this sufficient. In fact, the CRA has not yet offered guidance on a contract’s impact on SR&ED ownership, and instead, just refer back to their own regulations even if it defies the contract. When drawing up a contract, it’s best to refer to these regulations and determine who would qualify for the SR&ED in the CRA’s eyes, and outlining that as such.
Yes, the CRA does include contract payments as qualifying expenditures in the SR&ED tax credit – but at what point does the tax credit switch possession and belong to the contractor instead? When analyzing these contract payments, the CRA states, “ The question is not whether SR&ED work was carried out, but whether SR&ED was carried out because it was required under the contract.” SO look out for these four indicators:
Who is taking the risk?
Who has the financial risk when this SR&ED is being performed? A flat fee indicates that at some point the contractor might have to financially invest in the SR&ED themselves, at which point they are taking on the financial risk. If the contract allows for unforeseen costs or time, the business is assuming the risk and the SR&ED would belong to them. In either case, the risk taker is usually seen as the owner of the SR&ED.
What does the contract say?
Is the contractor required to perform specific SR&ED activities to solve some technological challenges met by the business? Are they required to meet particular specifications? The CRA views this as an indicator that the business rightfully owns the SR&ED.
Service or Product?
Service based contracts directly implies the SR&ED costs belong to the business. The service was performed on behalf of the business. A contract to produce a product however implies that the work done to make the product was not performed for the business, and gives ownership to the contractor. In these cases, usually, the contractor owns the SR&ED and the business owns the product – unless specified otherwise. That’s because the business has paid for a product but has not been involved in the development of the product. This is a tricky situation though, as contract language could play a heavy role in forming the CRA’s opinion. For instance, a contract might have extensive conditions about the method of creating or testing the product, and therefore the SR&ED was performed for the business and they, again, own the SR&ED rights.
Now that it’s done – who owns the Intellectual Property?
The CRA often considers this IP ownership in assessing who deserves the SR&ED tax credit. The ownership of the resulting IP is often included in the contract, and usually the IP owner also owns the SR&ED. Ofcourse, you might break the IP down to the final product and inner workings, so this may still be a tricky defining question.
When it comes to it, the best thing you can do going forward is speak about this early on with your contractors or hiring businesses. And if it’s too late for that, contact a specialist to help determine your next steps.