The Scientific Research and Experimental Development (SR&ED) tax credit program is a retroactive business funding program offered by the Canadian federal government that helps cover a portion of eligible businesses R&D costs. This is Canada’s largest funding program and is utilized by thousands of businesses across each province of Canada. Professional corporations commonly apply for SR&ED funding.
How Does SR&ED Define Medical Professional Corporations (MPCs)?
Several professions have regulated professional corporations and are restricted to practice their profession within these corporations, including engineering and medical professional corporations (MPCs). During a SR&ED review, when a high amount for a high-ranking official (such as a CEO) is claimed as SR&ED, the CRA seeks to understand the roles and how the company is run. Typically, these professionals perform SR&ED under contract to another entity to deliver a service or defined outcome. There may or may not be SR&ED or research activities stipulated within the contract. Further, the individual may perform self-directed research within their corporation to better improve their service and understanding within their field.
For example, a medical doctor may perform research within their area of expertise or collaborate with other physicians and institutions to generate additional knowledge related to the science and practices of medicine. An engineer may develop models to better predict phenomenon within their field of engineering. Both these individuals conduct work related to their professions through their professional corporation.
Are MPCs Able to Claim SR&ED?
Over the past few years, the CRA has had two main concerns with MPCs claiming SR&ED:
- If alternate funding plans (AFPs) or other monies directly paid to the MPC apply to the SR&ED activities :Typically, a portion of these sources of funding is assumed to support the pursuit of SR&ED, but not all. This depends on the agreements and why the funding is provided. Clinical billings received by the MPC are not subjected to this assessment.
- Whether the physician is performing SR&ED as an individual or on behalf of their corporation: The CRA released a guidance paper in 2019 attempting to provide insight into how to determine whether the physician was performing SR&ED eligible activities as an individual/independent contractor or through their MPC. While the guidance paper demonstrates the CRA’s attempt to provide consistent analysis of SR&ED activities of a physician and where they can be claimed, it remains vague and there are no definitive criteria to apply. Often the physician/MPC can be placed into multiple different scenarios, which makes it difficult to obtain clear, consistent guidance from the CRA. This is due to the Physician often being the sole employee of the MPC, and presenting themselves as a physician first, rather than as the director of the MPC, resulting in confusion as to how they intend to carry out their work.
Tax court of Canada and MPCs
Over the past years, the Tax Court of Canada has opined on several key areas, providing further guidance to the taxpayers and the CRA. One such case, Andre Lamy MPC v. The Queen, has been helpful in providing clarity regarding MPCs that claim SR&ED.
Dr. Lamy, a cardiologist, claimed SR&ED for 2013 and 2014 taxation years through their MPC. However, under review, the CRA determined that Dr. Lamy conducted the SR&ED as an individual, and not through their MPC, and therefore the SR&ED claim was denied. The key issue before the courts was whether the MPC carried out the SR&ED, or whether Dr. Lamy conducted the research in his personal capacity.
The Tax Court of Canada ruled that Dr. Lamy performed SR&ED on behalf of the MPC, and therefore the MPC’s SR&ED claim was allowed. Specifically, the TCC found that Dr. Lamy was practicing medicine through his MPC, as evidenced by payment of clinical billings to his MPC. This occurred regardless of signing documentation as an individual physician, and even submitting clinical billings as an individual and not through the MPC. The Tax Court of Canada determined that signing agreements as an individual did not negate that fact that Dr. Lamy performed research activities on behalf of the MPC.
Impact on Professional Corporations
Whether you are part of an MPC, another professional corporation, or are a specified employee with a significant portion of time related to research, clarity must exist on how and why the work claimed as SR&ED relates to the purpose of the corporation. There are several steps to help the CRA understand all work taken was on behalf of your corporation.
Through the Dr. Lamy v. the Queen tax court case, and our experience with MPCs and the CRA, we have developed methods to simplify the process to enable company owners with a high percentage of research time to claim SR&ED. Reach out to our team of SR&ED consultants to discuss how we can help apply for SR&ED on behalf of your company, and how your business may be able to stack this funding with other Canadian federal and provincial government grant or loan programs.