DOES GOVERNMENT ASSISTANCE REDUCE YOUR SR&ED CLAIM?
The answer is Yes. It is widely known that one of the key tenets of the SR&ED program is that it is a reflection of the ‘net costs’ of performing R&D. This means that the Government wants to ensure that true company costs are being reflected net of any other potential government subsidies. In general, accepting Government funding for R&D related resources will reduce your eligible SR&ED expenditures. For obvious reasons, the Government wants to make sure claiming SR&ED is not a profit-generating activity for companies. Therefore, for your SR&ED claim, you must be aware and recognize the impact of receiving government assistance.
This article clarifies how to account for government assistance in your SR&ED claims.
Government assistance is broadly defined in the Income Tax Act as assistance from a government, municipality, or other public authority whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance, or any other form of assistance other than the federal investment tax credit (ITC).
We’ve traditionally seen many forms of Government assistance such as:
..and many other obvious Government assistance types.
In 2020, many Covid-related subsidy programs (CEWS, etc) have emerged with many companies taking advantage of these programs. The Governments have made it clear that amounts received from these wage subsidy programs must be considered Government assistance. We’ve commonly referred to a reduction due to Government assistance as a “grind” on SR&ED or they’ve been commonly referred to as ‘stacking rules’. The issue is “To what extent does Government assistance reduce a SR&ED claim? Where is the line?
The courts have ruled on a few cases (Immunovaccine Technologies Inc. v. The Queen, 2013 TCC 103) relating to government assistance in SR&ED claims. The outcomes have all suggested that Government assistance has a broad and liberal interpretation meant to cover a wide range of non-commercial funding received by any body with public funds. Government assistance also includes assistance provided by a crown corporation or a foreign government.
From a SR&ED claimants point of view, the SR&ED Government Assistance policy suggests Government assistance received is reduced when it is “in respect of SR&ED”. What this means is that the SR&ED Government assistance must have a direct relation to the SR&ED work. Therefore, assistance amounts meant to cover those expenditures that relate both to direct SR&ED wages and amounts to be considered under proxy overhead treatment must be applied as SR&ED Government assistance.
There should also be some consideration given to whether a form of Government assistance is a truly assistance or merely a (normal) commercial loan or contract payment. In these instances, the facts of the transaction must be clear and there must be a clear understanding of repayment terms, interest rate applied, risk sharing and degree of control. Where it is clear that the funding comes from a publicly funded body and the terms are consistent with non-commercially available terms then they are likely considered Government assistance for SR&ED purposes. You should always ensure that a summary of your position and actual funding documents form the basis of your SR&ED claim documentation.
In our work, we’ve seen a dramatic increase in companies claiming some form of Government assistance especially in light of the Covid subsidies. The practical and pragmatic application of Government assistance policies is a logical extension of the SR&ED program thesis to “reflect the NET COSTS of doing R&D”. Simply put, claiming government incentives should not be a profitable activity for companies.
More detailed information and specific scenarios relating to Government assistance can be found on the CRA SR&ED program website under its Contracts and Assistance Payments policy document.
There are still many situations where claiming SR&ED is still worth pursuing even though it may appear that perhaps most if not all of your R&D expenses are covered by Government funding. We have seen many instances where companies can still maximize and optimize their SR&ED claim in light of significant Government assistance. We suggest you still engage with a SR&ED professional to assess the numbers and facts to ensure that there isn’t an opportunity to file a SR&ED claim.
At ENTAX, we have significant experience in assessing and applying all types of Government assistance scenarios relating to SR&ED. Please let us know if we can help you by contacting us as firstname.lastname@example.org or booking a FREE consultation with us.