You might think that only activities that occur in Canada are eligible for tax incentives. Not so! There is are plenty of SR&ED outside Canada that can be claimed through the program.
While this article will help give you a bird’s eye view of the subject, especially when conducted outside Canada, it can be a complicated topic. To understand the deep nuances and make sure you’re getting the most out of your claim, we highly recommend speaking to an expert.
So, let’s begin with why you might need to perform activities outside Canada in the first place.
Reasons For Conducting SR&ED Outside Canada
There are more than a few reasons you might need to conduct your research and development somewhere other than Canada, including:
- Your organization has facilities abroad that need to support the primary work you’re doing.
- You may contact non-Canadian entities to complete certain portions of your work or help support it.
- There may be aspects of your research and development with geographical limitations, meaning they are required to be carried out in specific locations outside Canada.
While expenditures do not qualify for SR&ED income tax credits, they are deductible from the claimants particular taxation year, as specified through the Income Tax Act:
In computing the income of a taxpayer for a taxation year from a business of the taxpayer, there may be deducted expenditures of a current nature made by the taxpayer in the year;
- On scientific research and experimental development carried on outside Canada, directly undertaken by or on behalf of a taxpayer, and related to the business (except to the extent that subsection (1.4) deems the expenditure to have been made in Canada); or,
- By payments to an approved association, university college, research institute or other similar institutions to be used for scientific research and experiment development carried on outside Canada related to the business provided that the taxpayer is entitled to exploit the results of that scientific research and experiment development
Check Out Another Blog: What Is Research and Development In Business?
Claiming Support Work
As specified through the SR&ED Overhead and Other Expenditures Policy:
When a claimant performs support work outside Canada, even if the work is in support of a particular Canadian SRED project of the claimant, the expenditures related to such work that is directly undertaken by, or on behalf of, the claimant and is related to a business of the claimant may only be deductible as an expenditure for SRED carried on outside Canada. However, some salary or wages for work performed outside Canada may be deemed to be expenditures incurred for SRED carried on in Canada. For more information on permissible salary or wages of employees carrying on SR&ED outside Canada, please refer to section 10.0 of the SR&ED Salary or Wages Policy.
The location where the SRED activities are carried on is the only criterion for determining which expenditures can be claimed for SR&ED performed in Canada or outside Canada. Accordingly, SR&ED overhead and other expenditures, including foreign travel expenditures, and any other expenditure for SR&ED carried on outside Canada will only qualify for a deduction related to SR&ED carried on outside Canada. These types of costs are considered to be directly related to the prosecution of SR&ED outside Canada. The location where the cost is incurred or paid (that is, the location where the contract is entered into or the location of the bank account used for payment) is not relevant. Even if a particular expenditure for SR&ED carried on outside Canada is incurred in Canada or is made through a Canadian subcontractor, or if it represents a minor portion of the project, it will not qualify for a deduction for SR&ED performed in Canada, but it will be treated as a deduction for SR&ED performed outside Canada. Expenditures deductible for SR&ED carried on outside Canada do not qualify for SR&ED investment tax credits (ITCs).
For more information about conducting activities outside Canada, you can read the Income Tax Act and SR&ED Overhead and Other Expenditures Policy in more detail.
You could also speak to the experts at Maxim Innovation and save yourself the trouble.