The Canadian federal government’s largest single source of business funding is the Scientific Research and Experimental Development (SR&ED) tax credit program. This incentive program was designed to encourage research and development (R&D) activities in Canada, but what happens if a Canadian business conducts a project outside of Canada? Is your business still eligible for SR&ED if you’re owned by an American parent-company? We’ll cover those questions and more.
Many Countries around the world have their own similar version of the Canadian SR&ED tax credit program to help incentivise business R&D efforts.
This article will cover what you need to know about receiving SR&ED ITCs (Investment Tax Credits) as an international business conducting work in Canada, or for Canadian businesses doing R&D work outside of Canada.
My business is in Canada, but our parent organization is outside of Canada. Are we still eligible to receive SR&ED tax credits?
Yes, your business is not disqualified from SR&ED tax credits by virtue of your parent company being outside of Canada, provided that your Canadian business pays Canadian taxes. In fact, one of the primary drivers for the start of the SR&ED program was to attract research to Canada paid for by foreign parent companies. In addition, the work must meet the SR&ED eligibility criteria (how and why) and have eligible expenditures (labour, contractor, and materials).
Example: A Canadian business with an international parent company
In this example, a food manufacturer is producing baked goods in Ontario. They are owned by an American parent company. The Canadian entity decides to undertake a project focused on increasing the shelf life of one of their baked goods. In this project, they expend significant resources (employees, contractors, and materials) to modify their production processes to achieve their technical objectives.
Assuming that the project meets the SR&ED eligibility criteria, the Canadian entity would be able to claim the associated expenses as SR&ED and obtain both federal and provincial ITCs in most provinces.
Our Canadian business conducts SR&ED eligible activities outside of Canada, can we still receive SR&ED ITCs for this work?
The answer depends on the kind of activities performed outside of Canada. If your Canadian business undertakes a project in Canada that meets the SR&ED eligibility criteria, and you have Canadian employees that need to travel outside of Canada to conduct eligible activities such as testing, their labour costs may be eligible, up to a maximum of 10% of the overall claim amount. Materials may be purchased from anywhere in the world but must be consumed or rendered valueless by SRED performed in Canada. Contractor expenses for services being conducted outside of Canada are ineligible.
Example: A Canadian business performing some activities outside of Canada
In this example, a Canadian concrete company that operates out of Nova Scotia wants to improve the strength of their concrete. They conduct SR&ED-eligible work in Canada, but to accurately measure the strength of various concrete mixtures, they need specialized equipment to reliably test what combination of materials result in a stronger concrete. Purchasing this equipment would be extremely expensive, and Canada doesn’t have a specialized testing lab with the equipment they needed.
The Canadian company turns to a specialized lab located in the U.S. that has the required equipment. The company has their employees travel to the concrete lab in the U.S. to conduct tests.
Given the above fact pattern, the company can claim a portion of their employees time spent outside Canada as SR&ED. However, since this portion of the work was conducted outside of Canada, expenses related to using the lab and trial materials are not eligible.
Can we claim expenditures from purchased materials from an international supplier?
Yes, your business may be eligible to claim these expenditures provided that the materials are required to complete the SR&ED projects taking place within Canada. The cost of the materials is full “landed cost” meaning shipping and duties are included in the expenditure base.
Can we claim expenses for international contractors?
Unfortunately, you cannot. Eligible contractors must be Canadian taxable suppliers and their work must take place within Canada for you’re the business to be eligible to claim their expenses for SR&ED tax credits.
Can we claim overhead costs for locations outside of Canada?
No, you cannot. The SR&ED eligibility criteria specifically states that overhead costs must be from a commercial location within Canada. These costs can be calculated with the proxy or traditional method of calculating SR&ED overhead.
Do other countries have R&D funding programs like Canada’s SR&ED tax credits?
Yes, they do. 36 of 38 OECD (Organization for Economic Co-operation and Development) countries have created similar R&D business incentive programs in the likeness of SR&ED. The basis for these programs is the Frascati manual, which was created as a roadmap for countries to monetize their R&D efforts and allow businesses commercialize and scale R&D.
The United States of America, United Kingdom, and most countries within the European Union have their own variation of the SR&ED tax credit program that your international business may be eligible for.
Who can help our business apply for international SR&ED claims?
Mentor Works, a Ryan Company, is one of the largest SR&ED consulting and Canadian government funding firms in North America. Our team of funding specialists provide a wholistic approach to government funding and can help your business find and apply for government funding programs for projects that are being planned, have started, and have been completed. We help businesses across the world apply for government funding programs, including the United States of America, United Kingdom, Australia, and more. Speak with a SR&ED Consultant to find out what funding programs your business is eligible to apply for.
Apply for Canadian government funding programs like government grants, no-interest loans, or SR&ED tax credits with the team at Mentor Works, a Ryan Company.